Gwen Moritz

Correlation ≠ Causation

Gwen Moritz Editor's Note

Correlation ≠ Causation
A former bank in Augusta (Luke Jones)

(A correction has been made to this article. See end for details.)

American Banker published last week a thought-provoking article by Victoria Finkle headlined “Is Dodd-Frank Really Killing Community Banks?” I’m not one of those old-school editors who object to questions as headlines — we use them in Arkansas Business and no apologies — and the question intrigued me. Have I been suckered?

This is an Opinion

We'd also like to hear yours. Leave a comment below, tweet to us at @ArkBusiness or
email us.

Two weeks ago, Arkansas Business published guest commentary from U.S. Reps. French Hill, R-Ark., and Stephen Fincher, R-Tenn., titled “Nightmare on Main Street,” which argued in the affirmative: Yes, the Dodd-Frank Wall Street Reform & Consumer Protection Act has been “devastating.”

Hill and Fincher relied in part on a report by the Harvard Kennedy School of Government that Finkle also quoted: “Consolidation is not inherently a bad trend, but policymakers should be concerned that a critical component of the U.S. banking sector may be withering for the wrong reasons — inappropriately designed regulation and inadequate regulatory coordination.”

But while Hill and Fincher — they are politicians, after all — made no effort to look at more than one side, Finkle gave the question a 360. While it has certainly felt — to me, anyway — as if banks are choosing to either acquire or be acquired in order to create the economies of scale needed to afford the increased cost of regulation, how things feel and what the data show are not always the same thing.

For instance, Finkle reported that banks have consolidated at an average rate of 3.5 percent per year over the past 30 years. “The pace did slow somewhat in the mid-2000s, but the shrinking has never stopped or reversed,” she wrote.

But the rate is much faster now, right? You’d think so, since Hill and Fincher noted that the number of community banks has fallen at “a rate of nearly one per day” since Dodd-Frank was adopted in 2010. But, according to Finkle, the rate has increased only to about 4 percent per year in the past five years — an appreciable uptick, yes, but devastating?

Maybe what feels different is that the consolidation we’re seeing now isn’t “FDIC-assisted,” as was virtually all of the bank M&A activity for half a decade.

The number of banks chartered in Arkansas has dropped from 120 at the beginning of 2014 to 106 today — nearly 12 percent in a year and a half. But half of that is attributable to Simmons First National Corp. merging six smaller state charters into its Pine Bluff national charter and acquiring Delta Trust & Bank (which resulted in a multimillion-dollar payday for French Hill, then its CEO). If we back out all the Simmons charters — multibank holding companies were out of style long before Dodd-Frank — the rate at which charters are disappearing in Arkansas is not far off the national trend.

And Arkansas can afford it. We still have a bank charter for every 28,000 residents; the national ratio is close to 1:50,000. Our state also has a bank office for every 2,150 residents, compared with a national average of about 3,450 — despite having a disproportionate number of “unbanked” Arkansans.

Finkle went on to point out something I’ve asked bankers about: The number of banks that are being merged out of existence is not being offset at all by bank startups. Only four new banks have been chartered since 2010, Finkle wrote; there used to be 100 or more per year.

Bankers I’ve talked to don’t expect to see a de novo in Arkansas anytime soon. Who would start a bank in the current interest rate environment?

More worrisome, then, than the declining number of bank charters is Finkle’s discussion of “the disparate treatment small banks receive from law enforcement when rules are broken.” While the big banks write checks to settle with the government, bankers at smaller banks get personal sanctions. (Not to excuse the alleged crimes on the late Scooter Stuart’s watch, but does it seem right that more bankers from little One Bank & Trust are being prosecuted than from all of the big banks put together?)

The president of a small Oklahoma bank told Finkle that her bank’s compliance spending has risen from 3 percent of the bank’s budget in 2008 to nearly 15 percent in 2015. Mary Beth Brooks, CEO of the Bank of Fayetteville, recently told me that regulators are in her bank every few weeks and the cost of training her staff to comply with new regulations has become a burden. BOF, as you probably know, is being acquired by Farmers & Merchants of Stuttgart.

Finkle concludes that Dodd-Frank has contributed to the trend toward bank consolidation, but it isn’t the sole factor. And while Harvard has sided with the opponents of Dodd-Frank, Georgetown law professor Adam Levitin, an expert on financial regulation, sent a different warning via Finkle’s article: “The Republican agenda is to get regulatory relief for the big banks and use the small banks as the lever to do so.”

Say it ain’t so.

(Correction, Aug. 25, 2015: At one point in the original article, information was attributed to Fincher that should have been attributed to Finkle. The attribution has been corrected.)

Gwen Moritz is editor of Arkansas Business. Email her at