Community banks threatened by government regulation

May 20, 2012
| By Pete Daly |
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A member of the American Bankers Association testified in Washington last week that years of added government regulations has reached the tipping point, dramatically increasing compliance costs and threatening the future of community banks. U.S. Rep. Bill Huizenga, a Zeeland Republican, is a member of the House Subcommittee on Financial Institutions and Consumer Credit, which heard the testimony from the ABA, and Huizenga agrees that the “massive” amount of regulations coming out of the Dodd-Frank Act put a big burden on community banks trying to comply.

William B. Grant testified on behalf of the ABA that “the regulatory burden for community banks has multiplied tenfold in the last decade, with about 1,500 small banks disappearing from their communities during that time,” according to an ABA press release.

When asked his opinion on the validity of that statement, Huizenga said, “We’ve heard that consistently” — that government regulations have led to closings and consolidations, and he terms the Dodd-Frank Act “onerous” in its scope. It will require 400 new rules, of which only 185 have been written so far and entail “over 5,000 additional new pages of regulation.”

Huizenga said while new government regulations are a hassle to the big banks, they have legal departments to study the regulations, whereas the small community banks have to find someone internally or externally “to start wading through all that and figure out what that means for them, and are they compliant? What do they have to change?”

The ABA’s Grant testified that “historically, the cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for small banks than for large banks.” He also suggested that some rules under Dodd-Frank, if written improperly, could drive community banks out of certain lines of business, and he cited mortgage lending as a key example.

“I have already heard community bankers say they are considering ceasing their mortgage lending activities,” Grant said.

However, Rob Bondy, a senior manager in Plante & Moran’s financial institutions group in Grand Rapids, said in an e-mail he found it “interesting that this banker is hearing mortgage lending may be at risk for community banks. As I indicated, it has been pretty positive for our local banks, recently. Perhaps if the volume slows down to ‘normal’ levels, there will be a reason to look strategically at the cost/benefit of being a full-service mortgage lender versus identifying strategic partnerships with lenders that have the infrastructure to handle the looming compliance costs.”

Huizenga spoke to the Business Journal one day after the announcement by JPMorgan Chase that it had suffered a $2 billion loss. Jamie Dimon, the CEO of JPMorgan Chase, said “egregious mistakes” in trading in hedge funds led to the loss.

When asked his opinion of the JPMorgan admission — the likes of which led to the finance industry regulations contained in Dodd-Frank — Huizenga said he would pose two questions.

“When is there bad judgment and when is there violation of rules? This may not have been a violation of rules; it may have just been bad judgment of one of their traders.

“The question ultimately is, are there enough rules and regulations today to stop as much as we possibly can?”

He added that “a lot of us” would agree that, “at some point, we know that mistakes are going to happen. We know that some things have the potential to happen. Can you write a rule to stop it? And if this was bad judgment, does a rule stop that from happening?”

If an individual is intending to act fraudulently in the financial industry, said Huizenga, “they’re not going to adhere to another rule if they’re breaking seven others.”

He also noted that he has heard an analyst state that 2 billion dollars is only about 2 percent of JPMorgan Chase’s revenue in the last quarter.

Is JPMorgan Chase too big to fail? “That’s the ultimate debate that we’re having right now,” replied Huizenga. “Are any of these banks quote-end-quote too big to fail?”

He noted that they are now referred to as “SIFIs”: systemically important financial institutions.

“I think we know that there may be a need for some large banks, but certainly it seems like, with the smaller banks, you’ve got more responsiveness and more accountability,” he said.

Would the American public accept a government bailout of JPMorgan Chase?

“Nope,” replied Huizenga.

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