Too Many to Fail: Against Community Bank Deregulation

70 Pages Posted: 18 Dec 2019 Last revised: 9 Feb 2020

See all articles by Jeremy C. Kress

Jeremy C. Kress

University of Michigan, Stephen M. Ross School of Business

Matthew C. Turk

Indiana University - Kelley School of Business

Date Written: December 13, 2019

Abstract

Since the 2008 financial crisis, policymakers and scholars have fixated on the problem of “too-big-to-fail” banks. This fixation, however, overlooks the historically dominant pattern in banking crises: the contemporaneous failure of many small institutions. We call this blind spot the “too-many-to-fail” problem and document how its neglect has skewed the past decade of financial regulation. In particular, we argue that, for so-called community banks, there has been a pronounced and unjustifiable shift toward deregulation, culminating in sweeping regulatory rollbacks in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

As this Article demonstrates, this deregulatory trend rests on three myths. First, that community banks do not contribute to systemic risk and were not central to the 2008 crisis. Second, that the Dodd-Frank Act imposed regulatory burdens that threaten the survival of the community bank sector. And third, that community banks cannot remain viable without special subsidies or regulatory advantages. While these claims have gained near-universal acceptance among legal scholars and policymakers, none of them withstands scrutiny. Contrary to the conventional wisdom, community banks were key participants in the 2008 crisis, were not uniquely burdened by post-crisis reforms, and continue to thrive economically.

Dispelling these myths about the community bank sector leads to the conclusion that diligent oversight of community banks is necessary to preserve financial stability. Accordingly, this Article recommends a reversal of the community bank deregulatory trend and proposes affirmative reforms, including enhanced supervision and macro-prudential stress tests, that would help mitigate systemic risks in the community bank sector.

Keywords: banks, community banks, too big to fail, too many to fail, Dodd-Frank Act, systemic risk, financial regulation

Suggested Citation

Kress, Jeremy C. and Turk, Matthew C., Too Many to Fail: Against Community Bank Deregulation (December 13, 2019). Northwestern University Law Review, Vol. 115, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3503692 or http://dx.doi.org/10.2139/ssrn.3503692

Jeremy C. Kress (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Matthew C. Turk

Indiana University - Kelley School of Business ( email )

1309 E. 10th Street
Rm. HH4080
Bloomington, IA 47405
United States

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