Technology is supposed to be the great equalizer in banking, so why are the largest banks winning deposits at twice the rate of their community and regional counterparts?
In the view of M&T Bank Chairman and Chief Executive Robert Wilmers, it's all about the cost of regulation.
The expense of complying with myriad new regulations is straining the budgets of small and midsize banks, inhibiting their ability to invest in the most up-to-date technologies and cybersecurity systems designed to protect customer data. Large banks, meanwhile, "are able to take advantage of their massive size to shrug off the impact of compliance costs" and spend whatever is necessary to meet customers' "evolving" preferences in mobile and Internet banking, Wilmers said.
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Community and regional banks should be subjected to simpler rules than very large banks, the chairman and CEO of the Buffalo, N.Y., company said. In fact, size is the wrong determinant for risk-based regulation, he said.
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The result, he pointed out, is that same-store deposit balances at the five largest banks have far outpaced deposit growth for the industry as a whole for the last three years. Even the customer-satisfaction advantages smaller banks have long held over large banks are starting to erode, Wilmers wrote in his annual letter to shareholders, released Friday.
"It would seem that legislative canon that purports to better regulate those institutions deemed 'too big to fail' is unwittingly creating a class of banks that may be 'too small to succeed,'" Wilmers said.
Wilmers used the letter to once again highlight his frustration with the one-size-fits-all nature of bank regulations put in place following the banking crisis. While he has acknowledged that stricter regulation was needed to help prevent a repeat of the crisis in 2008 and 2009, he continues to advocate for a tiered regulatory structure in which banks are regulated based on their complexity, not their size.
A persistent problem, he said, is the lack of coordination among regulators. He noted, for example, that three agencies analyzed the $122.8 billion-asset M&T's mortgage portfolio last year and each required it to submit a unique sample of mortgages. Overall, the Buffalo, N.Y., bank underwent 36 different inspections across 10 different agencies, with each review bringing as many as 15 examiners to the bank.
"A measure of improved coordination could help in reducing some of the unnecessary duplicative work needed to fulfill regulatory requests, and free up resources to make faster progress in reforming the system, allowing for a rebalancing of our responsibilities toward serving our customers," he wrote.
As this year's letter makes clear, he is also growing increasingly worried about the changing lending landscape and the shrinking role that small and regional banks are playing in it. Increased capital requirements and other new regulations have given banks no choice but to scale back their lending, leaving unregulated nonbanks — from hedge funds to marketplace lenders — to fill the void. Forty years ago, nearly 70% of all private-sector loans were made by banks and thrifts. "Today, just 48% of loans are made by one-third as many banks," he wrote.
"We have witnessed, through the rise of nonbank players, a subtle but steady shift in which regional banks are playing an ever-diminished role in the financial leadership of the communities and small towns of America that they have traditionally served so well," Wilmers wrote. "Such is the collateral damage of far-reaching regulation inspired by the misdeeds of a few."
Wilmers said that these shifts pose serious threats to the health of the economy. He noted that unregulated hedge funds are already carrying the majority of nonperforming loans in the leveraged-loan sector and wondered if they would have the "institutional restraint" to reduce their lending when demand slows. He also said that these lenders have little incentive to prop up local businesses and communities during tough times.
These are particularly tough times for entrepreneurs, Wilmers added. Companies with less than $1 million of revenue are struggling mightily to obtain credit from traditional banks, and though online lenders are stepping up to help fill that void, they charge significantly higher interest rates than banks. A surge in student debt — an unintended consequence of the government taking over the student-lending business from banks — is also hampering the ability of millennials to start businesses or buy homes, he said
Wilmers said that this competition from nonbanks is heightening competition among banks — and not in a good way. As more and more loans — albeit riskier ones — move outside the banking sector, lending standards are continuing to weaken as banks battle each other for what is a limited supply of quality loans.
"Loan features such as interest-only payments for the life of the loan have re-emerged while pricing is being pushed downwards, sometimes below minimum level of profitability," he said.
There are no quick fixes to increasing the availability of credit, but Wilmers said it starts with lawmakers and regulators primarily turning their attention to growing the economy, not handing down punishments.
"A fixation with the past — with the view that banks are, inherently, somehow a threat to the economy rather than a pillar of the financial system — itself poses risks," he wrote. "One can only hope that, working together, elected and appointed officials and industry leaders will work together to avoid the grim scenario in which capital is concentrated among a handful of banks even as lending and risk is dispersed to the barely regulated shadow banking sector."
