While he'll convince no one in love with Big Government of his thesis, the American Enterprise Institute's Peter Wallison is making the case that recent academic research supports the proposition that Dodd-Frank and other regulatory burdens imposed by the federal government in the wake of the economic recession of 2008 are hampering the economic recovery of the U.S. (hat tip to a community bank CEO and blog reader for sending me the link).

First, a study by Michael Bordo and Joseph Haubrich showed that recoveries after financial crises are actually sharper than other recoveries. After studying 27 recession-recovery cycles since 1882, they concluded that “the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis.” So we should have expected a steep recovery after the sharp 2008–09 recession rather than the stuttering and stalling economy we have experienced.

Also, studies of Dodd-Frank’s effect have shown that the regulatory burdens imposed by that law have been particularly harsh for community banks. The Fed defines community banks as banks with $10 billion in assets or less; 98.5 percent of all US banks fall into this category. A 2012 Government Accountability Office study showed that 7 of the 16 titles in Dodd-Frank had potential adverse effects for these banks, and studies by scholars at George Mason University and Harvard’s Kennedy School have found significant compliance cost increases attributable to Dodd-Frank. “Since the second quarter of 2010,” said the Harvard study, “around the time of [Dodd-Frank’s] passage, we found community banks’ share of [US banking] assets has shrunk drastically—over 12 percent.”

Of course, the regulatory costs to community banks are not a new story; Congress has been attempting to mitigate these costs for years. What is new is the data that shows the effect of these regulatory costs on small business and hence on economic growth.

Wallison asserts that the vast majority of small businesses (traditionally, the primary drivers of job growth) require bank financing because they do not have the access to capital markets that larger business have. Increased regulatory costs mean less credit. Less credit means slower growth. Slower growth means less job creation.

This is where the costs loaded on small banks begin to affect US economic growth. Regulatory costs affect small banks more than large banks because the costs are largely fixed and large banks by definition have a bigger asset base over which to spread these costs.

When a small bank is required to hire a compliance officer, that is an employee who is not making loans or producing revenue. When the Consumer Financial Protection Bureau—set up by Dodd-Frank and the bane of small banks—sends out a 1,099-page regulation on mortgage lending, that means a community bank must engage a lawyer to interpret the new regulation, a compliance officer to apply the regulation in individual cases, and a tech firm to retool its mortgage underwriting system. All costs, no revenue, and fewer funds to lend. When a bank examiner criticizes a loan because the bank does not have audited financial statements for a customer who has never missed a payment in 20 years, that forces a bank to revise its business model and change its customer relationships. Again, costs for the bank and less financing for the small business.

If the costs Dodd-Frank has imposed on small banks are hurting small business, we should see a significant difference between the growth rates of small and large businesses since 2010. That is exactly what the data shows. In a Goldman Sachs report published in April 2015 and titled “The Two-Speed Economy,” the authors found that firms with more than 500 employees grew faster after 2010—the year of Dodd-Frank’s enactment—than the best historical performance over the last four recoveries. These firms largely had access to the capital markets for credit. However, jobs at firms with fewer than 500 employees declined over this period, although this group had grown faster than the large-firm group in the last four recoveries.

Here, then, is the source of the slow recovery from the 2008–09 recession. Although 64 percent of net new jobs in the US economy between 2002 and 2010 came from employment by small business, this source of growth has disappeared since the enactment of the Dodd-Frank Act. While larger firms have access to credit in the capital markets, millions of small firms, limited to borrowing from beleaguered community banks, are not getting the credit they need to grow and create jobs.

As I said above, Wallison won't convince the Bernie Sanders/Elizabeth Warren crowd with facts. One of the commenters to Wallison's article makes this point ably.

To blame the slow recovery on Dodd Frank is frankly hilarious. It defies logic. Big banks were the major contributors to the 2008 recession and their failure to re-inflate the lending system after the government had made them whole will go down as one the major acts of treachery against small business. Small banks are doing poorly for a far different reason. See the growth of a strong aggressive regional banking structure.

You'll notice that, unlike Wallison, no studies or statistics are cited by the commenter to back up his arguments or even his factual assertions, nor to counter those that support Wallison's arguments. Instead the basic ad hominem attack is made that Wallison's position is "hilarious."

No, it's anything but "hilarious." As people who have actually made a career in the community banking business understand, it is many things, but "hilarious" is not among them.

A man who spent his working life successfully building a de novo community bank into a powerhouse that made himself and his fellow shareholders wealthy has started over using the same scheme. Unfortunately, this time around, he's not doing it in the United States.

You might call Vernon Hill a reverse Paul Revere. Most Americans like to believe that the U.S. is still a land of opportunity, the place where anyone can start a business and make a profit. But Mr. Hill issues a warning that rings loud and clear: The British—and others—are more inviting than we are.

“The regulatory environment has become so onerous in America that it is now easier to start a business in England than in the U.S.,” Mr. Hill says—and he would know.

That's right: the U.K. a nation that, 70 years ago, embraced the welfare state with open arms, is a better place to start and build a community bank than the land of the overregulated and the home of the Franken-Dodd Monster.

“When I went to Britain I thought the regulatory environment would be much worse,” he says. “It’s infinitely better there.”

The problem in the U.S. starts with towering federal regulations, such as the voluminous reporting and compliance rules in Dodd-Frank, the financial reform act that recently celebrated its fifth birthday. “Regulators are making it impossible for the medium and small banks to comply with the rules,” he says. “The burdens get so intense that it is destroying the small and medium-size banks in America.”

The result is that Dodd-Frank, a law intended to take on the systemic risk of “too-big-to-fail” banks, is multiplying the problem. “The big banks that are too big to fail are bigger now than ever, but the regulations have trickled down to the smaller banks that didn’t cause the financial crisis” Mr. Hill says. As a result, community banks are disappearing. “When I started my first bank in the 1970s there were 24,000 banks in America,” he says. “There are now 7,000 banks. It may soon be 500 or even fewer.”

According to Hill, Dodd-Frank is not the only spewer of regulatory offal. The BSA and the CRA get equal billing as soul crushers.

“The feds have taken anti-money-laundering rules to the extreme,” Mr. Hill says. “We have to monitor every deposit account every 24 hours. Somebody’s monitoring your account every day.” That’s invasive and expensive.

He laments that the Community Reinvestment Act, a catalyst of the 2008 subprime mortgage crisis, still hasn’t been repealed. “We are literally required to make loans that we know are going to fail,” he says.

Finally, the little guys are also being beaten down by the Mini Me's of red tape.

Then there’s the tangle of local regulations that every American small business must cut through. “You don’t need a building permit in Britain. Here [the U.S.] you have to get permits and you have to get inspections,” he says. All that can eat up months and months. “I can build 100 branch banks in Britain before I can get one built in the U.S., thanks to regulators.”

The linked article gives details on how Hill personally made hundreds of millions for himself (and billions for all of the shareholders) in the U.S. and how he's on the path to do the same thing in the U.K. It also gives his parting advice for US regulators.

What to do with banks that are too big to fail? Mr. Hill doesn’t hesitate. “You have to make them smaller,” he says. “You break them up.” He says that at one point there was a rule that barred any one bank from holding more than 10% of the country’s deposits, but that some institutions, such as Bank of America, have now edged above that figure. He views that as dangerous.

And how much should we be worried about overregulation—or competition from abroad? “Here’s my story in a nutshell and I hope Washington is paying close attention,” Mr. Hill says. “A very successful American business model has been transferred to Britain, where it’s even more successful because it doesn’t have to deal with the same burdens of government.”

He continues: “The politicians keep talking about fairness and helping the little guy. But it’s the little startup businesses that get hurt the most from the heavy hand of excessive government regulation. How is that fair?"

It's not fair. That's why Hill's "outta here" and "over there." He may be starting a trend.