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Back to the Future
As I prepare for a presentation at the WIB Annual Directors Conference, it strikes me that it has been seven years since the financial meltdown. While our economy has improved, it still has not completely recovered and the Fed and other banking agencies are fearful of an instant replay. The Fed, reminiscent of Japan, has held interest rates down at historical levels in order to jump start the economy. If and when this will materialize is a big question mark. World events continue to impact the Fed’s domestic monetary policy

What Underlies Today’s Regulatory Environment?
From my perspective, the fear factor created by the recession, seriously compounded by the vitriolic Monday morning quarterbacking contained in the Inspector General reports for failed banks, has contributed to an overly cautious regulatory environment. Honestly, I can’t blame the regulators. There clearly is no upside for them to take risks or give banks the benefit of the doubt. If they miss something or don’t act promptly enough, judged by 20/20 hindsight, they will be torched. This has created a very conservative oversight system, particularly for the community banks, and especially the smaller banks. From what we have seen, most types of creative ways to generate income, particularly noninterest income, are frowned upon if it isn’t plain vanilla. I think this is unfortunate.

The Clear Disparity Between the Megabanks and Community Banks
Let’s face it, there is a clear double standard between the megabanks and community banks. Cumulatively, the perceived risks community banks may take wouldn’t make a significant dent in the FDIC insurance fund. But the megabanks engage in risky hedging, currency trading, investment banking, insurance, and a plethora of other high risk enterprises in an attempt to manufacture higher earnings to offset compressed interest rate margins, slow loan growth, and a very competitive environment.

Can We Find a Happy Medium?
As a former regulator, I honestly believe in the system and the need for an appropriate level of regulation. That said, I think it needs to be tempered by the economic realities of the times. Community banks are struggling to be profitable because of their disproportionate reliance on interest income. Encouraging them to be responsibly creative in seeking legitimate noninterest income sources would be a healthy approach. I am also concerned that there will be a “brain drain” of talent from our industry as younger bankers get increasingly frustrated by the shackles of regulation.

Do We Really Want New Banks?
With about 300 bank mergers a year and but a handful of new bank formations, inevitably the total number of banks in this country will slip below 5,000 by the end of this decade and continue to fall. The FDIC has publicly stated it will be more receptive to legitimate new bank applicants. If they are really serious, they would roll back the “de facto” seven-year rule that was put in place during the recession to the historical three-year tight oversight period. As someone who has helped form 25 new banks in six states, I am convinced it is a major deterrent to startups. No doubt, low interest rates and skinny margins, tepid loan demand, and disproportionately high regulatory compliance costs have also contributed to the lack of interest by investors in startups. However, we have to start somewhere.

Good and Welfare
I believe in our banking system and the fundamental role community banks play. I also sincerely believe that the regulators want to do the right thing. I think it is time for some meaningful compromises between the industry and the regulators to encourage existing community banks to continue on and for new banks to emerge again. A happy medium between risk and growth needs to be found. This is our industry, and an economic driver, and we should all contribute to its health and prosperity with appropriate, but not overbearing, safeguards.

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