Regulation: Killing Community Banks?

Smaller banks will eventually not be able to bear the regulatory burden placed upon them.

Like most enterprises, the federal government tends to be reactionary rather than anticipating a problem and solving it before a crisis happens. A prime example of this is how we continue to spend ourselves into irrevocable debt, yet no one wants to do anything about it. Yet another is in the realm of regulation.

The government typically vacillates from regulating too little to regulating too much. Unlike the wee bear's porridge, regulators never seem to get it "just right."

The failure of regulators to properly oversee the financial system was given as a prime reason for the 2008 financial crisis, and as such the government responded with weighty measures designed to prevent another such scenario. Between the 14,000-odd pages of Dodd-Frank (much of which hasn't even been implemented yet), stress testing for capital adequacy and the creation of the CFPB, there were no shortage of new regulations created to try and prevent another financial crisis.

But do they really do what they're supposed to? Certainly, it makes sense to have better oversight over the largest financial institutions, the ones whose actions can actually affect the national economy. But smaller banks have been crushed under a glut of regulations that probably shouldn't apply to them.

For example, I understand the thinking behind the "stress testing" of capital adequacy for the nation's largest banks; if one of them failed it would have a severe affect on the economy. But this year, the Federal Reserve opened up the stress tests to banks in the $10-$50 billion asset range. It is ludicrous to subject a bank of around $10 billion in assets to the same rigorous standards applied to the likes of JPMorgan Chase and Bank of America. In fact, many banks around the $10 billion threshold purposefully stayed below that level to avoid the tests and other regulations. That's a concrete example of over-regulation killing business growth.

A recent report from Continuity Control, a New Haven, Conn.-based provider of compliance management system, says that community banks grappled with the toughest regulatory year on record in 2013, with an average of 61 regulatory changes each quarter.

"Many community financial institutions continue to rely on one or two individuals and antiquated processes to manage compliance," says Pam Perdue, Executive Vice President, Regulatory Insight, at Continuity Control and former Federal Examiner, said in the report. "It's become untenable for an institution to keep up with all of these changes using current methods. For many banks, they are increasingly discovering that updating their technology can solve the problem better, faster and cheaper."

Ironically, the familiar cry of "break up the banks" made by many pro-regulation people is exactly the opposite scenario of what will happen if things continue this way. As only the biggest banks will be able to afford the resources to comply with ever-increasing regulation, smaller banks will be swallowed up and acquired by their large counterparts, and the financial system will be the worse for it.

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio