Big Business Gets Bigger: Dodd-Frank Shows How Regulation Leads To Consolidation

One of the most persistent fantasies in American political life is the belief that Big Business favors small government, making every tycoon a presumptive Republican. (If only the connection between Republican Party politics and small government ideology was that strong!) Democrats position themselves as the party of the Little Guy, using the power of the righteous State to bring corporate Goliaths to their knees.

This fantasy dissolves instantly upon serious consideration of actual Big Business politics. They’re not at all hostile to Big Government and the regulatory state. They’re not always hostile to regulations that demonstrably interfere with their operations and cost them money. Why? Simple: the cost of such regulations is worth paying to purchase the priceless byproduct of anti-competition, a resource only politicians can legally sell.

Heavy regulatory burdens are far easier for big companies to shoulder. The dollar cost tends to be a much smaller share of their revenue. They have plenty of manpower to handle paperwork. They have enough lobbying muscle to get special exceptions carved out for their benefit.

No matter what the expressed intentions of regulators might be, the practical effect of the hyper-State is to keep new upstarts out of established markets, squash small competitors, and fuel the drive toward consolidation.

The statist Left is not truly displeased by the results, no matter how much anti-Big Business rhetoric it might peddle to win elections, because Big Business naturally merges into Big Government, like two massive celestial bodies embracing one another with powerful gravitational fields. The line between the largest corporations and government agencies becomes blurry. Chasing around a wild menagerie of wildly competitive, innovative small companies is hard work for the Ruling Class, but securing the cooperation of a few Big Business partners to advance a political agenda is relatively easy.

Case in point: the Dodd-Frank financial regulations, promulgated as a “solution” to the 2008 financial crisis by two of its chief architects.

The Wall Street Journal discuss a new study that demonstrates Dodd-Frank has been much harder on small community banks than large institutions. In fact, it’s pushing the little guys toward consolidation with the big players, which is the exact opposite of what the public was told would happen:

A recent study by Marshall Lux and Robert Greene of the Harvard Kennedy School, “The State and Fate of Community Banking,” details the risks government overregulation poses to community banks and the markets they serve. Released in February, the study found that America’s community banks continue to play a vital role in key lending segments, providing 77% of agricultural loans and more than half of small-business loans. Well capitalized and less leveraged than larger institutions, community banks stepped up lending following the 2008 financial crisis while their too-big-to-fail competitors closed their doors to borrowers.

Messrs. Lux and Green conclude that while community banks “continue to play a uniquely important role in U.S. agricultural, residential and small business lending markets . . . and while community banks weathered the crisis with greater resilience than many mid-size counterparts, since the [2010] passage of the Dodd-Frank Act the pace at which community banks have lost market share is nearly double what it was during the crisis.

In other words, despite the benefits of the safer and more secure community-bank business model, regulation is fueling consolidation. And as the Harvard study noted, regulatory burdens, which have significantly increased since the crisis, pose a disproportionate cost to smaller community financial institutions. Washington must move quickly if it is to reverse the damaging effects of applying these post-crisis one-size-fits-all regulations to community banks.

Testifying before the Senate Banking Committee on Feb. 12, John Buhrmaster, then-chairman of the Independent Community Bankers of America and president and CEO of 1st National Bank of Scotia, N.Y., warned that unchecked regulation will kill off community banking and localized economic growth: “The rich tradition of community banking—built on personal relationships, customized offerings, and local decision making—is at risk today because of regulatory overkill grossly out of proportion to any systemic or consumer risk posed by community banks.”

The Independent Community Bankers of America (whose CEO, Camden Fine, is the author of the WSJ op-ed) wants “regulations tiered and proportionate to the size and complexity of regulated institutions,” which seems sensible, but would represent a dramatic departure from the way things are working now. The present system is hammering the most responsible, least risky financial institutions hardest.

That’s usually the way it works in a heavily regulated industry.

Slap a thousand onerous regulations on the production of lemonade, and you’ll kill corner lemonade stands, not giant beverage companies. This is particularly true if the smaller competitors could benefit from the flexibility to address local needs, as with financial institutions. Take that away, and the rationale for doing business with the big players becomes stronger. Indeed, the rationale for giving up on small markets and letting the big boys buy you out becomes difficult to resist.

In the Dodd-Frank world, Citigroup is doing greatwhile others are scaling down… thanks, in part, to favorable legislation secured with lobbying muscle. Is that what everyone thought would happen, back in 2010?


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