White House Says Dodd-Frank Not to Blame for Decrease in Community Banks

WASHINGTON—The Dodd-Frank overhaul financial law isn’t to blame for the decline in the number of community banks, the White House Council of Economic Advisers said in a new report.

Since the passage of the law six years ago, a common complaint by community bankers is that new regulations are squeezing their profits and hampering their ability to provide credit to Main Street. It is widely acknowledged that Dodd-Frank has raised compliance costs for small banks, which aren’t able to absorb new expenses as easily as larger firms.

The report, set to be released Wednesday, said the community banks over all are the picture of health.

“There’s no evidence at all that Dodd-Frank has had a negative impact on this sector,” Jason Furman, chairman of the council, said in an interview. As evidence, the White House said nearly every county has a bank office, and many Americans have the ability to use a community bank. It also said lending by community banks has increased since 2010.

“In all those respects, this sector has been really successful in the last six years, and so it’s hard to say Dodd-Frank caused a problem,” said Mr. Furman.

Community banks have expanded their lending faster than larger financial firms, according to the Federal Deposit Insurance Corp.

Lending by community banks was up 8.9%, year over year, at the end of the first quarter, outpacing the loan growth of larger banks.

The economic report points to longer term trends in banking, including changes in branching patterns, that were playing out long before President Barack Obama signed the Dodd-Frank law in 2010—one of the legacies of his administration.

Critics point to the declining number of community banks as evidence that new regulatory requirements are too restrictive and have encouraged industry consolidation.

A number of studies conducted in the past few years on the impact of Dodd-Frank on community banks paint a less rosy picture than the White House’s report. A 2015 study by the Government Accountability Office and a 2014 study conducted by the Mercatus Center’s Small Bank Survey found postcrisis regulations resulted in increased compliance costs and forced smaller-size institutions to reconsider what products and services they offered to bank customers.

Independent Community Bankers of America President Camden Fine has embraced a proposal by House Financial Committee Chairman Jeb Hensarling (R., Texas) to replace Dodd-Frank. “ICBA has repeatedly called on Congress to rein in community bank overregulation,” he said in a statement, adding the Hensarling plan, which could largely exempt community banks from stricter rules, “will free up resources that can be used to make loans, promote economic growth and create jobs in local communities nationwide.”

While the White House report backed efforts by regulatory agencies to tailor rules to community banks, it is unlikely to give community bankers much hope of gaining regulatory relief.

“This report certainly says you would not want to gut Dodd-Frank or undermine critical consumer protection or dramatically change the definition of a SIFI [systemically important financial institution] in order to solve something that may be less of a problem then some have argued,” Mr. Furman said.

Write to Donna Borak at donna.borak[a]wsj.com