Why regulation is unhealthy

By July 21, 2015 September 6th, 2015 Lenders, Regulation

Regulated banks are under more and more pressure to comply with all the new regulations coming out of Washington, DC. The Dodd Frank Act was passed and signed into law by President Obama on July 21, 2010. It is a huge piece of legislation with over 2,300 pages and calling for 250 new rulemakings which have generated thousands and thousands of pages of new regulations.

For community banks, faced with this with massive burden, it literally creates fear in the local banker to, well, be a banker! It drains a Bank’s resources while trying to keep up with all the new regulations to comply. Banks end up worrying about the compliance aspects of the business and lose focus on what they do best—lending. Just as important, added regulation increases a bank’s cost to comply with more regulations, which in turn end up costing small businesses and consumers more. In addition, new regulations have restricted the availability of financial products and credit because banks are now so focused on complying with regulation it has become difficult to be innovative.

It can be argued that much of the new regulations are unnecessary to force upon community banks. Many of the new regulations do not protect consumers, or make the banking system any safer than before without the regulations. And in fact, just the opposite is occurring. Many smaller banks are being sold or merged with larger ones. Other banks are closing their residential mortgage operations. The banking industry is consolidating; the main street banker is forced to compete with the larger regional and national banks.

Unfortunately, perception is reality and the perception from the financial crisis is that more regulation is better. But is it smarter? How does it impact the commercial property owner? And what does it do for the local economy?

While there are no easy answers, the first one is, that our country has been based upon the freedom to choose. Increase regulatory burden, and you take away the freedom to choose. The freedom to run a business to meet the needs of your customers. If the banker is so restricted on what loans they can choose to make, it will have a negative impact on the commercial property owner and any small business looking for financing. When a small business cannot obtain the financing it needs to operate or grow, guess what, the community suffers. It suffers in terms of local employment, obtaining goods and services and generally economic activity is dampened.

Rather than more regulation, what is needs is regulation 2.0. Throw out the old and write new regulations; lessen the burden. Banks today are basically a government appendage. Bankers are subject not to their customers but to the government. While it appears the ultimate stakeholder is the government with their consumer protection agenda, the real stakeholder is the communities in which local banks operate.

According to American Banker,

 “…there are now 1,342 fewer community banks in the U.S. than there were in June 2010. The number of banks with assets below $100 million shrunk by 32%, while the number of banks with assets between $100 million and $1 billion fell by 11%.

Consequently, it should come as little surprise that since Dodd-Frank, the share of U.S. assets held by banks with assets above the $10 billion threshold has increased by 4%. By contrast, banks with assets below $100 million have seen their share of U.S. assets decline by 40%. Banks with assets between $100 million and $1 billion lost 21% market share during this time.”

You can read the full article here via American Banker