New rules will attempt to restrain the mischievous use of many kinds of derivatives, credit default swaps, collateralized debt obligations and other heretofore absolutely opaque constructs. There will be more rules governing loan underwriting standards, the bundling and selling of mortgages, and the capital requirements and risk retention of the mortgage originator.
Dodd-Frank also aims to affect executive compensation, the integrity of the ratings companies, the registration of investment advisers, the soundness of corporate governance and the protection of financial consumers.
Many of the more significant reforms, such as participation in the bank-funded “bailout” fund, are mandated only for banks with assets in excess of $50 billion. This is appropriate. The six largest financial institutions in the U.S. now account for about 55 percent of all banking assets.
But 7,000 of the roughly 7,600 banks in the country each have less than $1 billion in assets; these are “community banks,” and in many cases, their culpability for the Wall Street meltdown was almost zero.
I spoke with Michael Wheeler, president of Beverly Cooperative Bank, to learn how Dodd-Frank is affecting smaller, local banks.
Beverly Cooperative, founded in 1888, has four branches, 72 employees and $300 million in assets. It is growing, and last year gave out 206 loans. During the past 10 years, it has given out about 225 loans per year (125 commercial, 100 residential, on average). What is most impressive is that the bank has had less than 10 loan failures in that 10-year span of 2250 loans.
Although Wheeler acknowledges that new regulations were necessary to respond to a range of problems — from predatory loans to the irresponsible use of derivatives — he points out that, by far, the largest incidence of bad practices came from the few hundred biggest banks and lenders. The top 10 banks today still initiate 70 percent of all lending.
Wheeler believes that Dodd-Frank and the Consumer Protection Financial Bureau are burdening community banks with regulations where there has been little problem. He has a point, and Beverly Cooperative’s track record backs him up. During the housing bubble buildup, the bank’s loan underwriting standards did not deteriorate, nor did the bank take advantage of unqualified or financially illiterate loan applicants.