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‘Massive consolidation’: Dodd-Frank makes it harder for small banks to survive

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Politics,Beltway Confidential,Timothy P. Carney,Politics Digest

I’m not saying the Big Banks love the 2010 Dodd-Frank financial regulation bill. I’m saying they can live with it — and that their smaller competitors cannot. Thus, the law will cause more consolidation in the financial sector, possibly leading to more instability.

This is part of what JP Morgan chief Jamie Dimon meant when he said Dodd-Frank would expand the “moat” around the big banks. This is what the Columbia (Mo.) Business Times reported on, regarding the regulatory threat to small banks. This is part of the reason Wall-Street’s lobbyists talked Republicans out of trying to repeal the law.

Bloomberg News has the latest report on this front [emphasis added]:

Small banks will seek mergers because their management teams are aging and new regulations are too costly to bear, [investor Joshua Siegel] says.

“If you need one major overriding theme of the industry in the next three, five, seven, 10 years: massive consolidation, thousands of banks,” says Siegel, whose firm managed $5.1 billion as of the end of last year and invests in small banks. In the U.S., “I do see probably anywhere from 2,000 to 4,000 banks being swallowed up, and what you’ll see then is a more-concentrated system.”

JPMorgan’s Dimon, a critic of regulations he views as unnecessary or excessive, has recently touted the benefits. He told Citigroup analysts this month that new rules will help banks such as JPMorgan, the largest in the U.S., win market share from smaller competitors, the analysts wrote in a report.

In Dimon’s view, they wrote, the changes will “make it more expensive and tend to make it tougher for smaller players to enter the market, effectively widening JPM’s ‘moat.’”

The new rules, it turns out, may be doing more to shield banks from competition than to make them safer.

How does Dodd-Frank tilt the playing field towards the big guys? Partly through the crushing costs of regulation, which fall disproportionately on the small guys. Partly because the big guys can hire up the government officials who wrote the law (more here) and thus they have an inside track to tweak the law to their benefit. Partly because the big guys have the flexibility to get around the law.

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