That the Dodd-Frank Wall Street reforms — intended to prevent sophisticated financial firms from causing another financial crisis like in 2008 — fall most heavily on small community banks, as a new study published by the Harvard Kennedy School of Government has concluded, is hardly a surprise. Since the 1990s, Washington’s unspoken preference has been for banks and other financial institutions to get ever bigger, and it’s acted accordingly, making life easier for giants while hobbling the little guy.
Dodd-Frank was passed in response to the threat to the economy that the failure of big institutions, such as American International Group, Lehman Brothers and Citigroup, would pose to the wider economy. The five biggest banks in the United States — JPMorgan Chase & Co., Bank of America, Wells Fargo, Citibank and US Bancorp — hold 50 percent of all U.S. banking assets, all by themselves, up from 30 percent just 13 years ago. They are also members of the Fixed Fortunes 200, Sunlight’s ranking of the most politically active corporations. Between 2007 and 2012, they spent $180 million on campaign contributions and lobbying, while reaping $1.67 trillion in federal support. That included massive amounts of aid in the wake of the financial crisis, an event where Congress, the Treasury Department and the Federal Reserve took extraordinary measures to keep the largest financial firms solvent.
Federal law once kept banks smaller and restricted in the businesses they could enter; they were also allowed to fail when mismanaged. In the savings and loan crisis of the 1980s and 1990s, more than a thousand savings and loans failed. The federal government bailed out depositors while either shutting down or selling the banks to new owners — and new management. But after that crisis, Democratic and Republican majorities in Congress and the Clinton administration chose to let banks get big.
NationsBank and its CEO, Hugh McColl, pushed hard for Congress to pass the Interstate Banking and Branching Efficiency Act, which eliminated federal barriers to multistate banking, in 1994. The bank, its PAC and employees contributed more than $2.7 million to federal candidates and party committees, while one of its lobbyists claimed he sang the bill’s virtues to 150 members of Congress. Just for good measure, a NationsBank subsidiary gave a sweetheart mortgage deal to George Stephanopoulos, then an adviser to Clinton. Enactment of the bill allowed NationsBank to merge with Bank of America, creating what is now the second-largest bank in the country, holding 11 percent of all domestic banking assets.
Five years later, in 1999, Citigroup and its chairman, Sandy Weill, pushed hard for Congress to repeal Glass-Steagall, the Depression era law that kept banking separate from insurance and brokerage services. He did so in part because Citibank had already merged with brokerage Salomon Smith Barney and insurer Travelers Group, the latter deal coming in 1998. Citigroup, its employees and PAC showered federal campaigns and party committees with more than $4.7 million. For good measure, they’d also just hired Bill Clinton’s former Treasury Secretary Robert Rubin, who reportedly earned $115 million in his years at the bank. Rubin, of course, supported repealing Glass-Steagall.
Problems ensued almost immediately, in part because big banks are harder to regulate. Between 2000 and 2004, Citigroup’s scandals included “tainted transactions with Enron and WorldCom, biased research advice, corrupt allocations of shares in initial public offerings (IPOs), predatory subprime lending, and market manipulation in foreign bond markets,” wrote Arthur E. Wolmarth Jr., a law professor at George Washington University and an expert on banking, in an analysis of the megabank’s operations. “Citigroup was not only ‘too big to fail,’ but also too big and too complex to manage or regulate effectively.”
Meanwhile, small banks that don’t pose a systemic risk to the economy but still must comply with Dodd-Frank regulations are hurting. And it’s not just those community bankers who are harmed. Though they hold roughly 20 percent of the nation’s bank deposits, small banks are responsible for as much as 50 percent of the loans to small businesses, traditionally the engine of new jobs and economic growth. But since the early ’90s, when the consolidation of the banking industry got underway, small businesses have accounted for an ever-declining share of U.S. employment, as Bloomberg News reported. In part, that’s because the total dollars loaned to small businesses have stayed flat since 2004. Maybe that’s part of the reason that the labor force participation rate has been dropping steadily. In the Harvard study, authors Marshall Lux and Robert Greene quote a North Carolina banker who says, “When they created ‘too big to fail,’ they also created ‘too small to succeed.'”
And, apparently, too small to get the attention of Congress and the president.