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Article
There Goes the Neighborhood: Regulating Away the Community Bank-- An Analysis of the Costs of Current Regulations on Community Banks
West Virginia Law Review (2013)
  • Alan J Wilson, West Virginia University
Abstract
Community banks play an integral role in economic growth and are pivotal in providing access to credit for small businesses. Regulations serve to police markets and to promote fairness and transparency in the marketplace. In the United States, regulation is theoretically contrary to Adam Smith’s invisible hand. The Dodd-Frank Act seeks to advance a proactive mentality aimed at preventing another catastrophic financial collapse like the one experienced in 2008. Despite the goals of this legislation, this Act has strained community banks with voluminous regulation, duplicative regulatory enforcement, and regulatory uncertainty. Although regulation has created new industries of compliance professionals, it stifles innovation and causes uncertainty. At a time when consumers require access to capital but are underserved by noncommunity banks, lenders of last resort are closing operations due to compliance burdens. With fewer banks, consumer choice declines and available resources are not used most efficiently. By adopting a uniform activities-based definition of “community bank,” regulations and legislation would better protect the interests of community bankers who did not cause the financial crisis. By focusing regulations on principles rather than rules, free markets have flexibility. This flexibility promotes community bankers’ relationship model of banking that provides better consumer protection without regulatory disclosure requirements. Instead of embracing the unique operations of community banks, the Dodd-Frank Act and its many regulations seek to streamline products, and are doing so at the cost of greater uncertainty, reduced efficiency, and slower innovation. Despite the need to address the misdeeds that caused the financial crisis, Dodd-Frank impairs economic growth by overregulating small borrowers’ primary lender—the community bank.
Keywords
  • Community Bank,
  • Dodd-Frank,
  • Financial Regulation
Publication Date
Fall November, 2013
Publisher Statement
(c) 2013 West Virginia Law Review
Citation Information
Alan J. Wilson, There Goes the Neighborhood: Regulating Away the Community Bank -- An Analysis of the Costs of Current Regulations on Community Banks, 116 W. Va. L. Rev. 463 (2013).