Community Bankers Blame Too Many Rules for Mergers in Sector

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By Jeff Bater

June 9 — Bankers in rural America told Congress an avalanche of rules is driving mergers in the sector, and they called for legislation that would favor the treatment of small lenders.

A subpanel of the House Small Business Committee held a hearing about the effects of the Dodd-Frank Act and other federal regulation on community banks and rural areas. Roger Beverage, the president of the Oklahoma Bankers Association, said meeting customer needs has grown harder because of “the avalanche of new rules, guidances and seemingly ever-changing expectations of the regulators.”

Rep. Tim Huelskamp (R-Kan.), who leads the Subcommittee on Economic Growth, Tax and Capital Access, said the rising cost of regulation is causing many small banks to merge with large entities that may not understand the local community — or causing some lenders to shut their doors.

New Regulatory Atmosphere

Beverage, appearing at the hearing on behalf of the American Bankers Association, said there are nearly 1,500 fewer banks now than five years ago. In Oklahoma, there are 211 chartered banks, he said; when he came to the state in 1988, the number well exceeded 400.

“This new regulatory atmosphere — not the local economic conditions — is often the tipping point that drives small banks to merge,” Beverage testified.

Because rules change so often, First National Bank of Elkhart, Kan. — a $78 million institution with 20 employees that predominantly lends to agriculture — has had to go outside the bank to perform internal audits.

“We don't have the expertise,” the bank's president, Shan Hanes, said during questioning. “We've had to outsource that to outside firms that come in for a period of a week or a few days and do those audits. That comes at a cost. We're paying more than a full-time employee salary to outside firms to come in and do audits that we used to be able to do ourselves.”

Dodd-Frank Rules

According to a memo from the staff of the House committee, Dodd-Frank requires agencies to adopt nearly 400 new rules and, as of the end of 2015, 267 had been finalized, with an additional 40 proposed.

Beverage testified that the typical small bank with one compliance officer has recently had to contend with more than 2,000 pages of new regulations — and that encompasses just the housing, capital and remittance areas.

“The Dodd-Frank Act has charged federal financial regulators with writing and enforcing 398 new rules, resulting in at least 13,644 pages of proposed and final regulations, and that’s with regulators only halfway through the rulemaking process.

“While not all of those rules apply to all banks, many do,” Beverage said, adding that even the rules that do not apply tend to have a trickle-down effect and become “best practices” as determined by the bank’s primary federal regulator. “Those regulators then apply those requirements to thousands of banks otherwise not subject to the rule. The key to changing the consolidation trend is to stop treating all banks as if they are the same or as if all banks operate in the same manner as the largest and most complex institutions.”


A bill that would tailor regulation in the post-crisis banking sector has gained a little traction in Congress. In March, the House Financial Services Committee approved H.R. 2896, the Taking Account of Institutions with Low Operation Risk (TAILOR) Act. The measure was introduced in June 2015 by Rep. Scott Tipton (R-Colo.) and would direct banking regulators to take into consideration the risk profile and business models of institutions subject to regulatory action (42 BBD, 3/3/16).

“Financial regulation and examination should not take a one-size-fits-all approach,” Beverage testified, encouraging lawmakers to support the bill.

While H.R. 2896 cleared the Financial Services Committee, the 34-22 vote signaled considerable headwinds lie ahead — at least with the current, pre-election power structure intact. Rep. Maxine Waters (D-Calif.), the committee's ranking member, called the TAILOR Act a “bold attack” on Dodd-Frank and that the bill would allow “every bank overseen by agencies like the Federal Deposit Insurance Corporation or the Consumer Financial Protection Bureau to challenge rulemakings in court if they felt a regulation was not uniquely tailored to their business needs.”

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