Community banks have a lot to fear from the Dodd-Frank financial reforms, which could put half of them out of business, former FDIC Chairman Bill Isaac told CNBC Wednesday.
“The bigger banks can absorb it, the smaller banks can’t,” Isaac, who is now chairman of Fifth Third Bancorp, told Larry Kudlow. “I would not be surprised to see half of the community banks in this country go out of business if we don’t give some relief from Dodd-Frank for them.”
Earlier Wednesday, Federal Reserve Chairman Ben Bernanke said most of the provisions in the 2010 law were aimed at the largest financial institutions and not community banks.
“We will work to maintain a clear distinction between the community banks and larger institutions in application of the new regulations,” Bernanke said in prerecorded remarks played at a convention of community bankers.
However, Isaac called the sweeping reforms a burden on community banks.
“I think that Dodd-Frank is a terrible piece of financial legislation, he said. “It didn’t address any of the causes of the crisis that we just went through. It won’t prevent the next crisis. It’s heaped volumes and volumes of regulations.”
Isaac is also not a fan of the way the Fed’s current stress tests, which are mandated under Dodd-Frank, are being done. Since banks are required to capitalize on a depression-era scenario, they either have to raise capital or slow their growth or balance sheets, which he said many are now doing.
“What they’re missing here is that when you require banks to capitalize for a depression, it’s going to be awfully hard to get this economy moving,” he said.
The new banking regulations have also lead to the tightening of lending standards, despite the fact that banks have a lot of excess capital right now.
“Loan growth has almost been non-existent for the past three years,” he said. “It’s hurting the people who need the money the most. It’s hurting small business. I think it is impeding economic growth.”