On Tuesday, the House Financial Services Committee's Financial Institutions and Consumer Credit Subcommittee, chaired by Shelley Moore Capito, R-W.V., whose husband is a banker, held another hearing to receive complaints from community bankers about what they consider to be an excessive compliance burden imposed upon them by financial regulators. The subcommittee revisited the FDIC study that was discussed in a recent article in this series.
According to a committee staff memorandum, compliance costs are divided into two categories — those that restrict activities on the part of banks and those that require them to perform specific compliance duties. The industry's argument, internalized by the legislators, is that the burden of compliance falls disproportionately on small institutions, and the costs detract from their ability to serve customers. The industry has made this argument for decades, but now the complaint encompasses the spate of new regulations that are supposed to be promulgated under the Dodd-Frank Act.
Bankers have further refined their complaints to include the burden of hiring outside consultants to provide expertise the banks cannot afford to retain in-house. They add that the compliance burden is exacerbating a trend toward consolidation in the industry as community banks, defined as those having $1 billion in assets or less, are absorbed by banks with $10 billion in assets or more.
The FDIC study found that 57 percent of the industry's charters were absorbed by larger banks between 1984 and 2011 as the number of charters decreased from about 18,000 to somewhat more than 7,000 during that period.
Ken Burgess, chairman of First Bancshares of Texas, testified for the American Bankers Association and complained that the number of small banks in his market has declined, but at the same time, he touted the growth of his own institution, now holding $713 million in assets, still within the definition of a community bank. He addressed the debate over whether to break up the largest banks, departing from the message of many bankers by arguing that such a policy would not help community banks, and he went on to blame the banking regulators for "clamping down" on bank lending in an effort to drive all risk from the banking system.
Burgess threatened that one day his bank may leave the business. He called for liberalization of Basel III capital rules and simplification of new mortgage rules as measures that would improve the competitiveness of community banks. With respect to Basel III, Burgess called not only for a delay in implementation, but for a reversal of policies designed to improve the quality of bank capital.
The next witness was Charles Kim, CFO of Commerce Bancshares, who testified on behalf of the Consumer Bankers Association, a trade association representing bankers who lend to consumers. As a participant in the credit card business, Kim complained about a provision in the Credit Card Accountability, Responsibility and Disclosure (CARD) Act that requires bankers to review interest rate increases semi-annually as long as the increase remains in effect.
William Loving, CEO of Pendleton Community Bank in West Virginia, the home state of subcommittee chairman Capito, represented the Independent Community Bankers of America. He focused on a detail of the mortgage rules that removes an exemption community banks had enjoyed from the requirement to obtain independent appraisals of properties.
Loving’s argument, backed by Capito, is that it is difficult to obtain useful appraisals in rural areas because of the uniqueness of many of the properties. He also complained that requirements to maintain escrow accounts had forced banks to reduce their lending on higher-price properties when the loans are held in the banks' portfolios.
Finally, Preston Pinkett III, CEO of City National Bank of New Jersey, represented an African-American bank that is regulated by its choice as a Community Development Financial Institution (CDFI). He spoke of the challenges of seeking to serve unbanked customers in competition with check cashers and payday lenders.
On the whole, this hearing demonstrated once again that a huge gulf exists between the views of bankers and the reality that the nation's economy has suffered a series of financial crisis due to waves of failures among thinly capitalized banks that engage in risky lending practices that threaten their solvency whenever market conditions turn against the particular niche they have chosen to exploit.
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