A recent Wall Street Journal story noted that in the three decades before the Dodd-Frank bank regulation law passed in 2010, an average of more than 100 new banks opened each year. In the five years since 2010, exactly one new bank has opened — a small bank in Bird-in-Hand, Pennsylvania, serving the Amish community.
Going from more than 100 new banks each year to only one new bank in five years is an amazing decline. The article notes: “Bankers say the drought is a sign of new regulatory requirements in the wake of the financial crisis, which are boosting expenses and discouraging potential startups from even trying.”
Certainly, low interest rates and a struggling economy are also factors. But from my experience, onerous federal regulations are playing a large role in destroying incentives to engage in the banking business. The small staff at the new Bank of Bird-in-Hand includes one officer whose full-time duty is to deal with regulatory affairs. In addition, the bank must hire consultants to help it comply with regulations.
In March, a representative of the banking industry testified before the House Financial Services Committee, saying that “an avalanche of new rules, guidance and seemingly ever-changing expectations of the regulators” is hindering hometown banks in their efforts to serve customers.
Community banks have been the backbone of hometowns across America. But, according to the American Bankers Association (ABA), some 1,200 fewer community banks exist in the United States today than just five years ago. “That trend will continue until some rational changes are made that will provide some relief to America’s hometown banks.”
Examples of regulatory overkill abound. The ABA testimony before Congress cited a Texas bank that was forced to use a computerized underwriting model to avoid inadvertent fair lending violations, eliminating lending discretion by loan officers. But the one-size-fits-all system rejected applications from loyal bank customers of many decades, some of whom had never made late loan payments.
Over-regulation often reduces bank flexibility to meet the unique circumstances of customers. Common sense is replaced by complex rules. Fear of violating regulations and potential lawsuits leads to fewer loans, hurting customers and their communities.
Some members of Congress are proposing legislation to improve the regulatory environment for banks. The ABA is specifically asking Congress for four things:
1. Remove impediments to serving customers.
2. Improve access to home loans.
3. Ensure proper oversight of the Consumer Financial Protection Bureau, which is the source of many byzantine regulations.
4. Redefine a “systemically important financial institution” to make the designation more practical and apply to the largest banks.
The ABA noted in its testimony that unnecessary regulatory requirements distort the marketplace and constrict the natural cycle of facilitating credit, job growth and economic expansion — “leading to inefficiencies and higher expenses which reduce resources devoted to lending and investment.”
It makes no sense to treat all banks as if they were the largest and most complex institutions. In trying to prevent excesses that occurred before the 2008 financial crisis, federal regulators swept up smaller banks in regulatory regimes better suited for the gigantic Wall Street institutions.
I’m not suggesting that banks be deregulated. Reasonable regulations are absolutely needed to ensure the safety and soundness of the banking system. But the natural constraints and incentives of the free market system also play an important role. Banks obviously won’t be successful if they don’t treat customers fairly and if they aren’t careful and wise in loan and investment policies and decisions.
As the ABA noted, the enormously complex set of rules, reporting requirements and testing that are imposed upon the largest, most diverse and global institutions should not have become the standard applied to smaller community banks.
A. Scott Anderson is CEO and president of Zions Bank.