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

Abstract

I estimate a dynamic banking model to quantify the impact of the Dodd–Frank Act on small banks and bank entry in the United States. The model features a bank portfolio-choice problem with a risk-return trade-off in the loan market. My counterfactual experiments uncover a novel regulatory dis-synergy: while tighter capital requirements mitigate bank risk, higher compliance costs create a risk-seeking incentive for banks. The interaction of the two creates a strong destabilizing effect that aggravates bank failures in the short run. Furthermore, I find that increases in regulatory burdens explain about 70% of the collapse of bank entry since 2010.