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Too Big to Fail or Too Small to Save? Dodd-Frank and the Ripple Effect on Big and Small Banks

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Over the past decade, the United States has legislated huge responses to national crises. Shortly after 9/11, the Patriot Act was passed by Congress. In the wake of Enron and other accounting scandals, Sarbanes-Oxley was introduced. Troubled Asset Relief Program (TARP) was released to address the mortgage crisis of 2008 and, as a result of the bailout and other issues prevalent throughout the financial industry, the Dodd-Frank Wall Street Reform and Consumer Protection Act was legislated in 2010.

Dodd-Frank aims to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”1 2

This will be accomplished, in part, by implementing the following:3

  • Creation of Financial Stability Oversight Council, responsible for providing “comprehensive monitoring” of the United States financial industry, and identifying risks and threats.4
  • Creation of the Bureau of Consumer Protection Agency, responsible for the oversight of consumer financial laws.
  • Increasing capital requirements for banks with more than $50 billion in assets5 (further complicating implementation are the “Basel III” requirements for banks set to begin on January 1, 2013).6
  • Further regulation and transparency of the over-the-counter derivatives market.7
  • Subjecting credit rating agencies to even greater SEC oversight, increasing what was legislated in Congress’ Credit Rating Agency Reform Act of 2006.8
  • Requiring executive compensation disclosure to shareholders as part of good corporate governance.9 10
  • Incorporating the “Volcker Rule”, aimed to limit proprietary trading.11
  • Implementing new registration and disclosure rules for certain investment advisors.12
  • Legislating changes in the securitization market so that “securitizers of financial assets...retain a portion of the credit risk of securitized financial assets”.13

This past summer the massive legislation celebrated its first anniversary. Not surprisingly, since Dodd-Frank was voted (and passed) strictly along party lines its validity continues to be debated—particularly as the presidential nominations and debates and, ultimately, the national election, grow closer.14


Community banks are “the primary source of credit, depository, and other financial services in thousands of rural areas, small towns, and suburbs across the nation.”15 They are the smaller banks that are owned and operated locally, not the “too-big-to-fail banks” that dominated headlines in 2008. Community bankers argue that they cannot afford to comply with all the new rules and regulations and that they are paying the price for problems inflicted on the public by the large banks.16 They claim increased regulation will result in higher costs, fewer jobs, and fewer loans.17

At a GOP debate this fall, Mitt Romney argued, “Community banks...can't possibly deal with a regulatory burden like that.” The big banks “can deal with it” but “it's a killer for the small banks.” Newt Gingrich, in his description of the law and its impact, said: "Community banks are 12 percent of the banks right now and 40 percent of the loans to small business and they are being destroyed by Dodd-Frank."18 The American Banking Association has also argued that the Dodd-Frank Reform is too burdensome for the smaller banks and will ultimately result in fewer loans.19 Economic Growth, Capital Access and Tax Subcommittee Chairman Joe Walsh (R-IL) conducted a hearing in June 2011 entitled, “The Dodd-Frank Act: Impact on Small Businesses Lending.”20 He described the 2,300-page legislation as a “massive regulatory reorganization that contains requirements for over 240 new rulemaking actions” that will cost $1 billion to implement. Walsh concluded that the Act will drain $27 billion in “job creating funds” over 10 years from our economy and require 2,600 additional new full-time federal government employees.21 He asserts that Dodd-Frank “has caused uncertainty on behalf of both bankers and business owners, which leads to less lending to small business and less desire to take on additional capital.”22

Finally, President and CEO of the American Bankers Association (ABA) Frank Keating said the implementation of the Dodd-Frank Act “threatens the survival of many community banks that are the economic lifeblood of small towns across America.”23 The ABA also issued a report explaining that the Act is “impairing community banks’ ability to serve customers and local communities.”24


Dodd-Frank co-author Christopher Dodd explained that “small community banks were victims of the crisis, with hundreds failing as a result of the big banks’ risky gambles. That is why they came to Congress and asked us to modernize and strengthen financial regulations, leveling the playing field against the shadow banking industry—entities such as payday lenders and mortgage brokers that had been created to avoid regulation.”25 Neal S. Wolin, Deputy Secretary of the Department of the Treasury, authored Dismantling the Myths around Wall Street Reform and specifically addressed the “myth” that “Wall Street reform hurts small banks.”26

He explains that larger institutions are subject to additional rules and requirements under the Act and bear additional burden for compliance:

  • Capital and liquidity requirements designed specifically to mitigate threats from the failure of large, multinational banking giants are not required for about 7,000 community banks.
  • The Act requires the largest corporations bear a greater proportionate cost of the deposit insurance protection.
  • Deposit insurance protection more than doubles from $100,000 to $250,000, a far more significant backstop for the smaller banks catering to smaller consumers.


The Act does not officially discriminate against large or small banks. On the other hand, there is no denying the Act imposes complex new regulations and requirements on financial institutions big and small. Not surprisingly, the bigger banks are far better resourced and equipped to implement the new requirements, and the unintended consequence is that small banks are proportionally more burdened. Thousands of small banks, those with limited resources and staff that serve local communities, are saddled with massive compliance requirements (even if these requirements are limited in comparison to the multinational banks).

As of December 2011, almost a year and a half after the legislation passed, only 25% of provisions have been implemented.27 Even after all the provisions are finally put in place, time will have to pass to reflect on their effects to both banks and consumers. Moreover, given the strict voting along party lines when passed, it is likely that the validity and effectiveness of Dodd-Frank will be part of the political debate for years to come, including during the current presidential campaign. Hopefully, small banks (and their stakeholders and constituents) will not suffer any further as a result of the legislation; otherwise too big to fail may become too small to save.

–Howard Spieler is the compliance officer for NYCIDA (New York City Industrial Development Agency) and a senior vice president of the NYCEDC (New York City Economic Development Corporation). The views expressed herein are those of the author alone and do not reflect those of the NYCIDA, NYCEDC, or the City of New York


1 https://www.sec.gov/about/laws/wallstreetreform-cpa.pdf

2 https://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf

3 https://www.mofo.com/files/Uploads/Images/SummaryDoddFrankAct.pdf

4 https://www.treasury.gov/initiatives/FSOC/Pages/default.aspx

5 https://www.housingwire.com/2011/11/16/occ-basel-capital-requirements-top-priority-dodd-frank-complicates

6 https://www.housingwire.com/2011/10/19/in-race-to-adopt-dodd-frank-us-falls-behind-on-basel-iii

7 https://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/regulatory-practice-letters/Documents/rpl-1013-otc-derivatives.pdf

8 https://www.sec.gov/spotlight/dodd-frank/creditratingagencies.shtml

9 https://www.pwc.com/us/en/financial-services/regulatory-services/publications/assets/closer-look-executive-compensation.pdf

10 https://www.sec.gov/spotlight/dodd-frank/corporategovernance.shtml

11 https://www.skadden.com/newsletters/FSR_The_Volcker_Rule.pdf

12 https://www.sec.gov/news/press/2011/2011-133.htm

13 https://www.mofo.com/files/Uploads/Images/100721SECABS.pdf

14 https://www.nytimes.com/2011/09/21/business/dodd-frank-act-is-a-target-on-gop-campaign-trail.html?pagewanted=all

15 https://www.icba.org/files/ICBASites/PDFs/test030211.pdf

16 https://www.creditorweb.com/definition/community-bank.html

17 https://www.loansafe.org/community-bankers-speak-out-on-the-impact-of-dodd-frank-regulations

18 https://www.politifact.com/truth-o-meter/statements/2011/nov/21/newt-gingrich/newt-gingrich-says-dodd-frank-destroying-community/

19 https://www.politico.com/news/stories/1011/66178.html

20 https://smbiz.house.gov/Calendar/EventSingle.aspx?EventID=245671

21 https://smbiz.house.gov/UploadedFiles/Opening_Statement_Final.pdf

22 https://www.smallbusiness.house.gov/News/DocumentSingle.aspx?DocumentID=247057

23 https://regreformtracker.aba.com/2011/09/keating-reg-burden-threatening.html

24 https://aba.com/aba/documents/DFA/DFA_CBBurden_072111.pdf

25 https://www.washingtonpost.com/opinions/five-myths-about-the-dodd-frank-financial-regulations/2011/10/19/gIQAtq7j4L_story.html

26 https://www.treasury.gov/connect/blog/Pages/This-Week-on-Treasury-Notes-Dismantling-the-Myths-Around-Wall-Street-Reform.aspx

27 https://www.washingtonpost.com/business/capitalbusiness/banks-still-waiting-on-most-dodd-frank-rules/2011/12/20/gIQAeBZUHP_story.html

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