By Stephen W. Rice
2015 was an eventful one for New York community banks on the government relations front, as we faced difficult legislative and regulatory challenges in Albany and Washington, D.C. We were engaged in a wide array of issues, including but not limited to tax reform, proposed expansion of credit union powers and authorities, compliance, regulatory and operational burdens and regulatory reform initiatives. In short, we were at the forefront in protecting and enhancing the interests of community banks, as well as their customers and communities they serve.
Community banks operate in a challenging business, banking and regulatory environment. The impact of the Dodd-Frank Act and other regulatory demands has forced many smaller, independent banks to redirect resources away from what they do best (reinvesting in their local communities by making local small business, consumer and residential loans) and to instead focus on the increasingly costly and burdensome compliance tasks required by our federal and state regulators and legislators.
Several recent studies have illustrated the difficulties facing community banks.
The Federal Reserve and the Conference of State Bank Supervisors recently released the results of their second National Survey of Community Banks. The survey found compliance costs for community banks represented 22 percent of their net income. Respondents reported regulatory compliance accounted for 11 percent of personnel expenses, 16 percent of data processing expenses, 20 percent of legal expenses, 38 percent of accounting and auditing expenses and 48 percent of consulting expenses! The percentages “imply a hypothetical compliance cost to community banks, in these areas alone, of $4.5 billion annually,” the report stated.
The report also included anecdotal comments gathered through a series of town hall meetings nationwide. Among some of the themes consistently cited were “a lack of clear regulatory expectations and perceived aggressive examination tactics.” The result? Many banks have hired more compliance personnel and third-party auditors, and both “are in high demand and very expensive.” The report also noted that “compliance costs have also led banks to abandon certain financial products, forcing consumers to nonbank financial services providers.”
Another study earlier this year by Harvard’s Kennedy School of Government stated the decline in community banks has only accelerated since the Dodd-Frank law on financial reforms passed in 2010. Authors Marshall Lux and Robert Greene compiled FDIC data detailing 20 years of lending patterns. Since the enactment of Dodd-Frank, the share of banking assets controlled by community banks has declined by 12 percent. That’s almost twice the rate of decline over the previous four years before the act. The authors wrote: “Community banks’ vitality has been challenged more in the years after Dodd-Frank than in the years during the crisis.”
Of course, Dodd-Frank is not the only cause for these market share problems. In a recent survey by the Independent Community Bankers of America, nearly three-fourths of community banks reported they had scaled back mortgage lending due to increased red tape. However, consumer and commercial loans may have suffered more from weak borrower demand.
Commenting on a NYS Department of Financial Services’ Community Banking Study, Gov. Andrew Cuomo noted: “Community banks represent a strong economic engine that drives growth in New York and their performance is remarkable. Small business is the engine of job growth and most small business loans come not from the big national banks, but from community banks.”
IBANYS is working hard to establish a regulatory environment that will allow community banks to continue their important contributions throughout New York. ■
Steve Rice coordinates government relations and communications for the Independent Bankers Association of New York State. He has worked in the New York banking industry and New York state government for more than three decades.