How Simpler Regulation Can Help Banks Meet More Credit Needs

For far too many Americans, the economy recovery is something about which they read — a phenomenon affecting other people in other places. It is against such a backdrop that one must weigh the unintended consequences of financial regulation, which burden the institutions that power the core of our local economies in America.

To an extent, the financial crisis may seem like a faded memory. On an annualized basis, U.S. real GDP growth has topped the 3% long-term average in four of the past six quarters — the strongest period of sustained growth since 2006. U.S. private sector employers created 2.5 million jobs in 2014 — the strongest year-over-year increase since 1999. The low interest rate environment established by the Federal Reserve, along with the efforts of ordinary people trying to minimize their financial risk, have reduced household debt service burdens to generational lows.

But while metropolitan areas are doing much better, rural areas continue to struggle. Over the past decade, U.S. employment growth has varied widely between larger urban areas and rural communities. Collectively, U.S. metropolitan areas experienced a 12% increase in private sector employment from 2003-2013 while non-metropolitan areas recorded just a 5.4% gain.

More worrisome is the impact of the current, uneven recovery on the economy's future. Tomorrow's generation faces a number of headwinds that will forestall their ability to contribute to the next wave of economic growth. Aggregate student loan debt stands at more than $1.1 trillion, trailing only mortgage debt as the largest form of consumer indebtedness. One consequence of this rising student debt burden is deferment of home ownership — the percentage of 18-to-34 year olds who own homes has continued to decline and stands at 13% compared to over 17% before the crisis.

Contrary to their portrayals in popular media as a group of swashbuckling entrepreneurs, millennials have actually become less inclined to launch new businesses — the percentage of business owners in that demographic has not been this low since the early nineties. Since 2007, the average net worth of those under 30 has fallen by almost half.

Young people who are now entering the workforce with limited professional, financial and entrepreneurial opportunities may unfortunately be losing the most vital and economically productive years of their lives. It follows, then, that the total rate of business creation from 2012 to 2013 continued the downward trend that started in 2011. These are not the signs of the kind of America for which we strive and aspire — one in which opportunity, prosperity and growth are broadly shared.

One cannot question the applicability or utility of recent financial regulations in improving transparency and reducing opacity in the financial services industry. However, there is a need for balance, where supervision is commensurate with the complexity of an institution's business model.

It is hard not to see the situation in this way: regulators, under the most extreme sort of pressure from elected officials, train their sights on traditional banks, while capital heads elsewhere and with it, the sort of risks Dodd-Frank was meant to mitigate. At the same time, the traditional, so-called real economy recovers in fits and starts and American businesses and consumers struggle to get the credit they need.

Banks' ability to serve Americans' credit needs will depend, in part, on a supportive regulatory environment, one that is simpler and more predictable, tailored for different types of banks, and premised on a balance between costs and benefits – not for banks or banking but, rather, for the American economy as a whole. The time has come to allow America's community banks to serve their traditional roles of taking deposits and making prudent loans to the friends and neighbors they know, and not allow misplaced animus and a one-size-fits-all approach to regulation to hinder the American economic recovery finally underway.

In thinking about the banking industry in the overall context of the economy, we should pause to remind ourselves of history. Just as John Maynard Keynes presciently saw that the draconian terms of the Treaty of Versailles could be the harbingers of international instability — and which opened a Pandora's Box from which came economic stagnation, hyperinflation and social instability — so must we be open to similar possibilities when it comes to financial regulation. An overly harsh undifferentiated response could plant the seeds of new problems. As a long-time banker, I am hopeful for a return to an intelligible milieu where banks are able to energetically fulfill their roles as facilitators of commerce and of the quality of life in the local communities across our country.

Those of us in the industry share the common goal of legislators and regulators, to create the safest financial system in the world. It pains me to see excessive regulation that might stifle innovation, drive society's best and brightest away from our industry or discourage bankers from fulfilling their role in the economy out of fear of being inordinately fined and sanctioned. Much of what has been done is right, but it can be made better and more effective. The whole system will be better off if all constituents can get past their entrenched positions to just “make it right.”

Robert Wilmers is the chairman and chief executive of M&T Bank in Buffalo, N.Y. This article was adapted from his 2015 letter to shareholders.