Starting a Conversation on Bank Rules
No matter what your political stance, there is something that we should be able to agree on, and that is there are too many silly, outdated and overly restrictive laws affecting community banks and small credit unions, harming small businesses and their access to capital.
The Trump administration’s focus on regulatory burden is the start of a conversation that could lead to a more competitive business environment.
On Jan. 30, President Trump signed an executive order that will require federal agencies to cut two existing regulations for every new regulation they implement. Then on Feb. 3, the president signed an executive order directing a sweeping review of the Dodd-Frank Act, the 2010 law enacted in the wake of the financial crisis that brought the most significant change to financial regulation since the Great Depression. Under this directive, the Treasury Department is required to recommend changes that align with the administration’s goal of easing burdens on the financial industry.
From a banker’s perspective, regulations that are not well thought out can be a great cost in dollars and time. It’s well recognized that regulations, for U.S. community banks and credit unions, are imposing a much heavier regulatory and risk management burden than they were years ago.
There are many examples of regulations working against common sense. New rules affecting mortgages make it more cumbersome for banks and credit unions to offer nonstandard home loans. Regulators require banks to insist that borrowers provide detailed financial information on an annual basis even if borrowers are paying as agreed and are well known bank customers.
Banks spend crazy amounts of money and staff resources to comply with outdated rules that don’t address current threats to the U.S. financial system.
When confronted with too many regulations, managers can lose their ability to focus on serving customers. They take away a community bank’s ability to do what it is supposed to do to support the local economy. As financial institutions become increasingly concerned about compliance and risk management, they devote more time and resources to stave off potential issues, rather than activities to facilitate growth and performance. If the distraction is severe enough, there will be an increased likelihood of bank failures, a matter of concern to shareholders, employees, customers and American taxpayers, who ultimately may be asked to pick up the tab.
To be sure, there is reason to question how the president’s order will play out, with an approach that seems simplistic. I’m not sure there is a perfect two-for-one fit in the complex world of regulations and compliance.
But I strongly believe that there needs to be a deeper consideration of why we are imposing regulations, who they affect and whether regulations are successful in achieving their aims. I agree with former Federal Deposit Insurance Corp. chairwoman Sheila Bair who said in a recent interview that the president should focus on “smart regulation.” There is a need for balanced regulations to protect against risk of a financial crisis such as we experienced in the past decade.
If we can sit at the table for a discussion on scaling back regulations that are inefficient and ineffective, with emphasis on ongoing review of the usefulness of regulations and the administrative structure that governs them, it will be a good thing.
Virginia Varela is CEO of Sacramento-based Golden Pacific Bank.