Community Banks' Real Problemposted by Adam LevitinCommunity banks are ailing. Over the past decade many of them have failed or been gobbled up by larger banks. What's going on?Anew studyby a fellow and a masters student at the Harvard Kennedy School of Government thinks it has found the culprits: Dodd-Frank! The CFPB! Regulation! Not surprisingly, this paper is already getting circulated by bank lobbyists as a prooftext for their anti-regulatory agenda.Let me make no bones about this study. It is gussied up to look like serious academic research, with footnotes and working paper series cover page, but don't let looks fool you. The study doesn't conform with basic norms of scholarship, such as discussing contrary evidence and having conclusions flow from evidence. Instead, the study is really a mouthpiece for a big bank anti-regulatory agenda that pretends to really be looking out for community banks. I'm not going to spend the time on a full-blown Fisking of this piece, but let me point out some serious problems and then talk about the real problem facing community banks and how big banks exploit community banks' problems to advance their own agenda.I.Problems with the StudyA. Ignores Virtually All Contrary EvidenceFirst, the study doesnt even mention some pretty important contrary evidence:The Dodd-Frank Act actually gives community banks (which Ill accept for these purposes as institutions with less than $10B in assets, even though thats pretty big) special treatment.First, Dodd-Frank exempts community banks from the Durbin Interchange Amendments debit card fee regulation. That gives community banks a huge competitive boost. Big banks regulated, community banks not.Dodd-Frank exempts community banks from examination and enforcement actions by the CFPB. They are examined and enforced by their regular prudential regulators, unlike the big banks, so there isnt a dedicated consumer protection agency focused on them. Dodd-Frank requires the CFPB to go through a special and onerous rule making process for rules that will affect small business, like community banks. Thats called a SBREFA rule-making process. It lets small businesses comment on the rules when they are in an early stage, before the train has left the station, and gives them early intel about the rules. Only two other federal agencies have to go through the SBREFA process.The CFPB has built in small bank exceptions to some of its rules, such as a small servicer exception (which is briefly mentioned) and small lender exception to QM (not mentioned).The CFPB voluntarily created a community bank advisory board. A reader would have no idea of the extent of special consideration given to community banks by Dodd-Frank and the CFPB. Indeed, one could come away from this study thinking that the CFPB has it in for community banks! In fact, the CFPB is arguably community banks' best friend in the financial regulatory space. Dodd-Frank has started creating a separate parallel regulatory track for community banks (something worth considering more deeply, but not here).B. Silly EmpiricsSecond, the study's empirics are laughable. They either show stuff that's been well-known for years (e.g. importance of community banks in commercial real estate and small business lending) or make really bad post hoc ergo propter hoc arguments.The study points to community banks declining market share after the 2d quarter of 2010. 2Q 2010 is chosen as the baseline because that's when Dodd-Frank was enacted. But the problem is that Dodd-Frank didn't go into effect immediately. The CFPB itself didnt come into existence for a year, and the CFPB doesnt start rule-makings immediately. The first CFPB rule makings of note were finalized in January 2013, but did not become effective until January of 2014! Therefore, it's really hard to blame the decline in community bank's market share on regulations that weren't in place for most of the period in question. If one undertakes a slightly more careful analysis, one can see that in the seven quarters since the CFPB mortgage rules were announced, the market share of community banks with assets over $1 B actuallygrows! (Smaller banks' market share shrinks, but at a similar rate to previous two seven quarter periods).Marketshareisnt a meaningful story when marketsizeis changing. One wouldnt know from this study that community banks assets (all bank sizes) aregrowing! Not as fast as the big banks, but they're growing. Small (