Tight new banking regulations imposed after the 2008 U.S. banking crisis were meant to rein in global mega-banks. Nearly a decade after the crisis, it has become apparent that consumers and community banks have borne much of the brunt of the well-intentioned legislation.
“We’d be the first to admit that regulation is widely needed,” says Citizens Union Bank CEO David Bowling. “There are some bad actors out there that need limits, and we all want consumers to be protected. In some ways however the pendulum has swung too far. Some of the restrictions put in place can be overwhelming and burdensome and have created unintended consequences.”
“In the last 10 years, we have lost nearly 30 percent of the community banks in the United States,” Bowling says, adding that voluminous regulatory requirements and narrower lending guidelines have contributed to many smaller banks deciding to throw in the towel and sell out to a larger bank.
There are 168 banks in Kentucky, and 37 of them have fewer than $100 million in assets, employing 25 or 30 people, which is considered quite small, CUB’s Bowling says. Yet these small banks have to comply with many of the same tightened regulations as the very large banks, which have billions in assets and employ thousands of people. As one of the 25 largest banks in the state CUB has the resources to compete and grow but many smaller banks struggle to keep up.
Only three new bank charters have been issued in the US since the financial crisis. Regulatory fatigue, a decline in bank profitability, and the cost of trying to keep up with the onslaught of new regulations has stifled new bank charters. “It’s concerning that while the number of banks across the country is declining there are virtually no new banks being opened, ,” CUB’s CEO says. “Community banks play such a vital role in the nation’s economy and the communities they serve it’s a shame to see the number of community banks decline.”
Bowling says he is optimistic that a rebalancing of banking regulations may be on the horizon, which will free up banks to better serve their customers and their communities while still preventing mega-banks from taking on too much risk.
The difficulties for consumers and local communities caused by too much regulation and fewer community banks are multifold:
- Current regulations have restricted a bank’s ability to use personal character as an important factor in approving loans. Historically, community banks have been successful in making loans because they know their customers from church, the grocery store and Little League. Banks relied significantly on a customer’s character and prior history in making credit decisions. Many good loans that community banks once made cannot be made in today’s environment.
- Tight legislation has also significantly extended the time it takes for consumers and their realtors to get a home mortgage loan to the closing table. Required mandatory waiting periods and other requirements can frustrate customers and delay closings.
- As banks have had to add staff and more sophisticated technology to comply with regulations, the banks have been forced to pass these increased costs along to consumers driving up the cost of getting a loan.
- While well intended, the sheer volume of disclosures and red tape can be very confusing for consumers. Most consumers do not take the time to read the reams of documents required to get a loan closed and often feel overwhelmed. Simplifying the documentation and the process would take much of the fear out of the experience.
- Because of fear of regulatory scrutiny and criticism, many banks have been reluctant to innovate and roll out new products and services that could potentially benefit customers. Lack of innovation ultimately hurts the consumer.
- Because the character and ethics of a borrower are often intangible and difficult to document, a small business owner’s reputation and character has declined in importance in the loan approval process making it more difficult for small businesses to get the funds they need to grow.
- Community bankers are often leaders in their community, involved in Rotary Clubs, local non-profits, Boys and Girls Clubs and frequently sponsor children’s sports teams and community fundraisers. With fewer community banks and community bank leaders this civic leadership and charitable support will have to come from somewhere else or will not exist.
“Fortunately, it finally looks like the sentiment exists in Washington to provide some thoughtful regulatory relief.” Bowling says. “Most Senators and Congress members realize that community banks play a very important role in our society. We had very little to do with the 2008 banking crisis but we got sort of lumped in with everybody else. I am optimistic that there is reasonable regulatory relief on the way that will enable us to be more flexible and innovative in helping our customers.”