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By: Ben McLannahan in New York and Barney Jopson in Washington
Published: 06/11/2018

These are bullish times for small banks in the United States. Along with having the opportunity to exploit public anger at their largest peers, they are among the beneficiaries of the deregulatory wave in Washington. 

“All’s not Wells,” read a billboard by the entrance to the Lincoln tunnel in Weehawken, New Jersey, in full view of cars and buses heading in to Manhattan.

The ad was put there by Doug Kennedy, president and chief executive of Peapack-Gladstone Bank, who wants the world to know that his $4.3bn-in-assets lender has none of the toxic, sales-obsessed culture that led to a rolling series of scandals at the $1.9tn-in-assets Wells Fargo.

These are bullish times for small banks in the US. As well the opportunity to exploit public anger at their largest peers, they are also among the beneficiaries of the deregulatory wave in Washington. President Donald Trump last month signed a new law aimed at lightening the load on thousands of small and mid-sized banks that were swept up in the crackdown on huge lenders in the wake of the financial crisis.

Shares in smaller banks have been boosted as a result, with the Russell 2000 banks index outperforming the S&P banks by about 10 percentage points since the turn of the year.

But Mr Kennedy — who went to Peapack-Gladstone after a career at banking sector goliaths Capital One, Bank of America and NatWest — says he wants to see lawmakers go further in providing more targeted relief for smaller banks like his, which has 27 branches across central New Jersey and Pennsylvania.

The new law, he says, “is a good first step: it acknowledges that community banks actually fulfil a very meaningful role in communities, and that not all banks are created equally”.

The Economic Growth, Regulatory Relief, and Consumer Protection Act contains a number of provisions related to capital, mortgage lending and data collection, mostly targeted at banks deemed too small to present a serious risk to America’s financial system. Mr Trump said it was high time to give a break to “neighbourhood banks” trying to navigate “Dodd-Frank’s brutal maze of costly regulations”.

Mr Kennedy is hardly alone in arguing Congress should not stop there. Blaine Luetkemeyer, a Republican from Missouri who chairs the House subcommittee on financial institutions and consumer credit, has promised that the House will push for further rollbacks to laws that he believes are hobbling the 5,000 or so banks which support much of the grassroots growth in the world’s largest economy.

“It’s important that we start taking some of the straw off the camel’s back, and we in the House have a lot of little bills that will [do] that,” Mr Luetkemeyer said, at a community-bank symposium last month.

The chances of further legislative concessions seem slim, for now. House conservatives were forced to ditch their hopes of giving the recent bill a more pro-bank slant, recognising that shifting it to the right would immediately jeopardise its chances of passing the Senate. This November’s midterm congressional elections could kill off any chance of further deregulation if Democrats seize control of one or both chambers.

But even without action by Congress, regulators have enough power to make life easier for banks big and small. The US’s three federal bank regulators, which are led by the Federal Reserve and boast a growing contingent of Trump appointees, are exploring ways to loosen some rules they wrote to flesh out Dodd-Frank. Bankers say they are also taking a softer approach in their day-to-day supervision.

Ed Mills, Washington-based policy analyst at Raymond James, the financial services firm, says it is already a stark change from the Fed leadership of Janet Yellen and the central bank’s former regulatory chief Daniel Tarullo. “We’re taking a big step back from where we were under Yellen and Tarullo, when the US was the leader in establishing bank rules,” he said. “Now we’ll be the leader in walking them back.”

Virginia Varela, chief executive of Golden Pacific Bank in Sacramento, hopes that the recent bill “opens the window” for further measures to lighten the load. She complains that her Sacramento-based bank — with only $125m in assets and 38 employees — is subject to a lot of the same restrictions that apply to much bigger lenders.

She has two full-time employees, for example, who are required to “act like police dogs”, monitoring transactions for possible money-laundering violations under the 1970 Bank Secrecy Act. And during the three-branch bank’s latest examination by the Office of the Comptroller of the Currency, one of the most powerful agencies in the country, 13 examiners were on site, poring over the portfolio.

“It’s a lot to handle,” says Ms Varela, a former regulator for the Federal Reserve in Washington and San Francisco. “If they applied the same scope of review to Wells Fargo or Bank of America there’d be thousands of examiners crawling all over them.”

Hundreds of community banks have pulled down the shutters in recent years, squeezed by persistently low interest rates and sluggish regional economies. Without significant relief on the regulatory front, says Ms Varela, a lot more banks her size could be forced out of business.

“It’s not like the hardware stores going away because of Home Depot,” she says. “It’s not because of a lack of customers; it’s because of the regulatory burden.”

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