The Effect of Dodd-Frank on the Profitability of Community Banks: An Econometric Model

Conclusion

By examining explanatory variables for 82 banks in the years 2010-2014 factors affecting each dependent variable have been determined. Return on Equity is influenced negatively by growth of total deposits, cost efficiency, bank loan portfolio, non-performing loans, interest rate, and FRASE index, and positively affected by credit quality, assets, and real GDP. Return on Assets is influenced positively by the net interest margin, credit quality, and real GDP, and negatively by the FRASE index, non-performing loans, cost efficiency, and growth of total deposits. The Net Interest Margin is influenced negatively by inflation, and the interest rate and positively by non-performing loans. According to the models, there has been an impact on the profitability of banks since the enactment of the Dodd-Frank Act. This is evidenced by the negative correlation between profitability and the FRASE index. This correlation indicates that more regulation in a state decreases bank profitability. In addition, there was a positive correlation between asset size and profitability. This is interpreted as the smaller a bank is, the less profitable it will be. To conclude, a small bank and regulations will both negatively impact profitability. These findings are similar to findings by Naceur and Omran (2011). The Dodd-Frank Act requires more liquidity and there is evidence that holding deposits negatively affects profitability. However, the Dodd-Frank Act may have impacted the credit quality of banks and increased the quality of loans held. There is evidence that high quality loans increase profitability.

Extensions of Research

This study was based on the premise that the Dodd-Frank Act affects each of the explanatory variables and that these variables determine a bank’s return on equity, return on assets, and net interest margin. This study may be subject to omitted variable bias as there are many factors which may impact a bank’s profitability which were not included. It may be beneficial for future researchers to look into other regulations and their effects on different industries. In addition, sometime macroeconomic data is logged, however, it is not in this study. It may behoove a researcher to see if the data becomes more significant if it is logged. The economy was still recovering from a recession for the years available to sample; a more accurate study may be possible after the economy has recovered for a longer period. Eighty-two banks were used for this study, for future studies, larger and separate samples of community and non-community banks might lead to more accurate results.

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Appendix A: Banks & Locations Data

Appendix B: Correlation Matrix Appendix C Variable Descriptions

Appendix D: Descriptive Statistics

Appendix E: ROE Dependent Variable: Model Results

Appendix F: ROA Dependent Variable: Model Results

Appendix G: NIM Dependent Variable: Model Results

Appendix H: FRASE Score Map