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Tuesday, February 17, 2015

Harvard Study Shows Impact of Regulations on Community Banks

The Dodd-Frank Act’s regulations and other rules are constricting community bank activities and their share of the market, according to a new study from researchers at Harvard University’s Kennedy School of Government. They found that community banks lost just 6% of market share during the years of the financial crisis — but that the pace accelerated to 12% since Dodd-Frank was enacted.

The researchers attribute this decline in market share to a pullback by community banks in several lending categories — due in large part to regulatory burden. Meanwhile, community bank consolidation accelerated so that banks could reach greater regulatory economies of scale. The study belies claims last week by Sen. Elizabeth Warren (D-Mass.) that community banks “are doing better than ever” after Dodd-Frank. The authors said:

Consolidation is not inherently a bad trend, but policymakers should be concerned that a critical component of the U.S. banking sector may be withering for the wrong reasons — inappropriately designed regulation and inadequate regulatory coordination.

Community banks — those with less than $10 billion in assets — remain dominant in the agricultural lending market, where they account for 77% of total assets, and where banks with less than $1 billion in assets account for 55% of the market. Community banks also account for 46% of the commercial real estate market and 51% of small business loans, the authors found.

Download the paper.

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