The economy is showing signs of strength, and late last year, federal banking regulators postponed stringent new capital rules known as Basel III.
Those were both welcome developments for the banking sector, said Darius Palia, finance professor at Rutgers Business School.
"Right now, there is a stay on Basel III," Palia said. "But remember, Basel III is an international standard, so it is hard to say how much" the regulators will modify it. "They might exempt the very small banks, but who knows? I have no idea how they are going to deal with that."
Banking regulators announced in November they would not start implementing Basel III in January, as originally scheduled. Basel III is a global response to the 2008 financial crisis — the idea is to shore up the banking industry's capital fortress to weather the next financial crisis. But New Jersey's community banks say they weren't to blame for the last crisis, which was ignited by reckless subprime mortgage loans that were packaged by Wall Street into securities sold around the world.
John E. McWeeney Jr., president of the New Jersey Bankers Association, said there's reason to be optimistic that regulators will revise Basel III to lessen the impact on community banks.
"I think that is reasonable to assume because if they (the regulators) were not going to make any changes, they would have just gone full speed ahead," McWeeney said.
New Jersey-based banks are community and regional banks, and for the most part they are doing well, Palia said. "As the economy does well, more and more loans can be given. Lending is going to depend on the economy, and the trend line of the economy is stronger," he said.
But he said there remains downside risk to the economy, as Congress considers reining in the deficit through budget cuts that might slow the economy.
McWeeney said as the economy picks up, "the banks are really well positioned to take advantage of that, and you are going to see them do really well. But even with the slow-growing economy, the industry over the past few years has delivered very strong earnings."
Palia predicted bank mergers will continue in New Jersey. Increased bank regulation "requires more and more economies of scale; you've got to have a certain size just to deal with compliance."
Community banks are consolidating, and the government is discouraging the creation of new banks, Palia said: "I think they want some shrinkage in the number of banks."
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