Banking industry regulations have grown in number and complexity since the 2007 financial crisis, but the new regulations might not solve financial stability problems and could reduce the competitiveness of U.S. banks, said Daniel Tarullo, a member of the Board of Governors of the Federal Reserve System in a keynote speech at the Federal Reserve Bank of Chicago’s annual bank structure conference in May.
Smaller banks have been hit especially hard by the new regulations, he said.
The “aims of prudential regulation for traditional banking organizations should vary according to the size, scope, and range of activities of the organizations,” he said. He noted in many rural areas, a community bank is the only financial institution that serves the area. Additionally, banks with less than $1 billion in assets account for nearly one quarter of the commercial and industrial lending and nearly 40 percent of the commercial real estate lending to small- and medium-sized businesses. Their importance is disproportionate to their size. They have less than 10 percent of commercial banking assets, he noted.
Tarullo said the size threshold for middle-range banks, which are subject to increased reporting and regulatory requirements, should be raised from the current $50 million to $100 million.
Another conference speaker, Terry Jorde of the Independent Community Bankers of America, also pointed out much of the new regulation has placed undue burdens on smaller banks, which don’t have sufficient staff to handle the increased amount of paperwork. Ninety percent of community banks have less than $1 billion in assets, with many having much less than that.
Reports Four Times Longer
Jorde noted when she worked as a community banker several years ago, the quarterly call reports that all banks file were about 19 pages long. Now that same report is 80 pages long. Call reports include details about a bank’s financial condition. The level of detail is dictated by the size of the bank—the larger banks have to provide more detail. But regulatory changes over the last few years mean even small banks, with small staffs, have to file lengthy reports.
William Downe said some of the Fed’s capital reserve requirements have gone too far. Downe is president and chief executive officer of Montreal-based BMO Financial Group (parent company of Chicago-based BMO Harris Bank).
“The thought is that if some [capital] is good, more may be better,” Downe said. But the more capital that banks must hold in reserve, the less money they have for lending or for other investments. This limits investment returns. If investors don’t see enough investment opportunity in banks, they won’t provide funding, which also limits how much banks can lend, he said.
Almost No New Charters
This lack of return is one factor in the almost total lack of new bank charter filings over the last few years. There were many more new bank charter filings in other banking downturns, Downe said.
In addition, banking regulations have continued to change, which impedes strategic planning, Downe said. Fear of new regulations or changes to existing ones have kept banks from introducing some new products and services.
Competition from non-bank financial services providers also is having an impact. These non-bank firms provide many of the same services as banks without the same regulatory restrictions, said Karen Shaw Petrou, managing partner of Federal Financial Analytics, Inc. Currently, shadow bank (non-banks providing financial services) assets total more than 1.5 times (174 percent) the amount of banking assets in the United States. The global number is 52 percent. Petrou said this disparity is due in large part to the regulatory environment in this country. In fact, she noted, the U.S. figure is probably an underestimate because it doesn’t include mortgage-servicing payments.
Petrou also said the rules for executive compensation of bank officers could limit the level of talent the industry is able to draw. The shadow banking industry has no such restrictions, she noted.