David Bartlett: Community Banks Face Burdens With New Regulations

David Bartlett, the author of this guest commentary, is President and Chief Banking Officer of Simmons First National Corp. and Chairman of the Arkansas Bankers Association. This article first appeared in the magazine edition of Talk Business Arkansas, which you can read at this link.

There are more than 6,800 banks throughout the country, with more than 97,000 branch locations holding $14.5 trillion in assets that provide $284 billion in small business loans.

While these numbers are impressive, the most meaningful statistic is that these institutions employ over two million individuals who contribute daily to their local economy and help their communities prosper by enabling families and businesses to thrive.

More specific to Arkansas, as of June 2013, 146 financial institutions had an office within the state, with a total of 1,442 branch locations accounting for $53 billion in deposits.

This is a stark contrast from Arkansas banking in 1994. In the last 20 years, banks have more than doubled the amount of deposits in our state, up from $25 billion; however, the number of banks have decreased by 47 percent. This trend is not unique to Arkansas. Nationally, the past five years have seen a decline with 18 percent fewer banks and only one new bank chartered in the last two years.

Community banks are uniquely situated to promote local business growth and job creation. However, the rapid influx of new regulations on the banking industry has stymied the ability of banks to provide lending assistance in the communities they serve.

Current and proposed guidelines that force changes in an institution’s asset mix discourage community banks from participating in lending relationships where higher capital levels are required. With this “risk based capital” approach, banks must determine where to focus their lending opportunities based on capital levels versus what is best for their community and customer. This shift is not limited to mortgage loans or business lending – it encompasses all lending possibilities further reducing resources to the communities where we live and work.

These loan cutbacks cause economic slowdown and restrict job growth in our communities. From our larger metropolitan areas to our smaller rural towns, Main Street is supported by our community banks.

Of course, managing regulations is a tall task for any sized institution. However, for some community banks the challenge has become insurmountable. The cost of added compliance personnel, software enhancements and legal consultation can be devastating to an already tightly budgeted financial institution. In fact, many financial institutions are outsourcing their compliance department, thus taking jobs and income away from those towns, cities and counties the bank serves.

Banks with roots in their local communities are withering under the shadow of reactionary regulations. Like any interdependent ecosystem, when community banks suffer, their local economies suffer and they are left foraging for the capital needed to grow new business, and the relationships that lead to healthy lending partnerships.

The banks dubbed “too big to fail” are also too far away from the communities affected by the reactionary regulations to feel the full impact of the aftermath on local businesses and small town economies. Additionally, their size and resources have afforded them the luxury of weathering not only the ensuing storm, but also shouldering the weight of mounting regulations and reporting requirements.

It is not a single piece of regulatory guidance that has a devastating effect on community banks. It is the multitude of regulations: Dodd-Frank; Sarbanes-Oxley Act; Community Reinvestment Act; Financial Institutions Reform, Recovery and Enforcement Act; the Durbin Amendment; and legislation enacted by the Consumer Financial Protection Bureau. Furthermore, pieces of this regulatory direction give conflicting guidance, causing an institution to comply with one requirement while possibly being out of compliance with another.

Regulation is not the enemy of the banking industry.

That being said, the examination process that all banks, both nationally and state chartered, are subjected to should be a mutually beneficial relationship. Bank examiners are here to assist financial institutions, making sure the risks involved in banking are managed thoroughly and carefully while also ensuring there is sufficient capital in the institution to protect depositors in the event loans are not repaid in a timely manner.

Our task as bankers is to work with industry regulators to promote concise, clear guidelines for operations that actually encourage healthy growth across all lines of business.

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David L. Bartlett is President and Chief Banking Officer for Simmons First National Corp. and is the current chairman of the Arkansas Bankers Association.