The Democratic Party’s platform draft for Financial Services states that “[t]o restore economic fairness, Democrats will fight against the greed and recklessness of Wall Street.” Despite these goals, the proscribed policies in the Democrat’s platform will have unintended consequences that will harm consumers, and make the biggest banks bigger and smaller banks disappear.
In short, the Democrat’s platform for Financial Services entails breaking up large financial institutions into smaller institutions; while, at the the same time, increasing the regulatory burden. To break up the large financial institutions they suggest giving regulators the authority to break apart financial institutions and passing a modernized version of Glass-Steagall. To increase regulations, they offer a plan to build onto Dodd-Frank, protect the CFPB, add regulations to stop the “revolving door”, and add a transactional tax. The results of these policies would crush local community banks and increase the costs for consumers—potentially causing devastating effects to the economy.
As seen with the passage of Dodd-Frank, the increased cost of regulations (estimated at $950 Billion), has resulted in small financial institutions being forced to merge with other institutions to mitigate increased regulatory costs. Because of the high costs of regulations (including an estimated 660,656,575 hours of regulatory compliance paperwork generated by Dodd-Frank alone) , one in four local banks has vanished since 2008. This means there are 1,871 fewer small community financial institutions since the beginning of 2008. To be fair, the loss of these banks cannot solely be blamed on Dodd-Frank and the current regulatory climate; however, a study conducted by a senior fellow at Harvard’s Kennedy School of Government found the increased regulatory burden has had a major impact. The study noted that the decline in community banks accelerated in “the second quarter of 2010, around the time of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s passage.” Further, the rate of the creation of new banks is additional evidence that Dodd-Frank and burdensome regulation have harmed small community banks. Between 2004-2008, each year about 300 community banks disappeared and approximately 146 banks were created. Between 2010-2015, community banks have continued to disappear, but only 3 new banks have been created during this five-year time period.
Small local banks have two options to keep up with the crushing costs of increased regulations: (1) fail like the other 500 small banks that have failed since 2008; or (2) merge into large financial institutions. As the number of small local financial institutions decrease, Wall Street’s largest financial institutions are getting bigger. Since 2005, the largest banks with over $100 billion in assets increased from 44% to 59% of total banking assets in the United States; while, the total assets of smaller institutions fell from 27% to 11%. The Democrats ineffective and over burdensome regulations are creating more of what they are trying to destroy—large financial institutions.
If the goal is truly to redirect capital from Wall Street and big financial institutions to small and medium sized businesses in local communities, they have failed. Instead of vowing to modify current regulations to be more efficient at protecting consumers and to be less burdensome on the industry (which would improve quality and access to consumers), the Democrats are doubling down on their failed policies.