BOHANON & CUROTT: It’s time to unleash power of small banks

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Economic Analysis by Cecil Bohanon & Nick CurottThe banking system might finally get some relief from the burdensome overregulation that has hamstrung the economy for almost a decade. The Senate has approved a bill—called the Economic Growth, Regulatory Relief and Consumer Protection Act—that would ease restrictions on thousands of small and midsize banks. If the House of Representatives passes the bill, it will be the biggest rewrite of financial laws since the Dodd-Frank Act. And it will be an enormous boon to the U.S. economy.

When Dodd-Frank was passed in 2010, it buried the banking system in 22,000 pages of new regulations. These regulations haven’t made the economy noticeably safer from the risk of another financial crisis. But they have worked wonders to slow economic growth. By imposing higher capital requirements and other compliance burdens on banks, these regulations led to a substantial decrease in bank lending. As a result, business investment has significantly decreased and fewer new businesses are being created.

Ironically, regulations meant to improve financial stability have inadvertently favored large banks at the expense of smaller banks. The cost of hiring experts and devoting resources to regulatory compliance is far more burdensome for smaller banks. Larger banks can spread these costs over a much larger business. This advantage has contributed to the decline in the number of small banks and an increase in the size of big banks, leaving the economy more exposed to potential risk from too-big-to-fail banks.

Even so, 90 percent of U.S. banks are still small, community-based banks. These community banks are vital to their local economies because their knowledge of local conditions is critical for efficient credit allocation. Community banks supply 50 percent of all loans to small businesses. And small businesses are the engine of economic growth and the economy’s primary source of new jobs. Unnecessary financial regulations slow this engine down.

The legislation being considered would ease the regulatory burden on smaller banks by exempting banks with less than $250 billion in assets from the Federal Reserve’s annual stress tests, relax unnecessary mortgage regulations, and lift restrictions on trading for banks with less than $10 billion in assets. Ninety-one of the 92 banks headquartered in Indiana are small banks with less than $10 billion in assets. Eliminating onerous regulations will benefit these banks, their customers and the economy. It’s time to stop punishing Mainstreet America for the perceived sins of Wall Street.•


Bohanon and Curott are professors of economics at Ball State University. Send comments to

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