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Reform Law Could Pose Major Threat to Black Banks

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By Charles Ellison
Special to the NNPA from The Philadelphia Tribune

When President Obama signed the Wall Street Reform and Consumer Protection Act (otherwise known as Dodd-Frank) into law in the summer of 2010, no one could be satisfied. Only bill creator and outgoing Sen. Chris Dodd was putting a happy spin on it at the time, while Rep. Barney Frank, a famously crabby Congressman from southern Massachusetts, reluctantly put his political capital behind it before retiring.

Supporters of the law were pretty dim on its prospect as an effective Wall Street enforcement tool, with many decrying it as toothless. Critics, on the other hand, were equally disdainful for different reasons: They saw Dodd-Frank as not only the bane of the financial services industry and big banks, but the cataclysmic end of capitalism as we knew it.

Three years later, and Wall Street is still humming along alive and well with record breaking markers on the stock market. The top banks, wealth management and other financial service firms in the United States hold over $10 trillion in total assets, according to the latest Federal Reserve report, nearly $3 trillion more than they held in 2008 before the Great Recession laid waste to the economy.

But as the fog of Dodd-Frank appears to lift somewhat, critics on both sides of the aisle agree that the law’s focus on big banks has come at the expense of smaller community banks. That includes the less than two dozen African American-owned banks lightly sprinkled throughout the nation and struggling to serve economically battered African American communities.

According to a white paper released during a recent Community Bank Research Conference sponsored by the Federal Reserve Bank of St. Louis, more than 250 banks with assets under $250 million have failed since 2002. The bulk of those failures occurred at the onset of the financial crisis in 2009 but continued persisting even as Dodd-Frank went into effect. While the rate at which smaller banks failed decreased significantly, it didn’t go unnoticed by experts that the pace of big bank failures since Dodd-Frank dropped sharply compared to small outfits. In 2009, at the height of the financial crisis, 30 banks with assets over $1 billion failed. But, by 2012, only 1 big bank failed compared to 35 smaller community banks.

“Communities cannot reach their full potential without the local presence of a bank,” warned Thomas Boyle, vice chairman of Illinois-based State Bank of Countryside during a Congressional hearing on Dodd-Frank in 2011. “Hundreds of new regulations … are slowly but surely strangling traditional community banks and handicapping our ability to meet the credit needs of our communities.”

Two years later, B. Doyle Mitchell, Jr., President and CEO of Industrial Bank, is ringing the same alarm bell. Testifying before a House Small Business Committee panel last week, Mitchell’s tone was grim in his assessment of Dodd-Frank’s impact on his business. Industrial, based in Washington, D.C., is one of the largest and oldest African-American banks in the country, with total assets valued near $350 million.

“These regulations are being enacted in response to the worst abuses of the pre-crisis mortgage market, abuses in which community banks did not engage,” explained Mitchell during testimony. “In order to reach their full potential as catalysts for entrepreneurship, economic growth and job creation, community banks must have regulation that is calibrated to their size, lower-risk profile, and traditional business model.”

Mitchell argues that small banks like Industrial are getting hit with the cost of massive compliance provisions built into Dodd-Frank. Meeting regulations means hiring more staff and using scarce resources community banks like Industrial don’t have. Financial analyst and credit rating firm Standard and Poor’s projects the eight largest U.S. banks will have to spend $34 billion annually just on compliance. That figure excludes the $100 billion plus in legal fees these same banks have spent shielding themselves from regulators.

African-American banks only boast combined total assets worth less than $5 billion. As a result, bankers like Mitchell worry Dodd-Frank could pose an existential threat to Black banks.

In response, the Independent Community Bankers of America, a coalition of small banks, is proposing an alternative Plan for Prosperity bill to address the disparity. “By rebalancing unsustainable regulatory burden, the plan, if adopted by Congress, will ensure that scarce capital and labor resources are used productively, not sunk into unnecessary compliance costs,” says Mitchell. “This allows community banks to better focus on lending and investing that will directly improve the quality of life in our communities.”

“For those who have survived the regulatory burden it has required staff to spend more time on compliance than on helping customers,” said Rep. David Schweikert during that same hearing. “Consumers will have less choice when it comes to accessing financial services.”

To have one of the nation’s most prominent African-American bankers express concern about the impact of Dodd-Frank before Congress is particularly telling. It’s prompting Dodd-Frank supporters and Democrats such as the subcommittee’s ranking member Rep. Yvette Clarke to cautiously take a second look at the law.

“These one-size-fits-all solutions, the unintended consequences often times are not worth it,” said Clarke shortly after Mitchell’s testimony. “Even if there’s the fear that these regulations will be burdensome and it shocks the culture of the institutions that we’re trying to preserve, then we’re defeating the purpose that we’re all seeking.”

Clarke, a Congressional Black Caucus member, has reason to worry. Four of the largest Black banks in the U.S. – Industrial among them – are in the New York Federal Deposit Insurance Corporation region. That includes United Bank of Philadelphia, which holds nearly $70 million in assets.

Still Clarke reminded lawmakers and witnesses about why Dodd-Frank “was implemented in the first place.”

“Five years ago, widespread malfeasance brought our nation to the brink of financial collapse,” said Clarke. “If it were not for swift Congressional action, we’d be living in a different America today.”

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