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Is too-big-to-fail hurting small banks?: Erica Alini

It would be bad news for small business

The Goldman Sachs building in Manhattan (Photo: Youngking11/Wikimedia)

The Goldman Sachs building in Manhattan (Photo: Youngking11/Wikimedia)

The arsenal of new financial regulation crafted in the aftermath of the 2008-2009 crisis is finally starting to have a palpable impact on the likes of Goldman Sachs and JP Morgan. But the sweeping U.S. rules seem to be hitting some peripheral targets much harder: Small banks.

All but five of 131 bank M&As announced this year were under $400 million, the Wall Street Journal noted in August. For comparison, Morgan Stanley has assets worth upwards of $780 billion. It’s small banks that are buying each other — and one big reason for this is that many of them don’t have the resources to cope with the new federal banking and financial rules. Ironically, the offensive against too-big-to-fail seems to be encouraging the minnows to school.

It sounds like bad news for America’s small businesses. Community banks worth less than $10 billion account for 10% of the industry by assets but make about 60% of the loans to small businesses, according to the Independent Community Bankers of America. Bigger banks have shown little appetite for lending to tiny companies, which tends to be a high-risk, low-reward bet.

When Congress crafted the Dodd-Frank bill of 2010 to overhaul the financial system it had Wall Street in mind, not the thousands of small and medium banks that help Average Joes across America — and especially in rural areas — pay for a car, a house or a new investment for their local business.

And yet, the community banks are grappling with thousands of pages of new regulation that kicks in January 2014 — 3,500 pages from the Consumer Financial Protection Bureau alone, according to the American Banker. Many don’t have the money to beef up their regulatory compliance teams or to attract the smarter guys in that line of work. The only viable solutions, in many cases, is to pool resources via a merger or acquisition, or stop offering certain banking service that have become too complex to deal with.

With the inflation-adjusted value of small business loans still under 80% of what it was in 2007, that’s a concerning trend. Regulators, and particularly the Fed, seem to have awoken to the problem and to be looking for ways around. But with Congressional legislation written with the carpet-bombing approach in mind, it’s unclear how much latitude they have in inserting exceptions and exemption that would avoid collateral damage.

Erica Alini is a reporter based in Cambridge, Mass., and a regular contributor to, where she covers the U.S. economy.

Follow @ealini