According to community bank chairman William Grant, the burden of compliance with many tons of new regulations is crushing community banks. As a result, he claims, everyone should prepare for the phenomenon of the incredible shrinking bank biz. According to a recent Bank Safety & Soundness Advisor article (paid subscription required), Mr. Grant's recent testimony before Congress on behalf of the American Bankers Association was the polar opposite of "sunny."
“Without quick and bold action to relieve regulatory burdens we will witness an appalling contraction of the banking industry, at a pace much faster than we’ve witnessed over the last decade,” Grant said. “It is not unusual to hear bankers—from strong, healthy banks—say they are ready to sell to larger banks because the regulatory burden has become too much to manage. These are good banks that for decades have been contributing to the economic growth and vitality of their towns, cities, and counties but whose ability to serve their communities is being undermined by excessive regulation and government micro-management. Each bank that disappears from the community makes that community poorer.”
Perhaps anticipating the argumenht of the disintellctually dishonest pundits from the left of the political spectrum that bankers of all stripes want absolutely no regulations of their business, Mr. Grant claims that a basic problem with the deluge of regulations promulgated (and to be promulgated) in the wake of the abuses of the last decade is that their cost to banks outweighs their benefit to anyone.
“Banks appreciate the importance of regulation that protects the safety and soundness of the bank and protects the interests of our customers,” he said. “We know that there will always be regulations that control our business – but the reaction to the financial crisis has layered on regulation after regulation that does nothing to improve safety or soundness and only raises the cost of providing credit to our customers.”
“During the last decade the regulatory burden for community banks has multiplied tenfold, with more than 50 new rules in the two years before Dodd-Frank. Over the last decade 1,500 community banks have disappeared from communities. Each new law or regulation in isolation might be manageable, but wave after wave, one on top of another, will certainly over-run many more community banks.”
Grant also warns of something that other community bankers lay awake at night sweating: Dodd-Frank trickle down. Grant alleges that such fears are justified, and gives a specific example.
“We thought that the Volcker rule was something that only our colleagues in the largest banks had to attend to,” Grant said. “Instead, the regulators have proposed to implement the Volcker rule in a way that requires even a bank of our size to carefully examine any security we buy to manage our mix of assets and liabilities so that we do not accidentally do something that the implementing rule may not permit. We will also have to review every community investment we make for the same reason.”
The bank not only has to keep a close eye on securities and investments, but it also has to pay more attention to bank policies, he argues.
“Both asset and liability management and community reinvestment are basic banking activities that our regulators expect us to do day-to-day,” he says. “Now we have to develop policies and procedures to make sure we are evaluating those activities regularly in light of some 300 pages of technical regulatory guidance that is intended to address activities it wouldn’t even occur to us to conduct. These and other changes will have a pernicious impact on banks and their communities. They raise credit costs and litigation costs (for even minor compliance issues), lead to less hiring or even a reduction in staff, make hedging risks more difficult and costly, and restrict new business outreach. In fact, banks’ biggest risk has become regulatory risk.”
Personally, I expect regulators and some in Congress (primarily, those with strong ties to constituents in the community banking business) to pay some lip service to the need for a two-tired system of regulations to address this concern and to attempt to alleviate the "trickle down effect." I also expect that nothing substantial will be done to actually ensure that the crushing regulatory burden is alleviated. Talk is cheap and plentiful in the nation's capital. Effective action is a scarce commodity in a town where the acquisition and retention of power trumps all other considerations, especially a notion as outdated as "principle."
There's the additional problem that there is a strong desire by many in the federal regulatory agencies, in the political arena, and in some corners of the banking industry itself, to see a drastic reduction in the number of banks in this country. Proponents of a smaller industry include not only those afflicted with the nervous condition commonly referred to as "Socialistic Hysteria," but by banks who already have achieved a certain hefty size and think all this competition is bad for squeezing the most blood out the veins of consumers and business customers alike. If only we had fewer banks, the remaining banks would be more profitable. We've heard this argument for, literally, decades. I won't name names, but the singers of this ditty include some very, very high-priced lawyers who are currently being paid by the same community banks they think ought to be "down-sized."
Perhaps this view is overly cynical. However, if community banks (and I'm including credit unions in this category, because they have a stake in this regulatory burden crunch, and bigger banks have as little use for them as any other smaller competitors) want to derail this train, they'd better give it the cooperative, focused attention it deserves. They need to tell their legislative representatives that they're as mad as hell and they're not going to take it any more.
Or, they can decide that they've had enough, no longer want the cheese, and merely want out of the trap. Surrender is always an option.