One of the interesting aspects of writing a monthly commentary such as this is that I am never quite sure how many people are reading it. Just who are the readers? With that in mind, this month’s comment is directed at those who may not follow banking as closely as those of us who live it and breathe it each day.
We are tentatively emerging from the worst financial crisis that all but the oldest Americans have ever encountered. The causes of the crisis were many. One can make a strong case that just about anyone involved in financial markets or real estate or national politics had a hand in the creation of this disastrous recession. The purpose of this essay is not to find scapegoats. We’ve been there and done that and I cannot add to this discussion.
It is the response to the crisis that is the topic du jour. It is my opinion that the key players in the initial response to the crisis will someday be seen as heroes due to their quick, if not always decisive, actions. Names that come to mind are Ben Bernanke, Hank Paulson, and Tim Geithner, among others. Whatever they did prior to the crisis that contributed to it, they acted quickly and a review of the facts will show that they made more good decisions than bad ones during the days of the crisis. And those decisions likely saved us from a much worse fate had there been too much “dithering.”
As the dust settled and the country fell into recession, it became very clear that Congress was going to pass comprehensive legislation that would seek to put regulations and laws into place that would make the country less susceptible to an economic calamity in the future. This is how the Dodd-Frank Act (DFA) came into being.
To be clear, DFA has laudable goals. It seeks to expand financial regulation beyond the banking industry to the fringe players that were previously lightly regulated, if at all. It seeks to address the notion that any institution is “too big to fail,” thus receiving an implied guarantee from the Federal government. It seeks to enhance consumer protection. It attempts to put some rationality into the highly complex notion of derivatives and how they should be used. Unfortunately, the results have been less than stellar.
What has happened is that banks – large and small – have been subjected to mountains of new regulation and it is this very regulation that is causing a disruption in our industry. Why should you care? Our state has long been one of the stalwarts in terms of strong community banking roots. Iowa is 30th in national population and fourth in the number of bank charters. Nationally, we lose about one bank charter per day to consolidation. The reasons for consolidation usually fall into one of a few categories – aging ownership or management, lack of succession planning, and increasing regulation. The latter is the primary driver of consolidation.
Why should you care? You should care because the economics of banking have become quite transparent: you have a much better chance to succeed if you have scale. Without scale, chances of success are not impossible, but the odds favor the players in our industry with scale. Everyone – rightly or wrongly – believes that they must get bigger to spread the increasing regulatory costs out over a larger base of assets. Think about what this means in Iowa. We have many small communities where the bank is one of the key players in town. Many of these offices are relatively small—less than $25 million in deposits. As regulation increases, it becomes much harder to justify keeping offices open in these smaller communities. When I began my banking career, there were more than 14,000 banks in the United States. Today there are less than 6,800. It is extremely important – for many reasons –that hometown banking remain alive and well in our state and country. Unfortunately, despite the proclamations from our politicians and regulators that “Dodd-Frank did not affect community banks,” the results are unambiguously the polar opposite of these statements.
I end with a story that will strike some as strange because it was the CEO of a small credit union that best makes my concluding point. I was recently in a meeting hosted by a Washington, D.C. based politician, a politician who is powerful and well respected. The CEO of a small credit union told her story in terms of the effects of regulation on financial institutions. She said that regulatory compliance had always been a duty that had been divided among many employees in her shop. However, recently, due to the complexity and volume of increasing regulation, her institution, for the first time ever, had been forced to hire a full time compliance officer at a hefty salary. This salary was very difficult for such a small institution to absorb. The compromise made was that certain technology and product enhancements had to be delayed because the money is not available to support them. Who is harmed when this happens? The customers are harmed and not as well served as they would be with sensible regulation. Again: the customers ultimately are harmed.
Yes, we accept regulation and we understand that it’s the price we pay for being in this industry. But until we roll back some of the silly regulation that is currently on the books, customers and communities will continue to be affected. There is a ray of hope. The U.S. House of Representatives’ Financial Services Committee recently passed 15 different bills, each one with bi-partisan support, that begin to reduce some of the unnecessary regulation. It is our hope that the full House and the Senate will pass these bills. It is not the cure all, but it’s a start.
Thanks for listening today. I continue to believe ours is a “white hat” industry, one that does immense good in communities and in the lives of our customers every day. Our goal is to continue to do that for years to come.