June 1, 2012

Too Small to Survive

Hester Peirce

Former Senior Research Fellow
Summary

Dodd-Frank has created a new class of too small-to-survive entities. Small financial institutions cannot endure the regulatory burden imposed by the massive new set of regulations. Even sorting through the many provisions to find out which are applicable is a daunting task for a small bank. Trying to figure out how to comply is even harder. Big banks already had huge legal departments in place before Dodd-Frank, and they supplement those in-house lawyers with a stable of well-paid lawyers at well-connected law firms.

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Dodd-Frank has created a new class of too small-to-survive entities.  Small financial institutions cannot endure the regulatory burden imposed by the massive new set of regulations.  Even sorting through the many provisions to find out which are applicable is a daunting task for a small bank.  Trying to figure out how to comply is even harder.  Big banks already had huge legal departments in place before Dodd-Frank, and they supplement those in-house lawyers with a stable of well-paid lawyers at well-connected law firms. 

The big banks are still complaining, often justifiably, about the regulations.  But they will likely survive.  Their smaller competitors are more likely to throw in the towel.  The Hartford Business Journal told the story of one credit union in a piece in earlier this week about one such entity -- a three-employee credit union that could not handle the regulatory burden and so is merging with a larger credit union.

Time will tell if this example is a sign of a bigger trend of smaller financial institutions giving up.  If it is, customers, who often seek out small banks and credit unions for better customer service, may be forced to deal with big, impersonal banks.  This is yet another reminder of the irony that Dodd-Frank, an anti-too-big-to-fail bill, is looking a lot more like a bill designed to make sure that only the big survive.