Bank Lawyer's Blog

Another Step Back?

Ballard Spahr has one of the best initial analyses of last week's Financial Institution Letter in which the FDIC "encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk." In other words, the FDIC took another step back down from its participation in the Department of Justice's Operation Choke Point. The first step was taken last summer, when the FDIC obliterated its list of "risky businesses" by category. The FDIC claims that banks under its supervision should evaluate the risk of a business on a customer-by-customer, not industry-by-industry, basis.

The firm also discusses an internal FDIC memorandum to its examiners. Apparently, the FDIC is attempting to head off any rogue examiners who, like the former head of supervision in Atlanta, tried to put all payday lenders out of the banking system because he didn't favor that line of business as a matter of personal moral preferences.

The internal memorandum states that FDIC examiners: 

• Should not use “informal suggestions” to make recommendations or requirements for terminating deposit accounts or for criticizing a bank’s management or risk mitigation associated with deposit accounts that does not rise to the level of a recommendation or requirement to terminate accounts
• Must put in writing in the report of examination (ROE) their criticisms of a bank’s management or risk mitigation associated with deposit accounts
• Cannot base recommendations for terminating deposit account relationships solely on reputational risk to the bank

The memorandum further mandates that before recommendations or requirements for terminating deposit accounts are provided to and discussed with a bank’s management and directors, they must be made in writing and an FDIC Regional Director must approve them in writing. It also requires such findings to be “thoroughly vetted with regional office and legal staff” before they are included in the ROE or supervisory actions are pursued.

I suppose that this means that from now on, when a payday lender is blackballed by an FDIC-regulated institution, you'll know it's either the result of the institution's own analysis of the risk posed by that specific lender, or, at least, that the persecution has been authorized at high levels of the FDIC, not merely by a lone-wolf, piss-ant field examiner. That ought to give everyone comfort.

As the firm concludes, this latest guidance, while welcome, is not a "Get-Out-Of-Jail-Free" card for payday lenders, porno kings and queens, gun dealers, online dating services, and other "undesirables." As a practical matter, banks that want to do business with them will still be subject to heightened due diligence requirements. Although Ballard Spahr does not put it this way, I will: such businesses will still, for practical purposes, be considered "guilty until proven innocent." The customer will have to be able to demonstrate that it is one of the "good payday lenders" before the risk will likely be judged to be acceptable to the bank.

We'll have to see how this shakes out. While these signs are favorable, until there is a change in the White House, I'm from Missouri on whether we've actually turned a corner.

More Depth On Legal Issues Surrounding Marijuana Banking

University of Alabama Law Professor Julie Anderson Hill has posted a draft of a work-in-progress, an article for an upcoming Case Western Law Review Symposium Issue, entitled "Banks, Marijuana, and Federalism." In it, she explores the legal issues surrounding banks providing banking services to state-legal marijuana-related businesses in more depth than you'll see on the pages of this rag. While it requires some polishing (including the addition of a specific discussion of Fourth Corner, the Colorado cannabis co-op, in a section in the later portion of the article that she discusses in passing earlier in the article), I found it to be a valuable addition to the analysis of the risks to banks that want to provide services to such businesses.

Here's a portion of the "abstract" of the article provided by Professor Hill, which summarizes her approach and conclusions:

This article explores the root of the marijuana banking problem as well as possible solutions. It explains that although the United States has a dual banking system comprised of both federal- and state-chartered institutions, when it comes to marijuana banking, federal regulation is pervasive and controlling. Marijuana banking access cannot be solved by the states acting alone for two reasons. First, marijuana is illegal under federal law. Second, federal law enforcement and federal financial regulators have significant power to punish institutions that do not com-ply with federal law. Unless Congress acts to remove one or both of these barriers, most financial institutions will not provide services to the marijuana industry. But marijuana banking requires more than just Congressional action. It requires that federal financial regulators set clear and achievable due diligence requirements for institutions with marijuana business customers. As long as financial institutions risk federal punishment for any marijuana business customer’s misstep, institutions will not provide marijuana banking.

Among the many fascinating (to a nerd like me, at any rate) observations made by Professor Hill was the following potential problem with the Federal Reserve approving Fourth Corner's access to the federal reserve payments system:

If the Federal Reserve provided payment services to a cannabis credit co-op, the Federal Reserve and its employees would be engaging in money laundering. They might also be conspiring to manufacture and distribute marijuana, aiding and abetting the manufacture and distribution of marijuana, and acting as accessories after the fact for the manufacture and distribution of marijuana. 

As long as they don't process payments for payday lenders, online dating services, or Smith & Wesson, they should be safe from prosecution under the "prosecutorial discretion" mantra chanted by the present executive branch monks until the current administration vacates the White House. The problem with that approach is that the statutes of limitation will not have expired by the time new Attorney General Ted Cruz decides to wage a little MJ jihad on every Justice Department and federal bank regulatory agency official who looked the other way when some bankers in Colorado or Washington lit up a fat boy and followed the money.

I also agree with her conclusion that, while action by the U.S. Congress is necessary, it's not enough. A change in attitude by federal bank regulators will also be required, whether of not we get a federal legislative fix. If due diligence requirements make it too risky and expensive to bank these businesses, then marijuana businesses are going to find themselves continuing to face problems that only a third-party payment processor or payday lender could truly appreciate.

De Novo Headwinds Abating?

The FDIC chose an odd way to announce a purported "thaw" in its long-denied freeze on de novo banks: Q&As. Released late last month, the brief document supplements a 1998 FDIC Policy Statement regarding applications for deposit insurance. It was generated by a request by a couple of bank trade organizations for clarification on several points, including pre-filing meetings, application processing time, initial capitalization, and an initial business plans. The trade groups were concerned that the policy of the FDIC announced in 2009 in FIL-50-2009, which, among other things, extended the requirements for higher capital requirements and business plans from three years to seven years, was no longer justified given improved economic conditions and was "choking off" the creation of new financial institutions.

Without explicitly rescinding (or even mentioning) FIL-50-2009, the Q&As provides that the periods for higher capitalization and business plans is now three years. That's encouraging. The answers concerning pre-filing meetings and usual and customary processing times for applications are not new, but it is always good to have a reaffirmation of what is to be expected by the FDIC so that potential applicants can plan with some certainty.

The fact remains that since the onset of the crisis, only one new insurance application has been approved, and that one was for a bank with a fairly uncommon targeted customer base. If there is, indeed, now a willingness to consider new deposit insurance applications for de novo banks in good faith, there may, actually, be a few more filed.

As some observers in the trade press have mentioned, the increased regulatory burden and the less-than-fully-recovered economy present challenges to any new bank business plan. It's harder to make money without size, and size takes capital and growth, both of which present challenges, from a business and regulatory perspective. In addition, the de novo capital raising, organization, and regulatory approval process is time-consuming and expensive. If the promises that seem to made in the latest Q&As are not true, then what previous organization groups discovered will also be true in the future: you can burn through a lot of money on consultants and other out-of-pocket expenses and find after twelve-to-eighteen months that you've managed to bottle nothing but air.

I don't expect that the Q&As will lead to a gold rush in de novo bank applications. However, I do expect that a few more venturesome  groups that previously wanted to fly the de novo route will at least travel to the airport to see which way the windsock is blowing.

FDIC Emails Reveal A Chokehold

While the report by the Senate Democrats on CIA "enhanced interrogation techniques" has been grabbing the attention of the press, the emails released by the staff of the House Committee on Oversight and Government Reform this week should be of interest to bankers who fear choking on regulatory overreach. In June, Darrell Issa's Committee issued subpoenas for such emails to the FDIC and the FDIC turned them over. They show a clear intent on the part of some FDIC officials to deny payday lenders who are operating in accordance with the law access to the banking system.

The emails from the FDIC's Atlanta head honcho are especially illuminating. "I literally can not stand payday lending. They are abusive, fundamentally wrong, hurt people, and do not in any way deserve to be associated with banking." Therefore, he and his minions put pressure on banks to get out of the entire line of business.

He wasn't alone, of course. Other emails from other regional offices and officials in D.C. show similar intent. The attempt to link payday lending and pornography was, to the credit of FDIC lawyers, opposed by them. As many clients do when confronted with sound advice, the FDIC officials ignored their attorneys. Their intent was to persuade Congress to conflate payday lending with pornography and online gambling, not because it actually is analogous in any legal sense, but because the FDIC officials simply didn't like it. Similar treatment was accorded coin dealers and firearms and ammunition dealers, with businesses being named in the report that were denied access to the financial system because banks were exiting the "industry."

The report also alleges that certain FDIC officials "may have misled Congress" about the FDIC "partnering" with the Department of Justice in implementing Operation Choke Point. Specifically attacked is the FDIC's Acting General Counsel, the truthfulness of whose testimony before Congress is called into question by the report.

Issa has been on this hunt for awhile and, obviously, he's now naming names. In response to the increased pressure, we've seen the FDIC make baby steps in the direction of backing away from this endeavor that it denies ever having particpated in, such as the revised guidance issued this summer that proclaimed that when the FDIC said certain businesses were problematic, it was just joshing.

We'll see whether this new attitude trickles down to the regional and field levels. If it doesn't, expect Issa to continue hunting.

Poison "IvI"

*Kevin LaCroix discussed a recent federal district court decision that adds to the number of court rulings that the "Insured versus Insured" (IvI) exclusion in banks' D&O insurance policies does not preclude officers and directors of a failed bank from making a claim for coverage under the policy based upon claims of the FDIC as receiver against them for their alleged acts and omissions as officers and directors of the bank. This issue has come to the forefront again as a result of the waive of (mostly community) bank failures following the economic collapse of 2008. As was the case in the previous wave of savings and loan and bank failures in the late 1980s and early 1990s, insurance companies have attempted to invoke the exclusion in order to deny liability, arguing that the FDIC as receiver "steps into the shoes of the failed bank."

(As a side note, my Contracts professor in law school asserted that insurance companies have a very simple business model: Collect Premiums. Deny Liability.)

Kevin explains the exclusion in the specific policy.

The IvI Exclusion provided in pertinent part that the policy does not provide coverage for any claim against an Insured “brought by or on behalf of any Insured or Company [including the Bank] in any capacity.” The exclusion had a carve-back that preserved coverage for “a Claim that is a derivative action brought or maintained on behalf of the Company by one or more persons who are not Directors or Officers and who bring and maintain such Claim without the solicitation, assistance or active participation of any Director or Officer.”

The insurance company in the case discussed by Kevin asserted that the IvI barred coverage for claims asserted by the FDIC since the FDIC was itself the "Insured." The judge denied the motion for summary judgment filed by the insurance company and granted the FDIC and defendants' motion of summary judgment on the basis that the exclusion was "ambiguous" and could not, therefore, be used as a basis to deny coverage.

Judge Guilford went on to note that “the insurance company has the ability, as a repeat party to these contracts, to ensure that ambiguities are eliminated over time.” The insurer “had the opportunity to make clear in the Policy that the IvI Exclusion applied to the FDIC-R, and it could have done so with a simple statement.” Judge Guilford noted that, in fact, the carrier “provides an optional regulatory exclusion – not included on the policy here – that explicitly names the FDIC.”

Without thrashing through the weeds in a manner that would interest lawyers rather than bankers (and the lawyers can read the opinion via the link provided by Kevin), the takeaways for officers and directors are as follows:

• Read your policy and obtain professional, independent help to ensure that you understand it and that you get the best possible protection. As the court points out, the "regulatory exclusion" could have left the defendants high and dry if the insurance company had inserted it in the policy, Understand what could bite you in the nether regions and shop around if you have to.
• Get the protection you need before you need it. Your best opportunity to obtain the most favorable policy will be when things are going swimmingly, not when you're taking on water faster than you can bail out the dinghy.
• While the trend of court decisions appears to be in favor of the insureds and against the insurer on the issue of IvI in the context of FDIC receivership claims against former officers and directors, the issue is far from settled. Kevin points out that contrary rulings do exist (one in the Northern District of Georgia, one of the less favorable regions to be from if you plan to run a bank into a ditch) and that there appears to be questionable reasoning in some of the favorable rulings. Therefore, expect insurers to continue to litigate the issue until doing so will open the door to a can of whoop-ass sanctions and a complete failure to pass the lying-with-a-straight-face test.

*Photo's Source: Barrett Insurance Agency

Cheech and Chong Join The FDIC

There was some rather surprising news this week via the American Banker (paid subscription required) regarding banking: the FDIC is following FinCEN's lead in telling banks in Colorado (and elsewhere) to "smoke 'em if you've got 'em."

The Federal Deposit Insurance Corp. has quietly aligned itself with guidelines from the Financial Crimes Enforcement Network that are meant to assuage bankers' fears about the burgeoning marijuana industry, American Banker has learned.

[...]

Back in February, when Fincen released its guidance, the FDIC declined to comment on the document. But on Monday, FDIC spokesman Greg Hernandez confirmed that the agency is currently using the Fincen guidance.

The FDIC's decision to use the guidance is significant because federal banking agencies had previously refused to say whether they'd align themselves with the document, which is part of a broader Obama administration push to foster state-level experiments with marijuana legalization.

[...]

During one recent bank examination, an FDIC official told the bank's directors that the agency is in alignment with Fincen's marijuana guidance, according to Lance Ott, a consultant to the bank who heard the discussion. At the same time, the FDIC employee made clear that the agency is neither encouraging nor discouraging banks from serving pot merchants, Ott said.

The FDIC official told the bank that marijuana is a higher-risk business because of its dependence on cash and the increased chance of robbery, but that pot businesses do not hold a reputational risk for banks in states such as Colorado and Washington that have legalized the drug, Ott recalled.

One commenter to that article put one ironic aspect of this recent news very well.

Lemme see if I understand this. Two federal agencies, the FDIC and FinCEN, are knocking themselves out to have banks provide services to pot businesses which are legal in only a handful of states, while being illegal under federal law. Yet the FDIC, until just recently, actively participated in overt (Operation Chokepoint) and still participates in covert efforts to pressure banks to discontinue providing services to so-called alternative financial service providers, such as check cashers, money remitters and payday advance companies, that are legal in most states and are registered (legal) with FinCEN as Money Service Businesses. Where is the logic??

Logic? You want logic? Silly boy!

At the same time that the FDIC is inhaling deeply, its counterpart in the credit union arena is apparently blowing cold.

A New Mexico credit union closed its marijuana business accounts after a negative reaction by a NCUA field examiner, according to Paul Stull, president/CEO of the Credit Union Association of New Mexico in Albuquerque.

“From what I was told, the field examiner's reaction was quite over the top,” said Stull, who declined to name the specific credit union involved in the alleged incident. “The examiner said there was no way this could be done legally.”

The credit union closed the accounts after an examiner threatened to issue a letter of understanding and agreement if it didn't do so, Stull said. To his knowledge, there are no credit unions currently offering banking services to New Mexico's licensed medical marijuana businesses.

I spoke with the chief compliance officer of a Colorado Fed-member state bank that a Federal Reserve examiner made comments to her bank to the effect "You know, other banks in Colorado are banking marijuana businesses," but when she tasked if that meant that the Fed was taking the position that as long as the bank complied with the FinCEN guidance, the Fed would not object, the examiner backed off and said that he didn't mean to imply that such activity was OK or not OK, but that each bank needed to make an individual risk decision. Whatever the hell that means.

In other words, the federal regulators are all over the board on this issue.

The head of the Washington Bankers Association spoke for all but a tiny minority of banks in both Colorado and Washington (and elsewhere).

James Pishue, president of the Washington Bankers Association, said that the vast majority of banks are still staying away from marijuana because the drug remains illegal under federal law. "There really needs to be a federal solution to this," he said.

Yes, here's the basic risk for a bank that knowingly provides banking services to a marijuana business: The...Bank...Is...Violating...Federal...Criminal...Laws. The bank has to depend on the forbearance of federal government regulators and prosecutors to continue to get away with that law-breaking activity. If that's how you want to roll, go for it. You'll look great in pinstripes once John Ashcroft's doppelganger takes over as Attorney General in January 2017.

On the other hand, you are going to need to smoke dope to comprehend the current regulatory landscape of banking dope.

The FDIC's Left Hand Slaps Its Right Hand

I'm on vacation for a week, so y'all will be spared further abuse until at least the 29th. Before I bow out, however, I'd like to give a hat tip to the FDIC for its exercise of pure chutzpa and sublime soft-shoe-shuffling in attempting to dance away from a letter from one its officials that flat-out told a bank that the entire payday lending biz is problematic (paid subscription required).

The Federal Deposit Insurance Corp. told an Ohio bank early last year that doing business with payday lenders is generally unacceptable, according to a letter released Friday by House Republicans.

[...]

The newly released FDIC letter was written in February 2013, before the agency's actions had become the focus of public controversy. It was sent to the bank's board of directors, and signed by M. Anthony Lowe, the FDIC's Chicago regional director. The name of the Ohio bank that received the letter is blacked out in the version that was released publicly.

"It is our view that payday loans are costly, and offer limited utility for consumers, as compared to traditional loan products," the letter states.

The letter expresses concern about the bank's processing of transactions on behalf of one particular payday lender – the name of that company is also blacked out. It states that the bank's relationship with this payday lender "carries a high degree of risk to the institution, including third-party, reputational, compliance and legal risk, which may expose the bank to individual and class actions by borrowers and local regulatory authorities."

"Consequently, we have generally found that activities related to payday lending are unacceptable for an insured depository institution," the letter states.

Sounds like the critics of Operation Choke Point have a point, doesn't it? Not so fast.

The FDIC responded to the release of the letter by throwing Mr. Lowe under a bus.

The February 2013 letter is not reflective of FDIC policy," Barr said. "Because we have been asked many questions, the FDIC issued guidance in September 2013 making clear that financial institutions operating with the appropriate systems and controls are neither prohibited nor discouraged from providing services to customers complying with applicable federal and state laws."

"We have made this policy clear to our bank supervision managers and examiners, and worked hard to make sure that the policy is being followed," he continued. "We have asked banks to report any communications they've received that do not appear to be consistent with our guidance to the FDIC's management, ombudsman or inspector general."

Those banks who send such reports to the FDIC can expect nothing but the most lax examinations and favorable regulatory treatment on a go-forward basis. At least, they can until every member of the board and senior management is mysteriously felled by attacks by rabid Snow Monkeys imported from Sierra Leone.

 So, according to the FDIC, Lowe was an outlier who didn't understand the actual policy, which had not yet been written, although he should have known the content of the then non-existent policy because, after all...well...ummm...Shut Up! Shut Up! Shut Up!

Just another day in Wonderland.

And people actually make this a conscious career choice?

Uncollaring The Porn Biz

Any banking regulator who thought that the porn business was going to take auto-erotic asphyxiation lying down (or kneeling, or bending over an ottoman, or suspended upside down from various Cirque du Soleil circus apparati) now knows better. In yet another litigious response to Operation Choke Point (paid subscription required), a trade group for payment processors sued a federal banking regulator for pressuring banks that "serviced" purveyors of pornography to "choke the chicken" (that laid the golden eggs).

In a court filing Thursday, the Third Party Payment Processors Association alleged that FDIC examiners coerced and intimidated banks to end their relationships with companies that processed payments for porn businesses.

The examiners' push happened shortly after the FDIC's release in 2011 of a list of industries that it said warranted heightened attention by banks, according to the court papers. The list of industries included pornography, ammunition sales, payday lending, purveyors of racist materials, dating services, Ponzi schemes and coin dealers.

[...]

"FDIC examiners' targeted enforcement against the pornography industry was the advent of its improper practice of moralistic regulation over the banking industry," the filing argues. "Regulators did not target the pornography industry because there was evidence of fraud relative to that industry."

On the record, the FDIC refused to comment. Our usually unreliable inside sources, however, have speculated that if certain bionically-augmented female porn stars had merely agreed to accompany highly-placed FDIC officials on a whirlwind "Around The World In 80 Minutes" tour, all this "choking" might have by-passed the bottleneck of the porn business. Apparently, when certain "professional escorts" claim in their online ads that they are "classy," they mean that even they can only limbo so low.

As we discussed a couple of months ago, the FDIC has taken the position that it never intended to warn banks away from certain lines of business, and that any bank that thought so was "misinterpreting" the FDIC's original guidance that listed certain lines of business as being high risk. Any dummie should have understood that merely classifying a line of business as being "high risk" doesn't mean that a bank shouldn't bank that line of business, but should merely be prepared to justify, during subsequent examinations, exactly why the bank decided to jump into bed with pox-ridden harlots and to sell its soul to the Prince of Darkness. No worries, mate!

As the American Banker's Kevin Wack also notes, the FDIC has contended that any bank that choked a porn business (or spanked a porn monkey) did so solely as an independent business decision, with no pressure or influence at all from the FDIC. Any rumors to the contrary are vile calumny that will be met with an icy stare, followed by carpet napalm bombing via the FDIC's reserve force of Vietnam War-era B-52s.

So, for the porn business, according the FDIC, the banking choke collar is off. Unless, of course, the porn is for a BDSM audience. Then collars will be perfectly appropriate attire.

Wal-Mart Is Go-Go On GoBank

Not satisfied with prepaid cards from Green Dot or Bluebird Accounts via American Express, Wal-Mart's march into the banking business is now all the way into checking account territory.

Walmart, the nation’s largest retailer, is teaming up with Green Dot, known for its prepaid payment cards, to supply checking accounts to almost anyone over 18 who passes an ID check.

Daniel Eckert, senior vice president at Walmart, said on Tuesday that the accounts would be available nationwide by the end of October. The accounts are intended to be low-cost alternatives to traditional bank checking accounts, with no fees for overdrafts or bounced checks and no minimum account balance.

In comparison, a basic checking account at Citibank charges $12 if a check is returned and $34 for overdrafts.

The new accounts from Green Dot, called GoBank, will cost $8.95 a month if they have direct deposits totaling less than $500 a month. Mr. Eckert said that most people on Social Security or fixed pensions would qualify.

GoBank, as the service is known, is part of Walmart’s long-running push into financial services for people with little or no access to traditional banking.

[...]

Walmart has been eyeing financial services for some time. Two years ago, the company announced a partnership with American Express to offer a prepaid card and debit accounts. Retailers like Target and 7-Eleven also offer prepaid cards.

But the new Walmart initiative will be the first full-blown, off-the-shelf checking account. To help attract customers, Walmart and Green Dot will forgo a screening system many banks use to vet potential customers and rely instead on a proprietary system. The model is expected to allow almost any consumer who passes an identification check to open an account in minutes, according to Green Dot.

In the past, Walmart has tried to secure a federal bank charter to become a deposit-taking bank, but abandoned that effort in 2007 in the face of opposition from the banking industry. Since then, the retailer has assembled an array of services that could be offered without a charter, as well as partnerships with financial service companies like Green Dot.

Five years ago, we discussed how well Wal-Mart was adapting to the stonewalling by the FDIC of its attempt to start or buy an industrial bank. One benefit was that Franken-Dodd's "study of the need for industrial bank charter" may have presaged the demise of that particular charter, making Wal-Mart sorry that it got what it wished for. But there was more to it than merely the form of the charter that it was denied.

It's interesting that Wal-Mart, by not being in the banking business, is side-stepping the public relations backlash that is tainting other bankers who had nothing to do with the causes of the current crisis, such as community banks that are dropping like lawyers on a dove hunt with Dick Cheney. Instead, Wal-Mart is using the avenue open to it (not ideal, but workable) to cement its relationship as a low-cost provider of financial services to working class Americans. The Beast of Bentonville refuses to be tamed.

Wal-Mart didn't get to be a retail "beast" by backing down when confronted. When denied entry through one door, it has relentlessly worked on finding other doors, and then opening them wide. I simply don't see them stopping. As a consequence, of course, lower income citizens who form Wal-Mart's core customer base and who have traditionally had less access to traditional banking services are being "served," but in a beneficial way. Therefore, whether or not bankers are thrilled, the same FDIC that once effectively barred Wal-Mart from the banking business ought to be standing and applauding these latest efforts. Or, at the very least, a squatting ovation seems in order.

Credit Unions Also Weighed Down By Regulatory Burdens

Recently, a group of credit union executives in Cincinnati sat down with Staff Reporter Steve Watkins of the Cincinnati Business Courier and let him know that when bankers complain about the regulatory burden that is crushing them, credit union executives feel their pain (albeit, in a tax-free kind of way).

A group of Greater Cincinnati credit union executives met with me for lunch on Monday at Palomino to talk about the issues that are affecting them, and the regulatory burden was topic one.

They had just met Monday morning with U.S. Rep. Steve Chabot, a Cincinnati Republican, primarily about the possibility of easing the regulatory burden. Patrick Harris, director of legislative affairs for the Ohio Credit Union League, told me the banking sector has had 180 new rules and regulations foisted upon it by Congress since 2010, following the financial crisis.

This isn’t a banks versus credit unions thing. Most of the changes the credit unions want would also ease burdens on banks, Harris said. They’re things like reducing the need to send out disclosures about privacy policies, as well as the ability of some credit unions to tap the Federal Home Loan Bank for funds. How big of a factor is it? We know how regulatory costs have caused banks like the Bank of Kentucky to sell. And it has $1.9 billion in assets. What chance do credit unions with $20 million or $30 million in assets have to comply with those same rules?

“When the small credit unions merge, one of the main reasons is compliance costs,” Cinfed Credit Union CEO Jay Sigler said.

The first thing you'll notice is that they're all sitting down for lunch and a bitch-fest at Palomino. The visual of complaining about the cost of regulations while scarfing down Tuna Puttanesca or Asiago-Almond Crusted Scallops is somewhat incongruous. Maybe the newspaper picked up the tab.

The second thing you'll notice, however, is that the smaller the size of the institution, the more incentive there is to merge. Inasmuch as credit unions, especially smaller credit unions, are sometimes touted as a vehicle most able to offer services to the "underbanked" customers who often might "fall prey" to evildoers like payday lenders, the fact that regulatory burdens are leading many to merge should give banks cold comfort. While the number of competitors may decrease, those who are left standing when the shooting stops are going to be better armed at not only surviving, but competing with commercial banks.

The article also notes that all types of loan demand appears to be relatively flat. While one credit union official observes that business loans are a small part of its portfolio, I think that there will be no let-up in pressure by credit unions for more business loan authority. I also expect that there will be no let-up in counterattacks by commercial bankers, who will continue to demand that if a credit union wants to loan like a bank, it should pay taxes like a bank.

Still, the important point to me is that regulatory burden continues to be a driver of financial industry consolidation across the entire spectrum. In other words, unless there is some serious regulatory relief provided (likely via the US Congress), especially for smaller institutions, the incredibly shrinking financial services industry appears to be ia horror show will continue for some time.