Small US banks fear cost of new regulations
Community banks that avoided the excesses of the lending boom and survived the financial crisis without too much trouble are now increasingly worried that they will get penalized by the U.S. government’s regulatory crackdown.
While there was reckless behavior by some of America’s smaller banks, and a number are paying the ultimate price through failure and government seizure, there were many who stuck to conservative lending practices and turned away business if it was high risk.
The Obama Administration is proposing a raft of new regulations aimed at preventing banks and other companies from taking on risks that could again threaten the whole global financial system.
The only problem — the demands of the new regime could hurt smaller banks more than their larger brethren.
“We support the strong systemic risk regulation over too big to fail institutions because it will protect taxpayers and the economy from future economic crises, said Karen Thomas, executive vice president of government relations for the Independent Community Bankers Association (ICBA).
“But we want the reform to be more targeted to those institutions that caused the problems, not community banks.”
Community banks say the proposals to create a new Consumer Financial Protection Agency, remove the thrift charter, and require banks to hold a financial interest in loans they originate, are among changes that put an undue burden on some of the institutions that did not engage in abusive practices.
“It seems to me that we already have strong and strict consumer protections,” said Frederick Schea, Chief Executive of First Savings Bank of Perkasie, an Upper Bucks County, Pennsylvania bank with $1.1 billion in assets.
He said the creation of a new agency will likely lead to “additional fees on top of already high fees we pay for FDIC deposit insurance and other regulatory fees.”
These fees can soon cut into margins.
For example, River Valley Financial Bank, an Indiana-based bank with $384 million in assets, pays $80,000 annually in regulatory fees. Last year, it reported $2.5 million of net income, making regulatory fees equivalent to three percent of its earnings.
“I’m not happy about having a new regulator for compliance because another one could cost up to an additional $80,000 for us,” said Matthew Forrester, the CEO of the bank.
Other related costs include limits on leverage and expenses for compliance and audit staff.
Some of these costs went up after the 2002 Sarbanes-Oxley corporate governance law, passed in response to the Enron and WorldCom scandals. The law was much criticized in corporate circles for increasing the cost of auditing.
“This is one of our fears,” said Forrester. “I hope it doesn’t go off track like Sarbanes-Oxley did.”
Community banks may also face additional costs as proposed changes include the axing of the Office of Thrift Supervision. There is a possibility that banks now under the OTS umbrella will have to pay charter conversion fees as a result.
But consumers will also feel the pinch in the form of higher loan fees, lower rates for deposits, and less access to financial products, small banks say.
“The strength of our financial system is its diversity,” said Thomas of the ICBA. “To overwhelm small banks with regulation will result in limited choices for consumers at a higher price.”
SOME DISCOUNT IMPACT
Still some analysts say that while the impact of new regulation will be felt at the margin, it will not be broad enough to be cataclysmic.
“The top 19 banks make up about 90% of the banking system and are the plumbing of our financial system,” said Tanya Azarchs, a bank credit analyst for Standard and Poor’s. “If there were widespread failures of small banks, it would be disruptive and cause some dislocations to smaller communities, but not to the financial system.”
But bank trade organizations say that while the top 19 might be the plumbing, the small banks are the bloodline, providing access to capital for small and niche communities, as well as America’s small businesses.
“Small banks provide intangible value to the communities they serve, including volunteer hours and the bulk of small business loans,” said Diane Casey-Landry, Chief Operating Officer of the American Bankers Association. “A failure of a small bank impacts local hospitals, economic boards, and even minority groups.”
According to the FDIC, the U.S. had 8,246 financial institutions as of June 2009 and of those, 7,555 had assets of $1 billion or less.
While federal intervention, through the Troubled Asset Relief Program and other measures, is widely considered positive, small banks are saying that the system is designed to look after the larger banks.
“What we’re seeing is that there is not the same access to Capital Purchase Program funds because the solutions were not designed to work for small banks,” said Casey-Landry.
According to the ABA’s estimates, “it would only take $550 million to bring all small banks up to well-capitalized and this would be valuable to communities,” Casey-Landry said.
RBC Capital Markets analyst Gerard Cassidy expects 1,000 banks to fail as a result of the current economic downturn, but he says the picture isn’t entirely dismal, given the sheer number and role of community banks in America.
“We’re never going to be a country like Canada with five banks,” said Cassidy. “The community bank is woven into the fabric of this country and will always be here.”