Big Banks versus Agricultural Banks: Has Too‐Big‐To‐Fail Regulation Affected Efficiency and Scale Economies Measures?

The Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010 aimed to improve the financial stability of the banking industry. This reform was intended to reduce the too‐big‐to‐fail practices for very large banks. However, it might also affect the performance of relatively small asset size banks with different lending portfolios. Using the Call Report data from 2006 to 2016, evidence suggests that the Dodd‐Frank Act has affected the estimates of cost efficiency and returns to scale measures of both big banks and small agricultural banks. Results indicate that Dodd‐Frank Act has increased cost efficiency, discouraged mergers, and encouraged product specialization for banks above the $50 billion asset size. However, none of these results hold for the banks just above the $10 billion asset size. This appears to suggest that Dodd‐Frank Act has mainly affected the economic measures of those very big banks that are subject to the more stringent regulations. Nevertheless, Dodd‐Frank has reduced agricultural banks' cost efficiency and increased incentives for mergers. In addition, the Dodd‐Frank Act has dampened the incentives for product diversification in agricultural banking. Likewise, evidence exists that this act has slowed productivity growth, efficiency, and technological change in agricultural banks. Taken together, Dodd‐Frank reduced consolidations in very big banks that are subject to greater oversight but adversely affected U.S. agricultural lending.