The American Bankers Association warned a House financial services subcommittee Thursday that the cumulative impact of years of added regulations has pushed the nation’s community banks to the tipping point.
ABA representatives specially cited dramatically increasing compliance costs – estimated at $50 billion annually — and said they threaten the future of community banks.
William B. Grant, chairman and chief executive officer of First United Bank of Trust in Oakland, Md., testified on behalf of ABA before the House Subcommittee on Financial Institutions and Consumer Credit. Grant also serves as chairman of the Community Bankers Council at ABA.
Grant testified that 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.
“While community banks pride themselves on being flexible and meeting any challenge, there is a tipping point beyond which community banks will find it impossible to compete,” Grant said in a press statement issued by the ABA “Each new regulation or law in isolation might be manageable, but wave after wave, one on top of the other, will certainly overrun many community banks.”
Grant said that the costs to implement new regulations are substantial and weigh most heavily on community banks. He testified that a conservative estimate of hard-dollar compliance costs for the entire industry is approximately $50 billion annually – about 12 percent of total operating expenses.
“Make no mistake about it, this burden is keenly felt by all banks, but particularly small banks that don’t have as many resources to manage all the new regulations and changes to existing ones,” he said. “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. All these extra expenses could have been more productive if they were devoted to providing services to our customers.”
Grant noted that direct out-of-pocket expenses for compliance costs are just part of the story – the opportunity costs and unintended consequences of the Dodd-Frank Act also have far-reaching effects.
“Instead of investing precious capital into new products to meet the ever-changing demands of our customers, banks are paying for changes to software to ensure compliance with all the new rules,” he said. “Even a small reduction in the cost of compliance would free up billions of dollars that could facilitate loans and other banking services.”
Grant closed his testimony by expressing concern that some yet-to-be-formulated rules under Dodd-Frank, if written improperly, could literally drive community banks out of certain lines of business. He cited mortgage lending as a key example, with proposed rules that would make it much more costly for banks to make loans and would deny quality loans to creditworthy borrowers.
“I have already heard community bankers say that they are considering ceasing their mortgage lending activities,” Grant said. “The thought of quality institutions being forced from the mortgage market and of otherwise creditworthy borrowers being denied credit because of overly broad regulations is chilling – especially at a time when our housing economy has been severely battered and is just beginning to show signs of recovery.”