Dodd Frank

One of the outcomes of the mortgage crisis was the changes in banking led by Dodd-Frank. Before these changes the five big banks held 44% of all banking assets and were considered too big to fail. This meant that they were so large that even if they failed because of management mistakes the government would have to step in and save them from bankruptcy. It was felt that since the bankers knew this they would be willing to take risk that they might otherwise not take if the backing was not expected. In the world of finance this is called a moral hazard. After Dodd-Frank the big five banks now hold 67% of all banking assets. Many of these new assets come from small community banks many of whom were pushed out of business. Over the past twenty years, the share of US lending handled by community banks has fallen by half, from 41 percent to 22 percent, while the share handled by large banks more than doubled from 17 percent to 41 percent. One more example of the unintended consequences of good intentions!