Op eds

This op-ed by Sen. John Kennedy (R-La.) first appeared in The Wall Street Journal on April 23, 2017.     

Every politician says he is for jobs. But you can’t be for jobs if you are against business. And you can’t be for business if you are against giving job creators access to capital. Yet that is exactly the conundrum Congress legislated when, in 2010, it made the Dodd-Frank Wall Street and Consumer Protection Act applicable to small banks and credit unions. Dodd-Frank has been a loan-killing, anti-job disaster for these vital institutions. 

Dodd-Frank was supposed to prevent another 2008-like banking crisis by strengthening federal government regulation of finance. Maybe the law makes sense for too-big-to-fail banks. Maybe not. What surely doesn’t make sense is to cripple America’s smaller community banks, which did nothing to bring about the 2008 meltdown. 

When Federal Reserve Chair Janet Yellen appeared before the Senate Banking Committee on Feb. 14, I asked her the following question: “What did the community banks do wrong in 2008?” Her response: “Well, community banks were not the reason for the financial crisis.” 

Yet smaller banks are being smothered under the weight of Dodd-Frank. The Federal Reserve Act of 1913 is 32 pages. The Glass-Stegall Act was 37 pages. Dodd-Frank is 2,300 pages, with an astounding 22,000-plus pages of rules and more on the way. That’s why so many community banks no longer exist, and those that have survived have seen their costs go up, their profits go down, and their ability to make small-business and consumer loans curtailed. It’s all because of the heavy hand of government.

Main Street lending institutions should not have to keep paying for the sins of others. So I am introducing a bill, the Reforming Finance for Local Economies Act, that would exempt community banks and credit unions with assets of less than $10 billion from Dodd-Frank. Community financial institutions could get back to doing what they do best, which is helping local economies grow. 

These institutions desperately need regulatory relief. In 2015, the St. Louis Fed estimated that community banks take an annual $4.5 billion punch to the gut in the form of compliance costs. Alan Novotny, CEO of New Orleans-based Eustis Mortgage Co., said that before Dodd-Frank “it cost $2,000 to produce a loan. Now it costs $4,000.” 

More than 1,700 U.S. banks have disappeared since Dodd-Frank. The cost of Dodd-Frank regulation has driven small banks to sell to or merge with larger banks. That eliminates jobs at the community institutions. It reduces lending to Main Street, given that community banks with less than $10 billion in assets provide 48% of small-business loans, 16% of residential mortgages, 44% of loans to purchase farmland, 43% of farm-operations lending, and 35% of commercial real-estate loans. 

Forced consolidation in the community-bank sector has caused greater concentration of assets on the books of larger banks. This, in part, is what caused the 2008 debacle that Dodd-Frank is supposed to prevent from happening again. 

My bill would help the 5,785 credit unions and the 5,461 community banks in our country survive. They would no longer have to reduce products and services and divert resources to compliance. Their skill in evaluating risk would no longer be reduced to a mathematical exercise. They would be free to concentrate on providing traditional banking services to the customers they know by taking in local deposits and making loans to local borrowers, whose creditworthiness is closely monitored. 

Community bankers are relationship bankers. They don’t do widespread subprime lending or use derivatives to speculate. Most have fewer than 100 employees. The type of regulation they need, and the risks they take, are different from those of a $700 billion bank. 

Community institutions need some regulation to ensure their stability and security. But even after my bill becomes law, community banks will still be subject to a strict regulatory scheme established by dozens of applicable federal statutes—the Banking Secrecy Act, the Electronic Fund Transfer Act, the Truth in Lending Act, and the Equal Credit Opportunity Act, and more. They will remain under the supervision of the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corp., and National Credit Union Administration.