On the regulatory front, post-Enron, banks have been bowled over by a wave of costly regulation, starting with the Sarbanes-Oxley Act, and continuing with the Bank Secrecy Act and Dodd-Frank. Initiatives from new governmental bodies such as the Consumer Financial Protection Bureau are also costing banks, in dollars and customers. The CFPB, for example, is in effect trying to regulate non-regulated financial services firms — like check-cashing and debt-collection businesses — through their lenders, adding to bank compliance burdens and causing them to sever relationships in those industries.
The Federal Reserve and the FDIC have in effect also shut off the creation of new banks. As noted in an early December letter from the Independent Community Bankers of America and The American Association of Bank Directors, the FDIC’s policy on de novo banks, adopted in 2009, makes “forming new banks prohibitive.” The lobbying groups cite the FDIC requiring “applicants to raise capital prior to opening that would be sufficient to maintain [the bank’s] leverage ratio at a minimum of 8 percent for the full 7 years [of its prospective business plan].”
For small businesses and other companies that bank with small, local financial institutions, this is a problem. Community banks often have branches in communities where big banks won’t venture. And, when these banks are acquired, the buyer often closes any money-losing locations, usually the branches in less economically desirable cities and towns.
The loss goes beyond bank branches. “Credit is the lifeblood of businesses,” Barragan says, and “the fewer institutions, the less access to capital there is.”
Regulators and Congress have helped small, private companies in other ways. The prime example is the JOBS Act’s easing of Securities and Exchange Commission reporting requirements and equity-investor solicitation. Meanwhile, high-level public debate about addressing the disappearance of small banks and how to support the continued viability of them is nonexistent.
“There’s a lot of discussion about too-big-to-fail, a lot of discussion about Basel, a lot of discussion about capital levels,” says Barragan, but not about small banks. “To the extent community banks are an important part of a diverse financial-services industry, particularly in underserved communities, what can be done to ensure they stick around?” he asks.