Competition is a sin? “Govt” Regulations hit smaller US banks hardest

Competition is a sin” – John D. Rockefeller

Financial Times

Small US banks have been disproportionately hurt by post-financial crisis regulation, a former JPMorgan Chase executive working at Harvard University has found.

Amid a renewed push in Washington for regulatory relief for the country’s community banks, research by Marshall Lux — JPMorgan’s former chief risk officer for consumer businesses, now a senior fellow at Harvard’s Kennedy School — has concluded that they were hit hardest by new rules.

Although the market share of smaller US banks with less than $10bn in assets has been shrinking for some time, the research shows their decline has accelerated since the introduction of the Dodd-Frank financial reform bill.

Community banks lost 6 per cent in market share between 2006 and mid-2010, during the worst of the crisis. But, since the passage of Dodd-Frank in early 2010, the decline in market share has doubled to more than 12 per cent.

“What if Dodd-Frank created a too-small-to-succeed problem in addition to the too-big-to-fail problem?” said Mr Lux, who is based at the Mossavar-Rahmani Center for Business and Government at Harvard’s John F. Kennedy School of Government. “This research suggests it has.”

America’s smaller bank sector has long been a hot topic given its importance to communities, but the topic has met with renewed interest in Washington in recent months. These small banks are estimated to provide 70 per cent of US agricultural loans and 50 per cent of small business loans.

“It’s hard to imagine that remote parts of the country are going to be served by these larger consolidated banks,” said Mr Lux, who also works at the Boston Consulting Group. “If the trend continues, we’re going to see fewer community banks and more substitutions that would not be under the same scrutiny.”

“What if Dodd-Frank created a too-small-to-succeed problem in addition to the too-big-to-fail problem?”– Marshall Lux, senior fellow Harvard’s Kennedy School

In January, community banks won a regulatory concession when the Consumer Financial Protection Bureau proposed easing mortgage lending requirements for the country’s smallest providers. That same day, the Fed offered to ease certain capital requirements for banks with less than $1bn of assets.

Regulators have been trying to walk a fine line between easing burdens on smaller banks and ensuring that the sector remains under control – with many arguing that the US was overbanked before the financial crisis and in need of consolidation.

Some regulators are now wary of over-easing the rules on small banks at a time when lenders are attempting to boost profit margins, according to people familiar with their thinking.

Community banks’ share of the US lending market has fallen from more than 40 per cent in 1991 to 22 per cent last year. At the same time, the market share of America’s five biggest banks has jumped from 17 per cent to 41 per cent.

“It does seem like smaller institutions are the hardest hit,” said Robert Greene, Mr Lux’s research assistant. “There are economies of scale when dealing with regulation.”

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