GOP Candidates Have It All Wrong on Community Banks' Demise

The Republican claims that the Dodd-Frank financial reform law is crushing community banks is now well entrenched among the candidates vying for the party's presidential nomination.

Opposing the 2010 law allows those running to pose as populists while also claiming that the mountain of Dodd-Frank regulations is causing hundreds of community banks to go out of business. They can then argue in turn that this adds to the woes of working families, by starving local businesses of credit and killing jobs.

If only they had the facts. While community banks may have a legitimate claim that they need some compliance relief, the sector's challenges long predate Dodd-Frank.

In the most recent GOP debate, Jeb Bush started the ball rolling by claiming directly that Dodd-Frank is destroying community banks, citing the story of someone he met as he campaigned.

Marco Rubio piled on, although he was a bit more cautious. Then it was Ted Cruz, followed by Ben Carson and finally Carly Fiorina.

In the debate, Fiorina claimed that 1,590 community banks have gone out of business under Dodd-Frank's enactment.

"And now we've got Dodd-Frank, the classic of crony capitalism. The big have gotten bigger — 1,590 community banks have gone out of business," she said.

Rubio had offered similar data in August.

"We need to repeal Dodd-Frank. It is eviscerating small businesses and small banks. Over 40% of small and midsize banks that loan money to small businesses have been wiped out since Dodd-Frank has passed," he said.

The source for their statistics is a mystery. The National Information Center of the Federal Reserve System tells us that there are 888 fewer community banks now than when Dodd-Frank was enacted, but only 348 banks of any kind have failed since 2010. Most of the reduced number of community banks was due to acquisitions by other institutions, not banks being shuttered. And this process of a shrinking community bank system has been going on for decades before Dodd-Frank.

The number of community banks (defined as having assets of less than $10 billion) shrank by 55% from 1980 to 2010, the year that Dodd-Frank was enacted. Over that period, the largest five-year decline was from 1991 to 1995 (more than 19.5%), the second largest was 1996 to 2000 (16.4%) and the third largest was 1986 to 1990 (14.4%). In the five years from 2010 through 2014, community banks fell in number by 13.6%

By the end of 2012, community banks held only 13% of all of the assets held by banks in the United States. But as of 2010, this figure had already declined to 16%, down from more than 60% in the 1970s.

In short, conservative claims are a myth. Unfortunately, much of this discussion seems to find its way back to a study that came out of the Mossavar-Rahmani Center at the Harvard Business School early this year, titled "The State and Fate of Community Banking," by Marshall Lux and Robert Greene. The language of the article is almost as extreme as a GOP talking-points memo.

For example, one sentence reads, "But since the second quarter of 2010, around the time of the Dodd-Frank Wall Street Reform and Consumer Protection Act's passage, we found community banks' share of assets has shrunk drastically — over 12%."

While the "share" may have gone down by 12% (say, from around 14.4% to 13%), without context this tells you little about the effects of Dodd-Frank on community banks.

These kinds of studies, apparently designed to incite animus against financial regulation, can do real harm. But it is the determination of conservative leaders to disguise their animosity toward regulation as populism that is the direct threat to the public's interests.

Wallace Turbeville is a senior fellow at Demos.