The Impact of the Dodd-Frank Act on Small U.S. Banks

Abstract

I develop and estimate an industry equilibrium model to quantify the impact of the Dodd-Frank Act on U.S. small banks. I find that Dodd-Frank's impact is two-sided. While a heightened regulatory burden depresses profitability of all banks in the short run, there is an associated positive selection effect in the long run; prolonged absence of entry and endogenous size expansion via investment makes surviving banks 41.7% more profitable, leading to less exit. Meanwhile, loan prices rise and total small bank lending drops by 13.6%. The most profound impact on small banks comes from increases in entry barriers.

Keywords: small banks, entry barriers, entry and exit, structural estimation

JEL Classification: G21, G28, L11