Dubious Regulators Need to See Compliance Burden for Themselves

Are community banks overregulated?

I recently asked that question to a panel of top-level regulators representing the three federal banking agencies at the Independent Community Bankers of America's 2015 convention. Their answers were so ambivalent that I came away convinced that the agencies really don't think community banks are overburdened by rules. While they endorse a tiered regulatory scheme, in which regulation is based on the risk and complexity of banking institutions, they do not believe that regulation has reached a point that endangers the continued existence of community banking.

From the industry's perspective, this stance is unbelievable. Numerous independent studies have shown that community banks are struggling because of regulatory burdens.

The Independent Community Bankers of America found in its own recently released Community Bank Lending Survey that nearly three-quarters of 519 community bank respondents said regulatory burdens are preventing them from making more residential mortgage loans. The survey also found that significant percentages of community banks are considering exiting mortgage lending or are already in the process of doing so.

A separate 2014 joint study by the Federal Reserve and Conference of State Bank Supervisors confirmed that community banks face rising compliance costs as they devote more time and personnel to navigating regulations and pay more for the services of third-party vendors.

Anecdotal evidence about overregulation and its impact on is almost overwhelming. Just last month, David Williams, chairman of Centennial Bank in Lubbock, Texas, told the House Financial Services Committee that community bank regulation is injuring the customers it is intended to protect by cutting access to credit.

At the past two Economic Growth and Regulatory Paperwork Reduction Act outreach meetings hosted by regulators, banker after banker testified about how regulation is forcing the community banking industry to consolidate. This of course has a tangible impact on local consumers and communities nationwide — particularly when consolidation is very rapid and mergers take place between community banks and non-community banks.

But banking regulators seem to think the industry is exaggerating the impact of regulation. The prudential regulators and the Consumer Financial Protection Bureau downplay the impact of their ever-expanding regulatory requirements on community banks, even though their rules place a disproportionate burden on the smallest institutions. Last year's Federal Deposit Insurance Corp.'s study on community bank consolidation was silent on the impact of the regulatory environment on the shrinking number of community banks. If community banks have to consolidate to deal with regulation, that is not necessarily a bad trend, regulators seem to say.

Banking regulators will never conclude that regulation is actually hurting the industry until they study the issue and come to that conclusion on their own. Independent studies and anecdotal evidence will not convince them.

The best time to conduct the study would be now as part of the review going on by the EGRPRA process, which requires the banking agencies to determine if their regulation is "unduly burdensome." A comprehensive on-site survey of the community banking industry — conducted by a team of regulators who would interview community bankers to determine the bank's direct and indirect compliance cost — could conclusively prove to the regulators the impact that regulation is having on the industry.

The FDIC tried such a study as part of its 2012 Community Bank Study survey, but ended up only interviewing nine community bankers. With such a limited sample, the FDIC's Division of Insurance and Research was unable come up with any firm conclusions concerning the costs of regulatory compliance. In 2013, the Federal Reserve Bank of Minneapolis tried to quantify the costs of additional regulation on community banks based on additional staffing costs. But it too only came up with limited results.

The agencies should expand on these approaches and, as part of their EGRPRA process, conduct a comprehensive study of the overall impact of regulation on community banking. Then they will begin to understand what the industry already knows: that overregulation harms not only community banks but also the consumers and communities that regulators intend to protect.

Christopher Cole is executive vice president and senior regulatory counsel at the Independent Community Bankers of America.