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Monday, August 27, 2012

Small Bankers Under Regulatory Assault

Small banks matter a great deal to small businesses.  Therefore, business owners and entrepreneurs should be very concerned about the banks’ concerns with intrusive regulations that will reduce loans and raise the cost of capital.

As noted in an August 7 report in The Wall Street Journal, “Lenders with less than $1 billion in assets made up about 10% of industry assets as of the first quarter but made 37% of small loans to businesses and farms, according to research by the FDIC…”

Small businesses, therefore, should be concerned about the warnings being served up by small, community bankers on an array of regulatory measures that, in effect, would reduce the availability of credit.

As pointed out in the Journal story, executives at small banks are gravely concerned about new regulations linked to the Basel III international agreement. As reported, “Executives at many small banks complain that the rules could force them to cut back on loans to small businesses or homeowners.”

Specifically, worries swirl around the following: “Many are particularly upset about the complex system of determining how much capital a bank must hold against mortgage loans they make… The practical result is that many of the mortgages these banks make will require significantly more capital than they do now, for loans that community bankers say aren’t high risk because of their personal relationships with borrowers. The complexity of tracking and calculating capital requirements under this system is also a burden for smaller banks, they say. And the Basel rules come as a number of Dodd-Frank changes hit them, including mortgage standards being written by the Consumer Financial Protection Bureau.”

In its July 2012 “Current Top Issues” report, the Independent Community Bankers of America summed up the Basel III issue this way: “ICBA is deeply concerned with the new proposed capital standards issued under Basel III. The regulators’ proposed rules would increase capital requirements and impose more complex regulatory standards on all banks regardless of asset size. While community banks typically maintain the highest levels of capital in the banking industry, the more complex standards could limit lending and credit availability in Main Street communities.”

And ICBA analyses are full of warnings about problems with Dodd-Frank and the CFPB.

For example, in a statement submitted for the record to the House Small Business Committee, the ICBA noted the high costs of implementing various CFPB rules. It declared: “Finally, ICBA is concerned that the scope of the changes being considered by the CFPB have the potential to cause significant costly IT upgrades and changes to bank loan origination, document preparation, and core operating systems. These costs could drive many small banks to exit the mortgage lending business, even for loans held in portfolio, which will severely restrict credit in many rural areas. Those community banks that do remain in the business will likely have to increase their prices to cover these costs. These costs for items that add no value or protection to the consumer will end up increasing the cost of credit and reducing the availably of credit.”

The ICBA also summed up the problems with price controls being set on interchange fees: “While the Federal Reserve’s final rule capping debit interchange rule (effective October 1, 2011) and the network exclusivity rule (effective April 1,2012) implementing the Durbin amendment to the Dodd-Frank Act were a significant improvement over the December proposed rule, they remain a serious concern. ICBA strongly supports legislation introduced by Reps. Jason Chaffetz (R-UT) and Bill Owens (D- NY) to repeal the Durbin amendment and will work to advance it. At the same time, ICBA is focused on the networks’ implementation of the rule and the impact of the rule on community banks and other exempt issuers. ICBA is opposing further legislation to regulate credit card interchange, either through tampering with antitrust laws or undoing existing pro-consumer network operating rules, which would put community banks at a competitive disadvantage to larger institutions with national footprints. Merchants want to pay less for the benefits they receive by accepting payment cards, and their efforts to regulate interchange would mean fewer choices and higher costs for consumers.”

Points made at a House Financial Services subcommittee hearing focused on the costs of new rules and regulations on small banks.

For example, as reported by, Charles Hageboeck, the president of City National Bank, said in his testimony, “The flood of regulations emanating from Dodd-Frank is so large that bank regulators have been urging banks to add compliance officers to handle it. And despite claims that community banks like mine would be exempt from the new Consumer Financial Protection Bureau, we are not exempt. All banks — large and small — will be required to comply with the rules and regulations set by the CFPB. Given that the cost of compliance has a disproportionate impact on small banks as opposed to large banks, it is reasonable to expect this gap to widen even more as Dodd-Frank is fully implemented.”

According to, William Loving, the president and CEO of Pendleton Community Bank, observed, “I can’t think of one aspect of our bank that is not touched by regulation. My staff spends more time on regulatory compliance than it did before 2008. I can assure you our bank did not have anything to do [with the recent financial collapse]. Every dollar spent on compliance is not loaned to customers. Every dollar the staff spends on compliance is not spent on customer service.”

The regulatory assault on small banks is costly in a variety of ways, and is bad news for small businesses, individuals and families needing affordable credit, and therefore, bad news for the economy.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is Root of All Evil? A Pastor Stephen Grant Novel.

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