The Unintended Consequences of Regulatory Change

“For lack of guidance, a nation falls, but victory is won through many advisers” (Proverbs 11:14, New International Version)

In response to the financial crisis of 2007 and 2008 and the onset of the Great Recession in 2010, Congress passed, and then-President Obama signed into law, the Dodd-Frank Reform and Consumer Protection Act.  The intent of the law was highly worthy—to shore up the financial condition of the nation’s banks and to protect consumers from overly aggressive loan practices, often termed “predatory lending.”  Indeed, both banks and consumers are in a stronger financial position today.  But that has not come about without the advent of unintended consequences.  Since that time, the number of banks in the US has declined from about 6700 to 4800, a decline of nearly 30 percent. [i]

Although there are many reasons for this decline, two groups of banks, namely community banks and smaller regional banks, are responsible for much of the decline, while the so-called money-center banks have grown larger in both their assets and their role in the economy.  Recently, a bill was passed and signed President Trump that changed some of the regulatory rules imposed by Dodd-Frank.  It was intended to specifically help the smaller banks, but it is not clear how much this bill will affect the trend in bank consolidations. [ii]

The DeVoe School of Business is currently performing a research study on a small regional bank in northern Indiana.  In our interviews with the bank leadership, one item that has clearly surfaced as a catalyst for the decline in similarly-sized banks is the burden of regulatory costs.  The additional costs of regulatory “reform” have fallen particularly hard on the smaller banks, as they often do not have the staff resources or expertise to properly implement the new laws, nor do they have the “critical mass” of customers over which to recover these costs.  Consequently, many of the community and small regional banks are being swallowed up by the larger banks, those with the resources, expertise, and a critical mass of customers.  In many respects, the principle of economies of scale has become more important than ever in the banking industry.  One question remains:

Over time, what will be the impact—positive or negative—on consumers?

Special thanks to Dr. Ron Zargarian and Dr. Gary Wilkinson as they both helped contribute to this article.

[i] Commercial banks in the US. (2018, May 25). Retrieved from

[ii] Ryan, T., & Ackerman, A. (2018, May 24). Trump signs banking bill. The Wall Street Journal (online). Retrieved from



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