• Harvard Report Finds Growing Regulatory Burdens Afflicting Community Banks
  • May 26, 2015 | Author: George A. LeMaistre
  • Law Firm: Jones Walker LLP - Mobile Office
  • While economies of scale and rising technology costs have contributed significantly to the decline that the community-bank sector has experienced since the onset of the recession, available data indicate that growing regulatory burdens since the 2010 enactment of the Dodd-Frank Act also have accelerated that decline, according to a Harvard University report.

    "The State and Fate of Community Banking," published in February, was prepared by two researchers at Harvard's Kennedy School of Government and is based on call report data through the second calendar quarter of 2014. The report generally treats as community banks those having total assets under $10 billion, although, for some purposes, the smallest of that group-banks with assets under $1 billion-are considered separately.

    Community banks, like nearly all others, experienced significant difficulties during the worst of the recession, in 2008 and 2009, but what the report finds more striking are data that show continued decline in the sector since mid-2010, when Dodd-Frank was adopted. Thus, the report says, "[C]ommunity banks' vitality has been challenged more in the years after Dodd-Frank than in the years during the crisis."

    The report notes, for example, that during the period from roughly a year before the recession began, and continuing through a similar period after it ended-from the second quarter of 2006 through the second quarter of 2010-the share of U.S. banking assets held by community banks declined by six percent. From then through the second quarter of 2014, however, the rate of that decline more than doubled, and community banks' share of banking assets fell by more than another 12 percent.

    The study's authors suggest "three broad policy objectives," with accompanying proposals, intended to "create a more reasonable and streamlined regulatory system that is consequently less burdensome to these unique institutions." They are:

    1. Institute cost-benefit analyses of significant financial regulations.

    The report proposes that financial regulators be required "to conduct cost-benefit analyses for economically significant proposed rulemakings," and that those analyses be made subject to non-binding review by the Office of Information and Regulatory Affairs within the Office of Management and Budget.

    2. Provide for formalized review of existing regulations.

    A second proposal is for establishment of a bipartisan commission, modeled on the Pentagon's Base Realignment and Closure Commission, to identify ways "to merge, streamline and simplify banking and consumer financial regulation, particularly with regard to the effects they have on community banks." The report further suggests that the interagency Financial Stability Oversight Council, created under Dodd-Frank, "should utilize its unique institutional advantage as a council of regulators to identify what regulatory conflicts are unnecessarily harming community banks, to ensure better coordination and to reduce unintended consequences stemming from conflicting regulatory objectives."

    3. Expand community banks' regulatory exemptions.

    Third, the report advocates that because "community banks are often better capitalized than their larger peers," regulators should consider devising ways to relieve them from the burdens imposed by regulations-including, for example, complex risk-weighted capital requirements, and restrictions affecting banks' holding or trading in derivatives and other securities activities-that pertain almost exclusively to large national and multinational banks. Several current and former senior U.S. and European regulatory officials, as well as academic commentators, have suggested that criteria including factors such as an institution's asset volume, the kinds of investments that it holds, and the nonbanking activities in which it engages, can appropriately be used to identify banks that, without compromising regulatory objectives, appropriately can be exempted from such requirements.