NCPA - National Center for Policy Analysis

Regulations Reduce Community Bank Lending

May 16, 2013

While big banks, the ones that are "too-big-to-fail," caused much of the financial crisis, community banks are now suffering the results. Regulations intended to keep another financial crisis from occurring are penalizing local community banks whose business models are not a threat to the financial system. The result is that regulatory compliance is keeping small banks from making more loans and fueling the economic recovery, says Camden Fine, president and chief executive officer of the Independent Community Bankers of America.

  • Banks with less than $10 billion in assets control only 20 percent of total U.S. banking assets.
  • Because of the too-big-to-fail designation, large banks enjoy an estimated $83 billion annual taxpayer subsidy in the form of U.S. Treasury guarantees.
  • With federal guarantees, large banks engage in risky lending that small banks cannot afford to engage in.

Federal Deposit Insurance Corporation data shows that large banks have both the lowest credit quality and surprisingly, the lowest cost of funds. Community banks, which try to focus on building customer relationships rather than transaction volumes, have the highest credit quality, and perversely, the highest cost of funds.

  • Community banks deal with the same regulatory paperwork, yet have smaller staffs to do so.
  • Despite the obstacles, community banks are the source of almost 60 percent of small business loans less than $1 million, while the other 40 percent is held by large banks, which makes up less than 5 percent of large banks' total domestic lending.

The regulatory obstacles that community banks face hurt rural communities and the middle class who rely on them. Several steps have been proposed to lighten the paperwork and compliance burden on community banks.

  • Small banks should be exempted from mortgage rules that require escrow accounts for balloon mortgages and interest-only loans provided the banks originate the loans and hold them in their portfolio.
  • Red tape should be cut in small business lending that requires repeat information on every new loan application.
  • All proposed rules on community banks should be analyzed by cost-benefit analysis experts who can determine if a rule's cost will exceed its benefits.
  • Certain audit rules should also be waived, as well as privacy notice requirements that mandate the mailing of annual notices when no privacy change has occurred.

Source: Camden Fine, "New Regulations Are Strangling Community Banks," Bloomberg News, May 7, 2013.


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