Skip to content
U.S. National Debt:

Bold Regulatory Reforms Can Help Small Banks Survive

Crapo Op-Ed in American Banker

Crushed under an ever-increasing regulatory burden, community banks are disappearing from America's financial landscape. Legislators are aware of this issue: at a recent Senate Banking Committee hearing on the state of small financial institutions, senators expressed wide bipartisan support for creating a regulatory environment in which traditional lending can thrive in all communities. Federal banking regulators say they are already taking significant steps toward achieving this goal. While the hearing sent an encouraging message about the future of community banks, only follow-through can make these undertakings meaningful.

The number of banks in the United States has sunk to its lowest level since the Great Depression. We have lost more than 3,000 small banks and more than one-half of credit unions since 1990. In fact, 85% of banks with less than $100 million in assets disappeared between 1985 and 2013. The vast majority of those small banks did not fail. On the contrary: the rates of failure, voluntary closure and overall attrition were lower for these institutions than any other size group, according to a recent report from the Federal Deposit Insurance Corp. Not only is the nation losing small banks, our regulatory framework is discouraging the creation of new ones. Only two de novo federal banking charters have been approved since 2009.

A frank discussion about what regulatory burdens mean for financial institutions and the communities they serve is long overdue. The Dodd-Frank Act required approximately 400 new rules to be written and approved by federal financial regulators. With slightly more than 50% of these rulemakings finalized, we still have no idea what the cumulative cost of Dodd-Frank will be.

However, it is already clear that these new regulations require banks to expand their staff and hire many lawyers, resulting in compliance costs that few small institutions can absorb. Institutions are faced with a choice: shift resources around to accommodate regulatory compliance, or pass the compliance cost on to consumers. Whether the bank decides to close a local branch or stop offering free checking accounts, consumers lose in either scenario.

The September Senate hearing was a good step toward prompting the government to address the costs associated with regulatory compliance. Witnesses explained why regulatory agencies and Congress must understand the impact of regulations on consumers, small businesses and communities. "If left unchecked, the weight of this cumulative burden could threaten the model of community banking that is so important to strong communities, strong job growth and a better standard of living," Jeff Plagge, president and chief executive of Northwest Financial Corp. and chairman of the American Bankers Association, testified. I could not agree more.

Congress should heed this warning and pass a package of targeted and meaningful reforms. For example, community banks and credit unions are unnecessarily required to mail annual privacy notices to customers even when they do not share information with third parties. The House of Representatives passed legislation eliminating this regulation by voice vote, and companion legislation in the Senate has more than 70 bipartisan co-sponsors. There are more bipartisan bills we should pass that make common-sense fixes.

Meanwhile, banking regulators are beginning a review of unnecessary, outdated and unduly burdensome regulations, a process required by law under the 1996 Economic Growth and Regulatory Paperwork Reduction Act. A similar review, completed in 2006, was criticized because the regulators subsequently failed to repeal or eliminate many substantive regulations. Since that review, we have lost close to 1,000 banking organizations.

To ensure that the current review has a more successful outcome, the Independent Community Bankers of America have called upon regulators to hold at least six outreach meetings around the country to gather input from community banks; set up a government website that posts the input and lists the 10 most burdensome regulations identified by community banks; and establish a director of the review process who can overrule the objections of individual agencies and resolve interagency disputes.

These are reasonable requests, the results of which would promote traditional banking - banking with an emphasis on personalized services that meet the needs of local residents and businesses. We cannot afford another tepid review process.

If regulators and Congress miss this opportunity to lift unnecessary regulatory burdens, many more small banks will disappear. Rural communities will lose the only banking presence they have ever known. We must not squander an opportunity to make a lasting impact on our regulatory landscape.

Mike Crapo is the ranking member of the United States Senate Committee on Banking, Housing, and Urban Affairs and the senior senator from Idaho.