The “Great Recession,” precipitated by the financial meltdown during the latter part of 2008, was a very difficult and challenging time for everyone. The impact of this financial crisis was felt globally as international economies suffered economic slowdowns. Many countries even experienced negative GDP growth, an indicator of economic recession, which happened here in the United States. It also had a profound impact on the financial health and well-being of individuals, families and businesses as evidenced by the number of bankruptcies and foreclosures filed during this period.
Whenever an event such as this occurs, the reaction is almost often to identify the root cause in an effort to ensure that “it can never happen again”. Analyzing the financial crisis, it is obvious that the financial sector deserved much of the blame. Lehman Brothers went bankrupt, IndyMac and Countrywide essentially failed, and well-known firms such as Fannie Mae, Freddie Mac, AIG, and Merrill Lynch were all teetering on the edge; their eventual survival required government intervention.
Washington reacted to the crisis by passing legislation known as Dodd-Frank. It was named after Barney Frank and Chris Dodd who were instrumental in working through the details of the legislation. This legislation has been credited with improving the overall health and stability of the financial services marketplace while enhancing consumer protection; certainly, a very good result. There is, however, another side of this legislative action which bankers have been discussing for years. That is the unintended consequences associated with Dodd-Frank.
No one can necessarily blame Congress for overreacting to a financial crisis, which caused a recession of such magnitude you had to refer back to the 1930’s Great Depression for comparison. However, there are elements of Dodd-Frank that were intended to address the abuses and wrongdoings of the large, national financial service firms (“Wall Street Firms”) which ultimately impacted community banking and the customers they serve.
You might be wondering how you, as a consumer, were impacted by Dodd-Frank; a very reasonable question. The answer is that you were impacted in different ways. The most obvious was likely around obtaining a home mortgage loan either for a purchase or refinance. However, the more subtle, and greater impact, was an increase in the cost of doing business with banks. Community banks experienced a sharp increase in operating expenses as a result of the regulatory burden of Dodd-Frank. In fact, it was one of the reasons cited by Franklin Savings in our decision to close our office in Laconia last September. The Bank simply couldn’t justify the ongoing expense of having two branches within 2 miles of each other. Aside from the increased costs associated with Dodd-Frank, the consumer protection aspect of the law encourages banks to offer “plain vanilla” products and services so as not to confuse or deceive customers. Unfortunately under this model, product innovation and differentiation suffer and ultimately community banks begin to look more and more alike.
With regulatory reform likely to pass in Congress, and the House and Senate working together to finalize a Bill they can both support, community banking will experience some of the relief it has been asking for since the passage of Dodd-Frank in 2010. This will be a win-win, for both community banks AND their customers.