Dodd Frank and Industry Consolidation

Enhancing regulations is meant to protect consumers. The side effect is often to protect the large incumbent firms and make it more difficult for smaller firms to thrive. This theory is proving true under Dodd-Frank.

Dodd-Frank-Act

A study by Marshall Lux and Robert Greene on community banks found that since Dodd-Frank community banks have lost market share, especially small community banks.

The top 5 largest banks also lost market share.

Community banks have also suffered a significant decline in assets while the large banks have grown. Again the five biggest banks also suffered a smaller decline in assets.

However, the five biggest banks had an increase in commercial banking, while the other banks suffered declines and the community banks suffered declines.

For private equity firms, the data is unclear.

Marc Wyatt looked at the size of the funds being marketed and noted a decrease in size. He concluded that the cost of SEC registration and regulation is not stifling the formation of smaller managers. Perhaps he missed this comment from Prequin:

The stumbling block, however, has been the number of managers able to hold a final close, with this being at the lowest level since 2010. It is evident that the private equity fundraising market is still in a state of bifurcation. The largest, brand-name managers are receiving the majority of investor commitments, with smaller managers – particularly first-time funds – finding it difficult to raise capital.

This would seem to support my opening statement. Regulation is generally better for incumbent firms. Bigger firms can absorb the regulatory overhead, with the hurdle being bigger for smaller and start-up firms.

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