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 firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Federal agency checking whether Highmark has enough doctors in Medicare plan
- Lower gasoline prices fail to spur consumer spending
- Retailers that won’t open on Thanksgiving hope move pays off
- Google applies tech to medical device
- Butler County firm Deep Well Services tackles tough gas wells
- Small businesses’ dilemma: Keep costly health care coverage or lose talented workers
- Westinghouse to construct colossal nuke plant in Turkey
- Merry marijuana: Holiday shoppers urged to think pot
- Budweiser beer brand gives Clydesdales pink slip for holidays
- Housing prices nudge upward as more homes on market
- Household debt on the rise after 5-year decline