How Are Small Banks Faring Under Dodd-Frank?

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  • Even before Dodd-Frank there was growing concentration within the banking industrySmall bank population dropped ~43% over last 20 yearsLess than 2% of banks control over 80% of assets
  • Please note that figure numbers are based on the paper, so don’t be confused by the order of their appearance. Please grab a copy and take one with you.
  • Sample slightly under represent the $10-100MM category. Overall not bad. Categories may look strange to statistician, but it’s meant to help visualize an incredibly skewed distribution i.e. 90% of population resides in the lowest decile. 93.5% of banks are single institution organizations
  • Vast majority either local or intrastate-regional
  • As Ms. Pierce said earlier a lot of these banks are serving markets not served by the big banks
  • Most common response was moderate income
  • Don’t write this off as insignificant. For small banks this represents a big jump in overhead costs with no benefit to revenue or earnings. Also, bear in mind that it doesn’t tell us is how much more time existing personnel are spending on compliance related activities. Mr. Urbazzo may touch on this later, if he doesn’t get the chance it is a great question to ask him. How much time are noncompliance employees spending on compliance?
  • Though primary regulators are responsible for enforcing the CFPBs rules
  • Roughly 37% of the sample said they had hired additional personnel specifically because of the CFPB. This is what that subsample reported regarding the number of hires.
  • Draw attention to the four products and services at the bottom. Remittance Transfers, Mortgage servicing, overdraft protection, home equity lines of credit, and residential mortgages. Because of the nature of small banks, these relatively small percentages translate to significant impact. In markets where the small bank is the only or one of a few financial institution serving that community, it’s not just 16% residential mortgage products disappearing it’s 50% or even 100% of local mortgage offerings disappearing.
  • To better understand why small banks are pursuing discontinuation of mortgage products…
  • Can we identify the specific policies influencing small banks’ decisions to cut back on mortgages?
  • Nearly 1/3 won’t make a loan that doesn’t mean the qualified mortgage definition. Another 1/3 are unsure.
  • Big three: debit card interchanges fees (Durbin Amendment), CFPB, and mortgage regulations
  • Further consolidation seems to be on the horizon.
  • What can be done? Our sample reported that they had not received much direct contact regarding the feasibility of implementing Dodd-Frank regulation.
  • Most commonly the survey participants were state-chartered non-Fed members, then state-chartered Fed members, then nationally chartered
  • Waiting on the final map from Corrie!
  • Other responses included: secondary market mortgage services, ARM, escrow services, debt cancelation service, FHA loans
  • How Are Small Banks Faring Under Dodd-Frank?

    1. 1. How are Small Banks Faring Under Dodd-Frank? Hester Peirce Mercatus Senior Research Fellow Ian Robinson Mercatus MA Fellow Thomas Stratmann Mercatus Scholar
    2. 2. The Dodd-Frank Act • Dodd-Frank was the response to the financial crisis and, in the minds of some, a way to punish big banks • Small banks were not a target of Dodd-Frank • Congress exempted small banks from some of Dodd-Frank’s provisions
    3. 3. Why Small Banks Matter • Small banks serve communities that large banks don’t serve • Small banks are an important source of small business loans • Small banks lend to people who don’t fit within large banks’ plain vanilla lending models
    4. 4. Bank Concentration Share of Total US Banking Assets Held by 5 Largest Banks vs. Small Banks 60 % 46.6% 5 largest banks 40 % 30.1% small banks 20 % 18.6% 27.5% 0% 2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 Source: Statistics on Depository Institutions, Federal Deposit Insurance Corporation. Data note: Banks are ranked by asset size. Small banks are defined as U.S. banks with $10 billion or less in assets. For purposes of this chart, banks were aggregated under their bank holding companies. Available data did not permit thrifts to be aggregated under their holding companies. Produced by Hester Peirce, Robert Greene & Rizqi Rachmat, Mercatus Center at George Mason University
    5. 5. Why We Surveyed Small Banks • Only ½ of rules are done, but anecdotes suggest small banks are feeling the weight of Dodd-Frank • Some empirical work has been done, but we saw the need for a large-scale survey of small banks • We included banks with $10 billion or less in assets • We collected online responses to 96 questions from approximately 200 banks in July-September 2013
    6. 6. What We Found • Compliance costs are going up • Small banks are very concerned about the mortgage rules and the CFPB • Banks are considering cuts to products and services and consolidation • Banks expect consumers will not benefit
    7. 7. Results
    8. 8. Results Figure 2. Distribution of Survey Sample vs. Distribution of Small Bank Population % of Sample 80% % of Population 65.0% 61.3% 60% 40% 29.6% 22.7% 20% 11.4% 8.8% 0.9% 0.4% 0% Less than $10 million $10 million to $100 $100 million to $1 million billion $1 billion to $10 billion
    9. 9. Results Figure 5. Which of the following best describes your bank? 10.9% 2.3% Local 0.9% 1.4% National Statewide Interstate-Regional 84.6% Intrastate-Regional Sample Size N = 222 with 221 valid responses
    10. 10. Results Percentage of Respondents Figure 10. Market Type(s) Served 70% 60% 50% 40% 30% 20% 10% 0% Rural (population less than 50,000) Small metropolitan area (population greater than 50,000 and less than 500,000) Geographic Area Large metropolitan area (population greater than 500,000) Sample Size N = 222
    11. 11. Results Figure 11. Income Market(s) Served Percentage of Respondents 70% 64.9% 56.3% 60% 50% 40% 34.7% 30% 20% 14.9% 10% 0% Low Income Moderate Income Middle Income Upper Income Martket Income Type Sample Size N = 222
    12. 12. Results Figure 19. Change in Annual Compliance Costs since DoddFrank 0.5% 5.3% 3.2% Increased by more than 5% 8.0% Increased by less than 5% No change Decreased by less than 5% Decreased by more than 5% 82.9% Sample size N = 190 with 187 valid responses
    13. 13. Results Percentage of Respondents Figure 20. Histogram of Compliance/Legal Personnel 70% Before Dodd-Frank Current 60% 50% 40% 30% 20% 10% 0% 0 1 2 3 4 5 6 7 Number of Compliance/Legal Personnel 8 9 10 or more Sample Size N = 190
    14. 14. Results Figure 22. Dodd-Frank Compared to the Bank Secrecy Act (BSA) 16.4% Substantially more burdensome than the BSA Substantially less burdensome than the BSA Slightly less burdensome than the BSA 15.3% Slightly more burdensome than the BSA 2.1% 0.5% 65.6% As burdensome as the BSA Sample Size N = 190 with 189 valid responses
    15. 15. Results Figure 31. Business Activities Affected by CFPB? No 29.0% Yes 71.0% Sample Size N = 172 with 169 valid responses
    16. 16. Results Figure 33. Histogram of Personnel Added Due to CFPB Percentage of Respondents 80% 60% 40% 20% 0% 1 2 3 4 Number of Personnel Added 5 Sample Size N = 63
    17. 17. Results Figure 14. Impact of Dodd-Frank on Products/Services Offered Derivatives Securities and Investment Products Other Commercial Lending Commercial Real Estate Lending Agricultural Lending Small Business Lending (non-SBA) Small Business Lending (SBA) Debit Cards Insurance Construction and Development Lending Credit Cards Remittance Transfers Mortgage Servicing Overdraft Protection Home Equity Lines of Credit Residential Mortgages Sample Size N = 222 Anticipate Discontinuing as a Result of the Dodd-Frank Act Discontinued as a Result of the Dodd-Frank Act 0% 3% 6% 9% Percentage of Respondents 12%
    18. 18. Results Figure 35. Reasons for Alterations to Mortgage Offerings Other In response to bank examiner requests In response to demand changes in the secondary market For business reasons In anticipation of future regulatory changes In response to specific regulatory requirements 0% 20% 40% 60% Percentage of Respondents Sample Size N = 172
    19. 19. Results Figure 36. Effects on Mortgage Offerings Percentage of Respondents 0% 20% 40% 60% Consumer Financial Protection Bureau Definition of “qualified mortgage” Definition of “qualified residential mortgage” Low-interest rate environment Pressure from bank examiners Changed underwriting requirements by Fannie Mae and/or Freddie Mac Basel III Significant Negative Impact Slight Negative Impact Slight Positive Impact Significant Positive Impact Sample Size N = 172
    20. 20. Results Figure 37. Does your bank anticipate that it will make any loans that do not meet the definition of a "qualified mortgage"? No 30.5% Not Applicable 2.4% Unsure 32.3% Yes 34.8% Sample Size N = 172 with 164 valid responses
    21. 21. Results Figure 41. Impact of Policy on Bank Earnings Derivatives regulation Volcker Rule Elimination of the Office of Thrift Supervision Municipal advisor regulation FDIC insurance coverage Incentive-based compensation Systemic risk oversight New capital requirements Debit card interchange fees Consumer Financial Protection Bureau Changes in mortgage regulation Significant negative impact Slight negative impact Slight positive impact Significant positive impact 0% 10% 20% 30% 40% 50% 60% 70% Percentage of respondents Sample size N = 172
    22. 22. Results Figure 42. Anticipate Engagement in M&A Activity in the Next Five Years Yes 26.3% No 46.3% Unsure 27.5% Sample Size N = 162 with 160 valid responses
    23. 23. Results Figure 16. Regulator Contact Regarding Feasibility of Dodd-Frank None of the above 65.8% State bank regulators 22.6% Federal Deposit Insurance Corporation 16.3% Federal Reserve 11.1% Office of the Comptroller of the Currency 8.4% Consumer Financial Protection Bureau 2.1% State insurance regulators 1.1% Securities and Exchange Commission 0.5% 0% 20% 40% 60% 80% Percentage of Respondents Sample Size N = 190
    24. 24. Policy Implications • Regulators need to listen to small banks • Utilize economic analysis and analysis under the Regulatory Flexibility Act and SBREFA to help identify the consequences and quantify the impact before a regulations are adopted • Eliminate unnecessary regulatory burdens • Provide longer implementation periods
    25. 25. Questions & Comments Hester Peirce hpeirce@mercatus.gmu.edu Ian Robinson irobinson@mercatus.gmu.edu Thomas Stratmann tstratma@gmu.edu
    26. 26. Additional Charts
    27. 27. Additional Charts Figure 1. Number of Banks with $10 Billion or Less in Assets (Quarterly Data, 1993–2013) 12000 11,058 8000 6,279 4000 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Statistics on Depository Institutions, Federal Deposit Insurance Corporation. Data notes: Bank holding companies were used to group organizations. Thirft holding companies were not used to group organizations, because complete data on thrift holding companies was not available.
    28. 28. Additional Charts Figure 3. Bank Type State-chartered and not a Federal Reserve member Federal Savings Bank 31.2% Mutual Federal Savings Bank 44.3% Other Nationally chartered State-chartered and a Federal Reserve member 23.1% 0.5% 0.5% 0.5% Sample Size N = 222 with 220 valid responses
    29. 29. Additional Charts Figure 4. Charter Type Bank 85.7% 14.3% Thrift (including savings association, saving s bank, savings and loan association, or mutual) Sample Size N = 222 with 217 valid responses
    30. 30. Additional Charts Figure 6. Changes in the Number of Branches Since 2008 Stayed the same 29.7% Decreased Increased 57.1% 13.2% Sample Size N = 222 with 219 valid responses
    31. 31. Additional Charts Figure 7. Organizational Structure Stand-alone 41.6% 55.2% Subsidiary of a financial holding company Other 3.2% Sample Size N = 222 with 221 valid responses
    32. 32. Additional Charts Figure 8. Ownership Description Closely held Family-owned S Corp C Corp Mutual Traded on an exchange Other 0% 5% 10% 15% 20% 25% Percentage of Respondents 30% 35% 40% Sample Size N = 222
    33. 33. Additional Charts Figure 9. Geographic Distribution of Responding Banks
    34. 34. Additional Charts Figure 12. Products and Services Added in Response to Dodd-Frank Other Response 6.0% None/NA 94.0% Sample Size N = 222 with 133 valid responses
    35. 35. Additional Charts Figure 13. Products and Services Currently Offered Insurance Securities and Investment Products Mortgage Servicing Small Business Lending (SBA) Agricultural Lending Other Commercial Lending Commercial and Industrial Lending Business Savings Debit Cards Certificates of Deposit Personal Checking 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Percentage of Respondents Sample Size N = 222
    36. 36. Additional Charts Percentage of Respondents Figure 15. Engagement in Advocacy Efforts 100% Before the passage of the Dodd-Frank Act in July 2010 After the passage of the Dodd-Frank Act in July 2010 80% 60% 40% 20% 0% Met with an elected official to discuss regulatory policy including in a proposed other public advocacy through a representative regulatory issuesopen letters, or Discussed regulatory issues with regulators (not issues with representative organization thatsuch as letters to the editor, op-ed the above Submitted public comments a membership routine contacts with examiners) Held in connection Engaged in regulations, including engages in advocacy on None of pieces, organization or outside law firm articles Sample Size N = 190
    37. 37. Additional Charts Figure 17. Compliance Responsibility Percentage of Respondents 100% 93.7% 75% 50% 25% 38.4% 23.2% 22.6% 9.5% 2.1% 0% In-house External External External In-house compliance consultants legal counsel compliance legal counsel personnel personnel Other Sample Size N = 190
    38. 38. Additional Charts Figure 18. Anticipated Engagement with Outside Consultants for Dodd-Frank Unsure 21.3% Yes 51.1% No 27.7% Sample Size N = 190 with 188 valid responses
    39. 39. Additional Charts Figure 21. Hiring Additional Compliance Personnel in Next 12 Months Yes 27.4% Unsure 28.0% No 44.6% Sample Size N = 190 with 186 valid responses
    40. 40. Additional Charts Figure 23. Reasons for Changes in Tier 1 Capital Anticipated changes Changes since Dodd-Frank Merger/acquisition Other Specific regulatory requirements Recommendation of bank regulators Anticipation of Basel III changes Business reasons 0% 10% 20% 30% 40% 50% Percentage of respondents Sample size N = 190
    41. 41. Additional Charts Figure 24. Effect of Trust-Preferred Securities Phaseout Other response 17.2% None/NA 82.8% Sample size N = 190 with 157 valid responses
    42. 42. Additional Charts Change in FDIC premium Figure 25. FDIC Premium Changes 50%+ decrease 40–49% decrease 30–39% decrease 20–29% decrease 10–19% decrease 1–9% decrease No change 1–9% increase 10–19% increase 20–29% increase 30–39% increase 40–49% increase 50%+ increase 0% 5% 10% 15% 20% 25% 30% Percentage of respondents Sample size N = 190
    43. 43. Additional Charts Figure 26. Has the Durbin Amendment Affected Your Bank? Not applicable 2.8% Unsure 18.8% Yes 48.3% No 30.1% Sample size N = 190 with 176 valid responses
    44. 44. Additional Charts Figure 27. Have the Municipal Advisor Rules Changed the Way You Interact with Municipalities? Yes 4.0% Not applicable 16.1% Unsure 12.6% No 67.2% Sample size N = 190 with 174 valid responses
    45. 45. Additional Charts Figure 28. Primary Federal Regulator Federal Reserve 16.0% Federal Deposit Insurance Corporation 58.9% Office of the Comptroller of the Currency 25.1% Sample size N = 190 with 175 valid responses
    46. 46. Additional Charts Figure 29. Coordination among Regulators Well 23.3% Somewhat 30.8% Very little 19.2% Very well 10.5% Not at all 1.2% Unsure 15.1% Sample size N = 190 with 172 valid responses
    47. 47. Additional Charts Figure 30. Activities Modified in Anticipation of the Volcker Rule Yes 0.6% Unsure 8.1% No 91.3% Sample size N = 190 with 172 valid responses
    48. 48. Additional Charts Figure 32. Compliance/Legal Staff Added Due to CFPB Yes 37.3% No 62.7% Sample size N = 172 with 169 valid responses
    49. 49. Additional Charts Figure 34. Anticipate Changes to the Nature, Mix, and Volume of Mortgage Products in Response to Regulatory Changes Unsure 21.6% No 14.8% Yes 63.6% Sample size N = 172 with 162 valid responses
    50. 50. Additional Charts Figure 38. Changes in Customer Fees since Dodd-Frank Remained the same 24.2% Decreased by less than 5% 39.8% Increased by less than 5% Increased by more than 5% 16.1% Decreased by more than 5% 11.2% 8.7% Sample size N = 172 with 161 valid responses
    51. 51. Figure 39. Effects of Dodd-Frank on Fees of Product/Service Residential mortgages Personal checking Business checking Construction and… Overdraft protection Home equity lines of credit Commercial real estate lending Business checking Personal savings Other commercial lending Mortgage servicing Agricultural lending Small business lending (non-… Commercial and industrial… Debit cards Small business lending (SBA) Remittance services Certificates of deposit Securities and investment… Insurance Derivatives Credit cards 0% Increased by more than 5% Increased by less than 5% Decreased by less than 5% Decreased by more than 5% 5% 10% 15% Percentage of respondents Sample size N = 172 Figures representing "no impact" have been omitted 20% 25%
    52. 52. Additional Charts Figure 40. Change in Return on Equity since July 2010 8.1% 22.4% Increased significantly Increased slightly 28.6% No change Decreased slightly Decreased significantly 26.7% 14.3% Sample size N = 172 with 161 valid responses
    53. 53. Additional Charts Figure 43. Potential Future Strategies Percentage of Respondents 10% 8% 6% 4% 2% 0% Switching from a federal charter to a state charter Discontinuing operations Selling a subsidiary or affiliate Sample size N = 172
    54. 54. Additional Charts Figure 44. Concern about the Current Interest Rate Environment Concerned 37.9% Slightly concerned 18.0% Extremely concerned 40.4% Not concerned at all 3.7% Sample size N = 162 with 161 valid responses
    55. 55. Additional Charts Figure 45. Concern about Future Interest Rate Risk Extremely concerned 35.4% Concerned 36.6% Slightly concerned 23.6% Not concerned at all 4.3% Sample size N = 162 with 161 valid responses
    56. 56. Additional Charts Figure 46. Alterations to Credit-Analysis Practices in Response to Dodd-Frank Yes 49.4% No 50.6% Sample size N = 162 with 160 valid responses
    57. 57. Additional Charts Percentage of Respondents Figure 47. Alterations to Credit Analysis Practices in Response to Dodd-Frank 25% 20% 15% 10% 5% 0% Altered the nature of the securities that your bank purchases Contracted with outside firms to conduct credit analysis Hired additional employees to conduct credit analysis Other Sample size N = 162

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