This Week on Treasury Notes: Dismantling the Myths Around Wall Street Reform

Ed. Note: Cross-posted from Treasury Notes.

In the fall of 2008, a financial crisis of a scale and severity not seen in generations left millions of Americans unemployed and resulted in trillions in lost wealth. Our broken financial regulatory system was a principal cause of that crisis. It was fragmented, antiquated, and allowed large parts of the financial system to operate with little or no oversight.

Today, our most important challenge is creating stronger economic growth and helping the millions of Americans who lost their jobs get back to work. As part of that effort, we are committed to implementing new rules that will build a safer, more stable financial system—one that provides a robust foundation for lasting economic growth and job creation.

In order to achieve these goals, and help protect our economy from future crises, we must continue with the implementation of Wall Street Reform. However, more than a year after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, opposition to reform persists.   

Opponents are voicing a wide range of criticisms in a concerted effort to slow down, weaken, or roll back reform. Their arguments are misguided. This week, we’ll be taking a look on this blog at what those critics are saying—and rebutting their claims one by one. We begin this series by addressing one of the key misconceptions surrounding reform—its impact on small banks.

Myth #1: Wall Street Reform Hurts Small Banks

Fact:

This claim is particularly dubious given strong support for enactment of the Dodd-Frank Act by the Independent Community Bankers of America.  Wall Street Reform helps level the playing field between large banks and small ones, helping to eliminate distortions that previously favored the biggest banks that held the most risk. The Dodd-Frank Act subjects big banks to much higher standards than small banks in a number of areas:

• Tough new capital and liquidity requirements to reduce the risks presented by the biggest Wall Street firms do not apply to community banks. In fact, the law largely exempted about 7,000 community banks and thrift institutions, nearly all of which hold less than $10 billion in assets and a third of which hold less than $100 million, from these requirements.  
• Wall Street Reform requires the biggest institutions to pay a larger share of the cost of deposit insurance protection, reflecting the greater risk they pose to the financial system.
• Wall Street Reform strengthens protections for one of community banks’ core sources of funding by raising deposit insurance protection from $100,000 to $250,000.

The Dodd-Frank Act also helps to level the playing field between small banks and their nonbank competitors by making sure they’re playing by the same set of rules. The Dodd-Frank Act gave the Consumer Financial Protection Bureau the ability to examine regularly nonbank financial services providers—like payday lenders, debt collectors, and independent mortgage brokers—and to prohibit unfair, deceptive, and abusive acts or practices that hurt small banks and Americans across the country. Of course, in order for the CFPB to be fully equipped to carry out these crucial responsibilities, the Senate must move forward expeditiously to confirm Rich Cordray as Director.

Finally, Wall Street Reform helps make sure that small banks are not subject to excessive supervisory burdens, such as multiple exams by different regulators. The regulatorsof community banks will bear responsibility for enforcing one set of rules issued by the new CFPB, allowing small banks to avoid the burden of multiple exams.

The authors of Wall Street Reform understood that small banks did not cause the crisis and should not be the focus of reform. Small banks play a critical role in their communities—creating jobs and helping Americans borrow money to buy a home, grow their businesses, or pay for college.

Thanks to the steps now being taken, reform is helping put community banks on a more equal footing and is strengthening—not weakening—their essential role in our financial system. That’s good news for growth and job creation in communities across the country.