Washington, D.C. — With the fifth anniversary of the enactment of the Dodd-Frank financial reform law approaching, a new issue brief from the Center for American Progress denounces attempts to gut financial reform under the guise of helping small banks. Recent legislation passed by the Senate Committee on Banking, Housing, and Urban Affairs would remove competitive advantages given to community banks under tailored exemptions given to them by the Dodd-Frank law, undermine financial reform, and open the door to risky lending.
“Small and community banks play a critical role in the American banking system, and as such, lawmakers and regulators have granted these institutions targeted exemptions from financial reform rules,” said Julia Gordon, CAP Senior Director of Housing and Consumer Finance. “While big-bank and mortgage lobbyists have been quick to cite the needs of community banks as an excuse for gutting financial reform, lawmakers should look closely at the costs and benefits of tampering with the law. Rather than proceeding with legislation that serves the interests of big banks by rolling back the consumer and systemic protections contained in Dodd-Frank, policymakers should instead consider more targeted fixes for institutions struggling to serve the credit needs of the communities in which they are based.”
CAP’s brief demonstrates that the decline in the number of small banks began decades ago, and financial reform had no apparent impact on the pace of the decline. In fact, most community banks have actually seen consistent improvement in financial performance in the years since Dodd-Frank’s enactment, and they also have increased mortgage and other lending.
Financial regulators have already given small banks a significant number of exemptions from the financial reform rules with which larger institutions must comply, CAP’s brief notes, and these exemptions allow smaller banks to meet the needs of their communities without undermining consumer and systemic protections. By contrast, legislation proposed by Senate Banking Committee Chairman Richard Shelby (R-AL) and passed by the committee in May 2015 would primarily serve and benefit large financial institutions. Such legislation, if passed into law, would greatly undermine financial reform and open the door to the risky lending practices that helped lead to the financial meltdown that began in 2008.
Rather than proceeding with the risky Senate bill, lawmakers instead should consider legislation that focuses exclusively on assisting small institutions in various ways, such as that previously proposed by Senate Banking Committee Ranking Member Sherrod Brown (D-OH). Lawmakers could build on that proposal to ensure that any further exemptions from financial reform rules are narrowly targeted to benefit institutions that demonstrate a commitment to meeting the credit needs of their communities, rather than the behemoth banks that contributed to the financial crisis in the first place.
Click here to read “Do Not Gut Financial Reform in the Name of Helping Small Banks” by David Sanchez, Sarah Edelman, and Julia Gordon.
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