Mounting regulations may thin ranks of small banks
The financial crisis that began four years ago and claimed Bear Stearns, Lehman Brothers and other big names may soon add as victims the nation's community banks.
Ironically, industry experts say, small banks will suffer from measures that regulators are imposing to prevent another financial crisis.
“About 200 community banks could merge out of existence” because of costly rules, said Chris Cole, senior vice president and regulatory counsel for the Independent Community Bankers of America in Washington.
Losing 200 smaller banks would not be “a massive consolidation of the nearly 7,000 such banks in this country but it would be significant,” said Cole.
Community banks generally are defined as those with under $10 billion in assets but many are much smaller. About 38 such banks exist in Western Pennsylvania and about 200 statewide.
In the past decade, at least 18 community banks merged with others because of financial or other difficulties. Among those in the Pittsburgh area that recently disappeared: Parkvale Savings Bank and Fidelity Savings Bank, which this year merged with other banks because of financial pressures.
The post-crisis rules include higher capital requirements to offset financial risk, and lending and consumer disclosure changes requiring reams of paperwork. That could mean a need to hire compliance experts, bankers said.
“Community banks are facing an avalanche of regulations, and we don't have a roomful of attorneys to deal with them,” said Tim Zimmerman, CEO of Standard Bank in Monroeville, with nine branches and about $442 million in assets.
Most of the rules stem from the Dodd-Frank Act, a banking reform law that takes full effect Jan. 1.
For example, because ratings agencies frequently rubber-stamped mortgage-backed securities as “AAA-rated” investments even though they were closer to junk status, regulators banned financial institutions from relying on the agencies to assess investment risk.
But community banks don't have investment risk analysts on staff to study municipal bonds and other investments they typically purchase to earn money that they in turn pay to depositors as interest. It could cost $70, 000 a year to employ one analyst and the return would cover the overhead, Zimmerman said.
“The financial crisis was caused by the larger banks, so we got more regulations to address all the (mortgage-lending) abuses,” he said. “But the new rules are penalizing community banks, and they weren't the ones doing these things.”
Perhaps more onerous are pending requirements that banks hold more capital to offset bad loans. Regulators want the added buffer — formally known as the “Basel III” capital standards — to minimize bank failures if the economy tanks.
Yet even Pennsylvania's top bank regulator thinks the federal rules may go too far.
Glenn Moyer, secretary of the Banking and Securities Department, said in an email. “However, I also believe that we must seek out a more balanced approach that does not reflect regulatory ‘panic.'”
A simplified illustration of the complex Basel III rules: A bank making a $20,000 home equity loan on a house worth $100,000 currently must hold aside 6.5 percent of that $20,000, or $1,300, as a cushion in order to be considered a “well-capitalized” bank. Under the pending rules, the capital requirement would effectively double, to $2,600, for that loan.
“If a community bank wants to continue making these loans, they will have to price them higher,” Zimmerman said. That means charging borrowers higher interest rates and fees.
In addition, it could cost a community bank about $100,000 to overhaul information software needed to comply with the Basel III standards, said Cole.
Gary Pepper, chief financial officer of Eureka Bank, a two-branch bank based in Oakland, said changes to loan documents and compliance procedures will require community banks to hire outside professional firms.
“It's definitely going to affect the bottom line because we'll have to deal with the costs to get all this up and running,” he said.
Still, banks generally acknowledge the necessity for reforms and don't find fault with all the changes.
The Dodd-Frank rules, for example, will lessen the cost of premiums community banks pay the government for deposit insurance, said Cole. And banks with less than $10 billion in assets will not undergo examinations by the Consumer Financial Protection Bureau that Dodd-Frank created.
Bankers harbor hope that regulators will water down Basel III capital requirements by March or April, said Zimmerman. Fifty-three U.S. senators endorsed an independent bankers-sponsored letter urging regulators to exempt banks with less than $50 billion in assets from higher capital requirements.
“This is starting to resonate on Capitol Hill,” Zimmerman said.
Thomas Olson is a staff writer for Trib Total Media. He can be reached a 412-320-7854 or at email@example.com.