Dodd Frank Act Killing US Banks? Only 3 New Financial Institutions Have Opened Since 2010

As new technology and social media startups pop up almost every week, one U.S. industry has been lagging behind: banking. Since 2010, only three new banks have opened in the U.S., CNNMoney reported Wednesday.

There has also been a sharp decline in existing banks opening new branches. From 1990 to 2007, typically 500 new branches opened a year, but since 2010 that number has dropped to under 300 branches a year. Bank of America, for example, had 5,328 U.S. branches two years ago, but now that number has dropped to roughly 4,789. JPMorgan Chase also reported a decrease of 2 percent in their branches, and Citigroup has announced plans that they are leaving over a dozen countries.

One explanation for the lack of new banks in recent years might be the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in 2010. Before the act was passed, the banking industry was spurring, and over 100 new banks popped onto the scene every year, according to data from the Federal Deposit Insurance Corporation, which is responsible for approving new banks.

At the same time, banks are having a hard time profiting because the Federal Reserves have kept interest rates extremely low in recent years. Economists at the Federal Reserve, however, estimate that 75 to 80 percent of the decline in new banks is not tied to any sort of regulation and probably would have happened as a normal part of business. Recently, there has been rising popularity in bank alternatives such as peer-to-peer lending companies, like Lending Club, which is operated entirely online with no branch infrastructure. Companies like Lending Club are not held to the same requirements as banks.

The Dodd-Frank regulation was passed in an attempt to prevent events similar to the 2008 financial crisis from occurring again. The act primarily affected financial institutions, such as banks, and their customers. It established new government agencies that monitored the performance of companies that were often deemed “too big to fail.” The newly established agencies also had the power to break up large banks that might pose a risk to the financial system because of their size, and could also quickly liquidate or restructure firms that they found too financially weak, according to Investopedia. Another element of the Act, the Volcker Rule, restricted the way in which banks could invest and regulate trading in derivatives.

Dodd-Frank also required banks to have more cash on hand in case of a financial crisis and placed more restrictions on lending, which made it harder for banks to profit. Essentially, the regulation was meant to prevent large, insolvent banks from affecting the entire global financial system, but the regulation impacted smaller banks as well.

"Dodd-Frank was like the football players jumping on top of the pile," said Ernest Patrikis, a partner at law firm White and Case who spent 30 years at the New York Federal Reserve monitoring banks, CNNMoney reported.