The new rules and regulations, passed in the aftermath of the financial crisis, facing large and small banks alike, are posing an increasing threat to the pace of economic recovery across the country.
As banks scramble to fall in line with new directives from multiple state and federal agencies, many of them claim that the thousands of pages of new regulations are sharply curbing their business operations, with smaller community institutions facing the most pressure from rules designed to control larger international or multi-state banks with greater assets in multiple markets.
The effect, in some instances, has led to minimal returns, reduced earnings and stagnant or decreased lending.
Earlier this week, Warren-based First Place Financial Corp, the parent company of First Place Bank, was forced to file bankruptcy, mainly as a result of capital requirements imposed by regulators in 2011.
The Home Savings and Loan Co. of Youngstown has focused more on creating efficiencies and reducing exposure within its loan portfolio; existing regulations have led to a reduction in commercial lending at the bank.
In addition to Dodd-Frank, passed in 2010 by the U.S. Congress, which established the Consumer Financial Protection Bureau and mandated government regulators to write more than 400 new rules, stringent capital requirements once again are being proposed by the Federal Reserve to ensure long-term risk management.
“In our judgement, the increased capital requirements could have a measurable impact on the recovery,” said Mike Van Buskirk, president and chief executive at the Ohio Bankers League, a trade association representing large and small banks across the state. “It’s a catch-22, more capital means less loans — it’s that simple.”
Essentially, the new capital regulations, known as Basel III will require banks to set aside more capital, like cash or liquid assets, to protect against the risks associated with their investing and lending practices.
At the same time, under Dodd-Frank, banks with assets greater than $10 billion are required to conduct annual stress tests, but those requirements differ from similar expectations at smaller community banks, for which regulators issued a separate set of standards to assess risk in their loan portfolios.
Until recently, when the Office of the Comptroller of the Currency issued a clarification for community banks, the stress tests created nothing but time-consuming confusion, Van Buskirk said.
Smaller banks are not entirely opposed to minimum capital requirements, but they contend that regulators have proposed increased capital levels without considering the impact on communities across the country.
In 2011, the Organization for Economic Cooperation and Development estimated that Basel III would reduce the Gross Domestic Product at a rate of between 0.05 percent and 0.15 percent per year. The House Financial Services Committee also estimates that banks will spend nearly 24.2 million hours complying with only half the rules enacted since the financial crisis.
Indeed, the FDIC reports that the number of unprofitable banking institutions has dropped and earnings have increased at banks across the country this year, but community banks want out from under certain regulations.
Another trade association, the Independent Community Bankers of America, reported earlier this week that nearly 15,000 community bankers have signed a petition calling for regulators to exempt small banks from the proposed capital requirements.