Regulations stymie bank lending

Bank Lending - Independent Community Bankers of America

By John Rehkop. Community banks want to lend more, and they have the capital to do so.

But the Independent Community Bankers of America (ICBA) and other industry lobbying groups say a steady inflow of increased banking regulation that emerged from the financial crisis has bogged down many community banks in an avalanche of paperwork, and stymied lending and economic growth.

“There has been layer upon layer of regulation and thousands of pages that banks have had to absorb and act on,” said North Carolina Bankers Association President and CEO, Peter Gwaltney.  “It’s choking economic growth.  (Banks) need to be unleashed to do what they do best.”

Unlike the Wall Street megabanks, community banks are not staffed or operationally structured to adhere to the rigorous standards that the Dodd-Frank Wall Street Reform and Consumer Protection Act and other subsequent legislation has set.

“Anything they could do to reduce the cost and operational complexity would certainly be beneficial to community banks,” said Uwharrie Bank President, Brendan Duffey.   “What they (regulators) have done is dumbed it down to a single standard that takes away the ability to customize bank lending to the individual.”

The ICBA hopes to change that with a set of principles, called the Plan for Prosperity, that aim to create new tiered regulation that is proportionate to a bank’s size and risk profile, thus reducing the regulatory burden on banks that are not involved in the complex securitization markets and have balanced sheets that are less leveraged.

The ICBA argues that banks with less diverse financial models and fewer earnings streams should not be held to the same regulatory standards as multifaceted megabanks.

ICBA Chairman John Buhrmaster presented the Plan, with more than a dozen legislative measures, to the Senate Banking Committee last month, urging them to advance Plan provisions to provide community banks with relief.

While the far-reaching Plan covers several areas, the overarching goal is to provide community banks relief from various mortgage regulations and improve access to capital to help community bank’s sustain independence.

For example, the Plan would treat loans that are held in a bank’s portfolio differently than those that are resold, since banks that retain loans would have a direct stake in ensuring the performance. Additionally, the Plan addresses onerous regulations on escrow, appraisals and mortgage servicing rights with reforms that would preserve important community bank participation in mortgage lending.

Aligning these new mortgage rules with the community bank incentive structure that promotes sound lending is instrumental in preventing further declines in access to mortgage credit for consumers, the ICBA claims.

While there is little disagreement that the new financial rules have placed an increased burden on banks, especially smaller banks, the significance of the impact the Plan’s passage would have on a bank’s bottom line and economic growth within a community is debatable.

Views about the Plan from local banking executives varied from being generally unfamiliar with it, to supportive, but skeptical about the federal government’s ability to enact any immediate reform.

“The wheels of government grind slowly,” Duffey warned.

Both Gwaltney and Duffey agreed that the direct impact is difficult to quantify. However, a recent study from the School of Business and Government at Harvard links the community banking industry’s plight and consolidation at least partial to the new regulatory environment.

The Harvard study found that the total market share of community banks, or those banks with less than $10 billion in assets, decreased only 6 percent during the four years just prior to and during the financial crisis. But since the second quarter of 2010 – around the time of the passage of Dodd-Frank – their share of U.S. commercial banking assets declined at nearly double that rate.

“Particularly troubling is community banks’ declining market share in several key lending markets, their decline in small business lending volume, and the disproportionate losses being realized by particularly small community banks,” the study read. “Our findings appear to validate concerns that an increasingly complex and uncoordinated regulatory system has created an uneven regulatory playing field that is accelerating consolidation for the wrong reasons.” The study acknowledged that the prevalence of technology was also a likely factor in the decline.

“The banks that are really getting hammered are the ones that have less than one billion in assets,” said Gwaltney. “Banks just want regulation that is reflective of the risk they present. And unfortunately, any reform that happens will be incremental at best.”


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