Kansas farm
Jun 22, 2016 - 2:00pm

Dodd-Frank’s Domino Effect: Law Squeezes Small Banks, Which Squeezes Small Farms


Executive Director, Strategic Communications

Shan Hanes’ community bank has served farmers in southwest Kansas and northwest Oklahoma for more than three decades, recently helping the region’s agricultural community withstand a years-long stretch of economic turmoil, sinking commodity prices, and record drought. Last year, the rains returned and the local economy started to bounce back, and as a result, many local farmers have started to reconsider buying those additional acres or that new tractor they had put on hold for the past few years.

However, it’s getting harder for Hanes and his bank’s 20 employees to help those farmers finance their investments, due in large part to onerous new regulations associated with Dodd-Frank.

“When we look at a loan, we’re now making a compliance decision, not a credit decision,” Hanes, president and CEO of First National Bank in Elkhart, Kan., told members of the House Small Business Committee during a recent hearing on financial regulations – particularly the bureaucratic hurdles put in place by the Dodd-Frank law. “That’s wrong, and it’s not what we were built to do.”

Before the law was enacted in 2010, Hanes noted that his small bank could handle routine loan audits (which have long been required by federal regulations) in house. He considered them a learning opportunity, and he would pull one his 20 employees to help conduct the audit, offering the worker a chance to learn more about the lending process and prepare them for further career growth in the banking industry. However, “we can’t do that anymore,” he told lawmakers.

Hanes explained: “The rules and regulations now change so often that a banker cannot stay abreast or competent to review the details of the new rules and regulations. Therefore, we have begun outsourcing most audits to a point that we are paying a full-time teller salary to compliance audit teams. The impact is one fewer bank employee serving our customers on a daily basis and one less salary paid to a member of our community.”

In addition, Hanes pointed out that new regulatory restrictions have prohibited his team from working with borrowers to customize payment schedules (a personal touch that helped his small farm bank compete with its larger competitors) and have made it nearly prohibitive for community banks like his to continue to offer mortgage loans – once his bank’s “bread and butter.”

These burdensome restrictions – ones put in place by regulators thousands of miles away in Washington – have a damaging domino effect in the community. When Hanes declines a loan application due to regulatory concerns, not credit concerns, his bank loses out on revenue, a local farm loses out on the capital it needs to grow and produce more crops, and frequently, because that farmer couldn’t access the funding he or she needed, a local equipment manufacturer or retailer loses out on a sale of a new tractor or harvester or irrigation system.

The impact is one fewer bank employee serving our customers on a daily basis and one less salary paid to a member of our community."

First National Bank of Elkhart CEO Shan Hanes on Dodd-Frank

“Our town needs new businesses, we need new people coming to town, and the bank is the lifeblood of that,” said Hanes, who grew up on a farm. “We want to help bring new people to town and help them fund their dreams.”

America’s agricultural businesses aren’t the only ones getting hit hard by recent financial regulations. The U.S. Chamber’s Center for Capital Market Competitiveness (CCMC) last week released a new survey showing that three-quarters of business leaders across all sectors believe that regulations on the financial services sector will not help their firms’ outlook in the next few years, and nearly four in five say new rules have directly affected their financing activities.

“Companies have many different financing needs and rely on financial institutions of all sizes,” the CCMC report stated. “The financial regulatory environment is getting worse and hampering their ability to acquire the financial resources they need.”

Unfortunately, this shockwave of regulatory impact is hitting small banks and rural towns particularly hard. More than 5,000 banks provided agricultural loans last year, and America’s farm banks (defined as those that make more than 15.5 percent of their loans to farmers and ranchers), the majority of them small companies themselves, currently hold $48 billion in small farm loans, with nearly a quarter of that total tied up in microloans valued at less than $100,000.

“In rural communities, smaller community banks are in many instances the exclusive source of capital for farmers, ranchers, small business owners and residents,” Roger Beverage, president and CEO of the Oklahoma Bankers Association, told the House Small Business Committee. “Once that capital-access system becomes dysfunctional – as it is today – the community itself begins to encounter more difficult challenges in order to survive.”

When Beverage arrived in Oklahoma in 1988, there were more than 400 banks serving the state. Today, there are 211, and in the past five years, not a single new bank has opened in the Sooner State. It’s no coincidence, he says, that that’s around the same time Dodd-Frank was enacted.

“Dodd-Frank has charged federal financial regulators with writing and enforcing 398 new rules, resulting in at least 13,644 pages of proposed and final regulations, and that’s with regulators only halfway through the rulemaking process,” Beverage said, adding that many of the new regulations stemming from the law amount to “layers of unnecessary requirements that add little to improve safety and soundness, but add much to the cost of providing services.”

Those layers of unnecessary requirements are particularly hard on credit unions and small, community-based banks that don’t have regulatory compliance experts to help them navigate the maze of bureaucracy, as Jim Nussle, a former Iowa congressman and now president and CEO of the Credit Union National Association, explained in a recent Dear 45 letter to the next president.

“Smaller financial institutions lack the scale to spread their regulatory costs across a larger base,” Nussle wrote. “Typically, they’re forced to dig out from the regulatory blizzard by adding costly staff or reducing services that benefit their members.”

Added Rep. Tim Huelskamp (R-Kan.), chairman of the economic growth, tax and capital access subcommittee that held last week’s hearing: “In rural towns without many other alternatives for access to capital, the results of top-down regulation can be devastating and impact a whole town. Home mortgage lending, small business lending, agricultural lending‒ all areas where community banks play a lead in providing capital‒ become much more difficult, and much more costly.”

In order to turn the tide and get small banks and other small businesses growing again, Congress must strip away some of the red tape associated with Dodd-Frank, Beverage said.

“America’s hometown banks have been the backbone of communities across nation,” he said. “When a bank sets down roots, communities thrive. When they leave or reduce services, communities and consumers do not thrive. It’s that simple.”

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About the Author

About the Author

J.D. Harrison
Executive Director, Strategic Communications

J.D. Harrison is the Executive Director for Strategic Communications at the U.S. Chamber of Commerce.