Rising Cost of Red Tape a Threat to Small Financial Institutions, Witnesses Tell Subcommittee
May 9, 2012 -
Small financial institutions are being hit especially hard by the rising cost of regulations, and the impact of more red tape is a threat to the existence of small town community banks and credit unions, witnesses told a House subcommittee on Wednesday.
“Each new law or regulation in isolation might be manageable, but wave after wave, one on top of another, will certainly over-run many more community banks,” William Grant, President and CEO of First United Bank and Trust in Oakland, Maryland, testified before the Financial Institutions and Consumer Credit Subcommittee.
A hearing witness representing a credit union based in South Carolina agreed. “While any one single regulation may not be particularly burdensome, the layering of new regulation on top of old and outdated regulation can completely overwhelm small financial service providers like credit unions,” said Ed Templeton, President and CEO of SRP Federal Credit Union.
Both Grant and Templeton also informed Subcommittee members about the costs – both direct and indirect – of complying with this rising tide of red tape.
Grant, who estimates it costs his small bank almost $3 million a year to comply with all the regulations, said that means his bank has to either offer fewer products and services or charge customers more for those services.
“Instead of money being used to make loans to hardworking people and businesses in our communities, it is being spent on consultants, lawyers and auditors. Instead of investing precious capital into new products to meet the ever-changing demands of our customers, banks are paying for changes to software that assure compliance with all the new changes,” Grant testified.
Templeton pointed to results of a 2011 survey that showed almost two-thirds of credit unions said they have increased or were considering increasing fees on products or services due to recent regulatory changes.
“Unfortunately, every dollar spent on compliance, whether stemming from a new law or outdated regulation, is a dollar that could have been used to reduce cost or provide additional services or loans to members,” he told the Subcommittee.
Members on the panel have heard similar complaints about the collective impact of red tape from community bankers and credit union leaders in a series of hearings on the subject. Over the last year, the Subcommittee has listened to officials from small financial institutions at field hearings in Georgia, Wisconsin, Texas and Ohio.
Many of the new regulations come from the Dodd-Frank Act passed by Congress and signed into law by President Obama in July 2010. Dodd-Frank requires federal regulators to write more than 400 new rules and requirements on financial institutions.
While supporters of Dodd-Frank said the law was aimed at “reforming” Wall Street, small institutions across the country – and far from Wall Street – are raising alarms about its impact.
“With Dodd-Frank alone, there are 3,894 pages of proposed regulations and 3,633 pages of final regulations, as of April 13, and we’re only a quarter of the way through the 400-plus rules,” said Grant, whose Maryland bank in is located in a rural Appalachian town of less than 2,000.
One of those Dodd-Frank regulations came under particular criticism from Grant.
“We thought that the Volcker rule was something that only our colleagues in the largest banks had to attend to.” Instead, Grant said, the regulators have proposed to implement the Volcker rule in a way that requires “even a bank of our size” to worry about it.