Tags: banks | regulations | small | loans

LA Times: Small Banks Are Buried in Red Tape

By John Morgan   |   Thursday, 19 Sep 2013 08:05 AM

Forget too big to fail — some banks now are too small to succeed, in part because of the blizzard of regulations imposed after the financial crisis, the Los Angeles Times reported.

It matters not whether a small bank made no shady home loans, sold no toxic securities or never traded leveraged derivatives, like many mega-banks did, nor whether they received a taxpayer bailout, again like many big banks did. They are still subject to the new oversights sparked by big banks' bad behavior.

At the end of 2007, the Federal Deposit Insurance Corp. (FDIC) insured 8,534 commercial banks and savings institutions, down 52 percent from 1984. By this week, the count was down to 6,926, the Times said.

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"Regulatory burden is absolutely a factor for many smaller banks that are looking to exit," said Steven Gardner, president of Pacific Premier Bank in Irvine, Calif. "And it's absolutely going to continue."

Gardner's bank has acquired two failed banks and two open banks in the past two years.

Of the 1,608 banks that no longer exist since the 2008 financial meltdown — most of them small community concerns — nearly a third were shut down by federal regulators, and the rest were consumed by larger banks.

While community banks tended to avoid the subprime home lending that helped bring the U.S. economy to its knees, they remain far less profitable than bigger banks are, the Times reported.

Gary Findley, a California consultant to small banks, attributed the difference primarily to the cost of regulatory compliance.

Findley said one of his client banks, a small business lender in Whittier, Calif., with $100 million in assets, needed only one part-time employee to deal with banking regulations in 2006, but now needs 1.5 full-time employees for the task — a significant strain on a bank with only two dozen employees.

Today, small banks must deal with the new Consumer Financial Protection Bureau, bank examiners, the U.S. Office of the Comptroller of the Currency, the Federal Reserve, the FDIC and state banking departments.

The Fiscal Times, meanwhile, concluded that if big U.S. banks are reined in too far with more regulations, it would ensure their global dominance is overtaken by eager European and Asian banks.

Despite the new federal oversight, many of the banking problems that existed before the financial crisis are still in place, the Times said — including the government's tendency to weaken home loan lending standards in the name of fairness, the dominant financing role played by Fannie Mae and Freddie Mac, the vulnerability of money market funds, the "influence of and ineptness" of the credit rating agencies, and a securitization process in which it's easy for primary lenders to lay off their risk on others in the financial food chain.

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