On Friday, May 22, the Senate Banking Committee approved Senator Richard Shelby's regulatory reform bill for financial institutions. Although the process between committee approval and actual floor debate and passage will take some time, proponents of tougher regulations on big banks are already voicing fierce opposition to the bill, which purports to free smaller banks (those with less than $500 billion in assets) of the more stringent requirements of Dodd-Frank. However, all is not what it seems.
Americans for Financial Reform released a statement about the bill on May 12. They say:
Senator Shelby’s 216-page draft legislation makes sweeping changes that would significantly weaken key financial reforms passed in direct response to the events of the 2007-2009 financial crisis. It puts the wish list of the financial sector above protecting the stability of the US economy, and the safety of mortgage markets and of homebuyers. The changes in the bill include:
- Introducing sweeping new exemptions to Dodd-Frank mortgage underwriting requirements that could lead to a resurgence of toxic lending with abusive fees and other predatory features (Section 106).
- Requiring extensive re-review and re-examination of all Dodd-Frank regulations that have been passed in the last few years and in many cases have not even been implemented yet (Section 125).
- Requiring a cumbersome, time-consuming, and impractical designation process before the Federal Reserve could apply stronger risk controls to some of the largest banks in the country – including multi-hundred billion dollar banks comparable in size to banks like Washington Mutual and Countrywide that played a major role in the financial crisis (Title II).
- Greatly weakening the ability of the Financial Stability Oversight Committee to designate giant non-bank financial institutions for Federal regulatory oversight. Entities that were not commercial banks, such as AIG, an insurance company, and investment banks like Lehman and Bear Stearns, played a major role in the financial crisis (Title III).
. . . Even from our preliminary review it is clear that this legislation would constitute a major rollback of financial reform.
You can read all of their statement here.
Mouthpieces for the big banks, of course, are emphasizing how opposition to the bill hurts small and medium-sized banks. But supporters of community banks say that the real measures we can take for smaller banks are not found in the Shelby bill at all. Rather, as Stacy Mitchell wrote on May 6:
. . . the correlation between Dodd-Frank and the drop in the number of community banks is not nearly as strong or clear cut as [critics] suggest. Many of Dodd-Frank’s provisions took effect only in the last year and cannot explain losses in previous years . . . Lobbying groups like the American Bankers Association (ABA) are already using the plight of community banks to push for overturning parts of the law, including many regulations that apply only to Wall Street. Senator Elizabeth Warren . . . noted that “the ABA’s very first request in the name of community bank regulatory relief” was the passage of a bill exempting banks of all sizes from a rule designed to prevent them from issuing mortgages that borrowers can’t afford to repay.
Mitchell agrees with the Public Banking Institute that the best way to save community banks is to implement public banks. But she also says there are better deregulation alternatives, specifically targeted to small banks:
The good news is that several prominent lawmakers and regulators are calling for fundamentally changing our approach to banking policy. One idea gaining traction is to recognize that community banks and megabanks are different types of businesses and ought to be governed by distinct regulatory regimes. “Neither I nor any community banker I know is advocating for a regulatory- or compliance-free world,” Centinel Bank’s Romera Rainey told participants at a recent Federal Reserve conference. “But we must have proportionate regulation … It’s two different [business] models.” In early April, Thomas Hoenig, vice chairman of the FDIC, outlined a plan to do this by exempting from certain regulations banks that do not engage in securities trading, have limited involvement in derivatives, and hold capital equal to at least 10 percent of their outstanding loans and investments.
Of course, at PBI, we have long documented the ways in which public banks can help community banks. This piece analyzes the relationship between Dodd-Frank and community banks, as well as the reasons why the Bank of North Dakota has made that state the most community bank-rich state in America.
Public banks offer unique benefits to community banks, including collateralization of deposits, protection from poaching of customers by big banks, the creation of more successful deals, and, important in light of what we've discussed above, regulatory compliance. The Bank of North Dakota, the nation's only public bank, directly supports community banks and enables them to meet regulatory requirements such as asset to loan rations and deposit to loan ratios. It makes shareholder loans to investors in those banks allowing those banks to increase their capital when needed and it can make deposits into those banks to increase their deposit base. On top of all that, it keeps community banks solvent in other ways, lessening the impact of regulatory compliance on banks' bottom lines.
We know from FDIC data in 2009 that North Dakota had almost 16 banks per 100,000 people, the most in the country. A more important figure, however, is community banks’ loan averages per capita, which was $12,000 in North Dakota, compared to only $3,000 nationally. Number of overall loans is also a significant figure, because having more banks doesn’t necessarily mean providing more loans, particularly when it’s difficult for small businesses to get them. During the last decade, banks in North Dakota with less than $1 billion in assets have averaged a stunning 434 percent more small business lending than the national average.
Short–term projections show North Dakota will suffer significantly less decline than the national average. According to the Minneapolis Federal Reserve, North Dakota may lose two banks to consolidation in 2015, but the nation as a whole will lose 317 such banks, an average of 6.34 per state. The pressure on community banks is tough right now, and North Dakota banks won't emerge completely unscathed, but its rate of loss in 2015 will be less than a third of the national average.
One thing's for sure: We can't trust big banks to regulate themselves, or rely on their bought-and-paid-for public servants to do it for them--and that alone should make us suspicious of the Shelby bill. We'll keep you posted on its progress.