Tags: AEI | Fail | Banks | Small | Business

AEI: 'Too Big To Fail' Banks Are Choking Small Business

By    |   Sunday, 02 Mar 2014 03:47 PM

The Dodd-Frank financial reform law has not only broadened Washington’s “too big to fail” safety net for Wall Street, but it also is choking off lending to small businesses by killing community banks, according to blogger James Pethokoukis of the American Enterprise Institute (AEI).

In an AEI column, he noted the law explicitly permits bank bailouts by the government, to be financed by taxes on surviving bank and potentially by taxpayers.

“Indeed, megabanks have responded to Dodd-Frank’s TBTF (too big to fail) incentives by
getting bigger, the industry more concentrated.”

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According to Fortune, the six biggest banks now hold 67 percent of U.S. financial assets, up from 37 percent only five years ago.

Pethokoukis said that by “doubling down” on TBTF, Dodd-Frank squeezes the rest of the nation’s banks.

He cited research from the Mercatus Center at George Mason Center, which concluded Dodd-Frank is imposing new regulations that weigh the heaviest on smaller banks.

The Mercatus Center’s Hester Peirce and Robert Greene wrote, “Moreover, by designating the largest financial institutions as ‘systemically important,’ Dodd-Frank creates a market expectation that designated firms are too big to fail and generates funding and other competitive advantages for the largest U.S. banks.”

Since Dodd-Frank was passed in 2010 until mid-2013, the U.S. shuttered 650, or 9.5 percent, of its small banks, Peirce and Greene said.

An attendant problem with more concentration in the TBTF big bank category, according to Pethokoukis, is that community banks provide almost half of small-business loans.

He said the system erected by Dodd-Frank actually rewards the big banks for taking on risk in areas such as mortgage lending.

Gabe Krajicek, CEO of Kasasa, which together with a group of community banks commissioned a survey of U.S. adults about their opinion of big banks, said he was surprised at the popular anger against the TBTF set.

The survey found that 71 percent of Americans believe big banks have not taken responsibility for their role in the 2008 financial meltdown that nearly sank the economy, he told Yahoo Daily Ticker.

The study showed consumers want to support community banks and credit unions but do not view them as adequate alternatives to the big banks. Krajicek said that conclusion is actually a “myth,” and that smaller banks serve smaller customers equally as well as big banks.

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The Dodd-Frank financial reform law has not only broadened Washington's "too big to fail" safety net for Wall Street, but it also is choking off lending to small businesses by killing community banks, according to blogger James Pethokoukis of the American Enterprise Institute.
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Sunday, 02 Mar 2014 03:47 PM
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