Because of the 2008 financial crisis, the government took steps to control how big and small banks function so future bailouts aren’t necessary. Some of those steps, such as passing the Dodd-Frank Act, may have done more harm than good for local banks.

Dodd-Frank Act

U.S. Representatives Barney Frank (D., Mass.) and Chris Dodd (D., Conn., retired) championed one of the controversial banking regulations that came about in 2010. The Dodd-Frank Wall Street Reform and Consumer Protection Act gave regulators control over risky financial activities of large banks and addressed the “too big to fail” issue. Critics of the reform pointed out the length of the 2300-page law and its 390 complicated rules. By the end of September 2015, many rules still weren’t finalized, including those related to derivative and mortgage reforms.

Community Banks

Community banks typically provide traditional banking services for local communities. By obtaining local deposits, monitoring citizens’ creditworthiness, and providing loans to community businesses, the bank forms personal relationships with local members. Passing the Dodd-Frank Act created cost issues for small banks that lower their profit margins and earnings. As a result, typically one community bank or credit union closes daily, causing small- and medium-sized businesses difficulty in securing loans. In addition, small banks are offering their customers reduced products and services that don’t always fill their needs.

Costly Compliance

Compliance with the Dodd-Frank Act became an expensive burden for community banks.  Increased need for compliance personnel caused rising expenses. Small banks ended up being consolidated or sold, resulting in a largely negative impact on locals who utilized the banks for all their basic financial needs.

Other Factors

Many argue Dodd-Frank has little to do with the decreasing number of community banks. Larger factors such as Basel III, which affects international banking regulations, low interest rates by the Fed, and growing use of technology rather than tellers for financial transactions also play a role in closing small banks. It should be noted, however, community banks lack the massive capital and deposit base of big banks, and any number of factors affecting customer service and regulatory compliance can threaten the survival of small banks more than big banks.

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