Tight-knit regulations hit smaller banks in pockets

February 13. 2012 3:00AM

Tight-knit regulations hit smaller banks in pockets

Thomas X. Geisel, president and CEO of Sun National Bank, says while there is a lot to consider in long-term planning, the bank has to push ahead with its own initiatives in the short term.

Working in one of the most heavily regulated industries in the nation, bankers extol the positive aspects of government efforts to closely monitor “too-big-to-fail” institutions, police less-than-honest actors and protect businesses and consumers — but they also say many rules and regulations bring higher costs and unintended consequences that could cause harm to institutions and their business lines.

Now, say the executive teams at banks, a sense of “regulatory fatigue” is setting in as they consider new rules and regulations from the Consumer Financial Protection Bureau and the Dodd-Frank Wall Street Reform and Consumer Protection Act. And the most damage seems to be felt at the smaller banks.

Dodd-Frank and stepped-up compliance regulations with the Federal Deposit Insurance Corp. create sizable challenges for community banks trying to cope with increased oversight, said Michael A. Schutzer, president and CEO of Jackson-based Harmony Bank, which has two branches.

For Harmony Bank to continue to do consumer lending, the institution would need to hire additional personnel with compliance expertise to avoid any errors and bring on additional outside consultants — at substantial fees — to train and give general guidance to its staff on compliance and disclosure issues, Schutzer said.

“The cost of doing this significantly outweighs any profitability we make doing consumer loans in a competitive environment,” Schutzer said.

Community banker David J. Hanrahan, president and CEO of Vineland-Based Capital Bank of New Jersey, praised efforts to improve financial services through increased regulation of “fringe financial institutions,” like non-FDIC mortgage brokers and payday lenders. He also applauded the recent change in the way the FDIC calculates its assessment base in determining what banks pay for deposit insurance.

But Hanrahan said excessive, overly broad and misdirected regulations might reduce options and protections for consumers.

“There are often not just costs but unintended consequences that come with new regulation, and because so many of the rules have yet to be written, we still don’t know what a lot of those consequences are going to be,” he said.

The bevy of federal regulations still due out through legislation like Dodd-Frank has done little to alleviate bankers’ concerns.

“Given the delay in the issuance of formal regulations, which will follow the rules that are promulgated once they become effective, it’s still a little early, in terms of exactly trying to read the tea leaves with respect to some of the regulations that will evolve,” said Leonard G. Gleason, senior vice president and associate general counsel of The Provident Bank, who works in the bank’s administrative offices in the Iselin section of Woodbridge.

Despite that uncertainty, bankers like Thomas X. Geisel, president and CEO of Sun National Bank, said they have to push ahead with their own initiatives in the short term. Longer term, however, “you do have to try to have a little bit of a crystal ball and look out into the future,” he said. “But you can’t just have your eyes closed and not think about it.”

Part of that uncertainty might be starting to clear. Since the appointment of Richard Cordray to head the CFPB, the consumer watchdog has been releasing proposed rules, but bankers say that even though the bureau is principally responsible for regulation of banks with assets of $10 billion or more, it won’t stop there.

“We fully expect the other regulatory agencies to follow the lead, and ultimately, whatever changes in the regulatory arena that may emanate from the CFPB, they’ll find their way down to all banks and thrifts throughout the country,” Gleason said.

With the increased costs, banks in general will be paying to keep themselves in line with the law, as the regulations come with downward pressure on revenue. The Durbin Amendment to Dodd-Frank mandates debit card interchange fees charged by banks be “reasonable and proportional” to actual cost — a requirement widely predicted to cost banks billions of dollars every year.

“At the end of the day, people have to make their money somehow, and the consumer is going to get the short end of the stick,” said Chris Martin, chairman, president and CEO of The Provident Bank, based in Jersey City.

So if there’s less money to be made from owning a bank, it’s no surprise, industry professionals say, that few new banks have been started in recent years, with the federal regulatory environment often sharing much of the blame for the dearth in startups.

“People just aren’t opening banks anymore, because the barriers to entry are so significant,” said Bridget Day, partner at accounting firm WeiserMazars.

In addition, Day pointed to the Collins Amendment to Dodd-Frank, which has increased the minimum ratios and amounts of capital that banks are required to hold. That changes the way banks can operate and maintain profitability, she said.

But regulations banks need to follow have been around for years. The Bank Secrecy Act dates back to the 1970s, and the Patriot Act has been around for a decade; both have been ongoing sources of expense for banks, according to Robert A. Schwartz, a partner at law firm Windels, Marx, Lane & Mittendorf.

“They’ve given banks oversight responsibility comparable to what previously the government would have had — and so essentially, to some extent, they’ve made banks almost like an arm of the government, in overseeing customer transactions and accounts,” Schwartz said. “All of that requires money, technology and people.”

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