US losing one bank or credit union a day, but trend was in works before Dodd-Frank

According to U.S. Rep. Keith Rothfus, community banks have been collateral damage in Dodd-Frank’s push to rein in big banks.

Rothfus said America has lost an average of one community bank or credit union every day since the end of the Great Recession, when Dodd-Frank became law.

Rothfus, a Republican, made the claim in a press release explaining his May 22 vote in favor of a partial rollback of Dodd-Frank, the Obama-era law containing new financial sector controls and consumer protections inspired by the banking industry’s role in the financial collapse of 2007. We stumbled upon the claim when comparing Rothfus’ voting record to that of rookie Democratic Congressman Conor Lamb, who is after Rothfus’ seat in the newly drawn 17th District, which includes Beaver and parts of Allegheny County.

"Since the end of the financial crisis, we have seen an average of one community bank or credit union disappear every day," Rothfus said.

The Great Recession ended in June 2009 — though the recovery continues in many places. Dodd-Frank was signed into law by President Barack Obama one year later and has remained on the books.

So is Rothfus’ claim about a decimated community banking sector accurate? Here’s what we found.

Rothfus made his claim after voting in favor of the Economic Growth, Regulatory Relief, and Consumer Protection Act, S. 2155, which supporters said will lessen the Dodd-Frank burden on community banking institutions — defined as those with less than $10 billion in assets — and which critics argue creates wiggle room and loopholes that larger banks will exploit. The rollback was signed into law by President Donald Trump on May 24.

In explaining his "yes" vote two days earlier, Rothfus said, "Today a House majority that included both Republicans and nearly three dozen Democrats voted to right-size regulations for our community and regional financial institutions. Since the end of the financial crisis, we have seen an average of one community bank or credit union disappear every day."

As we stated above, the Great Recession ended in June 2009, the point at which real GDP and industrial production hit bottom and resumed growth. So we’ll start with the third fiscal quarter of 2009 in looking at the number of community banks reporting to the Federal Deposit Insurance Corporation, or FDIC.

According to FDIC data, there were 7,309 community banks in the third quarter of 2009, and that number decreased every quarter since, winding up at 5,168 in the first quarter of this year. (When asked to cite the source of his claim, Rothfus’ office pointed to FDIC data.)

That’s a decrease of 2,141 reporting institutions over 35 fiscal quarters or roughly 244 fewer a year.

The decline in community bank numbers certainly has continued under Dodd-Frank. But it was also underway long before the Great Recession and Dodd-Frank ever took hold.

"From 1985 to 2013, the number of the smallest institutions has declined dramatically (85 percent to be exact)," PolitiFact reported in 2015. "But mid-size and large community banks have remained relatively stable since 2010 (and have increased, albeit incrementally, since 1985)."

The report adds: "Two-thirds of failed or voluntarily closed community banks are actually acquired by other community banks, according to the FDIC. The result: fewer, but larger community banks. Their goal: to achieve ‘economies of scale’ (cost advantages gained when spreading out expenses over more revenue), says the U.S. Government Accountability Office."

A 2015 paper published by the Federal Reserve Bank of Kansas City found the number of "failed" community banks went down under Dodd-Frank — from roughly 125 in 2010 to less than 25 in 2014 — while the number of community banks involved in voluntary mergers grew in that same period — from roughly 175 to more than 225.

PolitiFact found that the consolidation craze was "a 30-year trend" with various underlying causes — they include a softening of interstate banking rules in the ’80s. And while some experts say Dodd-Frank has exacerbated the trend, the law’s exact impact remains the subject of much debate.

According to National Credit Union Administration data, there were 7,691 federally insured credit unions in the U.S. in June 2009. That number fell to 5,573 in the last quarter of 2017 — the most recent quarter for which data is available.

That’s 2,118 fewer federally insured credit unions, or roughly 282 fewer a year.

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John Fairbanks with the Office of Public and Congressional Affairs at the National Credit Union Administration said the "federally insured credit union" figures above include all but roughly 125 credit unions — those are privately insured — in the United States.

Fairbanks told PolitiFact Pennsylvania that it’s important to note what’s happening with these "disappearing" credit unions.

"That does not mean those institutions were simply ‘lost.’ Most credit union ‘losses’ are the result of mergers, usually a smaller credit union into a larger one, and usually for a business-related purpose, such as the smaller credit union being unable to provide a greater array of services to members," Fairbanks said. "So credit union members do not ‘lose’ a credit union; it folds into another one. The numbers go down, but note that credit union membership and industry assets continue to grow."

So mergers are increasingly common with both U.S. credit unions and community banks.

Fairbanks added, "This, by the way, is a long-running trend in credit unions and financial services generally, going back decades. The consolidation process is nothing new."

As for the bill supported by Rothfus, the National Law Review says it could actually speed up the pace of community and regional bank mergers by raising the threshold for "enhanced prudential standards" applied to big banks from $50 billion to $250 billion.

"The increase in this threshold is especially important because it may spark renewed interest in [merger and acquisition] opportunities among regional banks that have carefully managed growth to avoid crossing $50 billion or that have otherwise been reluctant to pursue transactions in light of the significant regulatory scrutiny that has accompanied applications by large acquirors," the Law Review reports.

Rothfus said, "Since the end of the financial crisis, we have seen an average of one community bank or credit union disappear every day."

His statement is supported by data for that timeframe from both the FDIC and National Credit Union Administration. Since the third quarter of 2009, America lost 2,141 community banks and 2,118 credit unions. That’s 4,259 financial institutions total. Over roughly eight years, that’s 486 per year or roughly 1.4 per day.

However, some banks "disappeared" due to voluntary consolidation, something that has been happening for 30 years, and not always as a direct result of Dodd-Frank.

Therefore, Rothfus’ claim — given its context — is Mostly True.