ABA Issues Whitepaper Detailing 5 Major Dodd-Frank Burdens for Community Banks
The American Bankers Association (ABA) has issued a whitepaper discussing some of the most burdensome issues that community banks will face as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The ABA acknowledges that the amount of regulation is a significant challenge for a bank of any size, but is overwhelming for community banks with limited resources.
The ABA says that five of the most cumbersome provisions of the Dodd-Frank Act for community banks are:
- Risk Retention The Dodd-Frank Act requires banks to retain a portion of the risk of loans that they originate and sell off to other parties. Since capital must be held against that retention, the ABA suggests that due to the current environment where capital is hard to come by, community banks will be forced to originate fewer loans as their capacity to make and retain loans steadily diminishes.
- Higher Capital Requirements and Narrower Qualifications for Capital The Dodd-Frank Act will require banks to hold more capital while restricting what qualifies as capital. The requirements imposed by the Dodd-Frank Act will limit what qualifies as capital to little more than shareholder interest and retained earnings. The ABA says it will be significantly more difficult for community banks to attract investors and build retained earnings because of regulatory policies which hold down interest rates, establish controls on interchange, apply restrictions on overdraft programs,and lead to higher compliance costs.
- SEC s Municipal Advisors Rule Banks will be subject to additional registration and oversight from the Securities and Exchange Commission, in addition to the oversight already provided by their primary regulators, if they provide traditional banking services to municipalities. The ABA suggests that increased compliance costs associated with this duplicative regulation will make it unattractive for community banks to service municipalities.
- Derivative Rules Banks will find that using derivatives to mitigate risks will become much more expensive as they will be subject to new rules imposed by the Dodd-Frank Act.
- Doubling Size of the Deposit Insurance Fund (DIF) The FDIC has announced plans to double the size of the DIF under its authority established under the Dodd-Frank Act. The ABA reports this will take as much as $50 billion out of the earnings and capital of the industry.
To view the ABA s whitepaper click here.
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