It’s a long way from Washington and Wall Street to Greeley, Neb., but from Bill McQuillan’s chair at CNB Community Bank, that distance closes in a hurry when it comes to regulatory matters. As delicately as he can, he points out that such change gets to Greeley by rolling downhill.
“Certainly, new regulations were put in place, laws passed, to make sure we don’t have another meltdown like we did a couple of years ago,” says McQuillan, vice chairman of the Independent Community Bankers of America and a former Omaha branch board member for the Federal Reserve’s 10th District. “But the big banks essentially caused this, whether on Wall Street or commercial—they’re the ones that put us in this box.”
That particular box contains the now-routine calls for federal intervention into the banking system. Two bills are now in Congress promoting a wide range of reforms, and the Comptroller of the Currency, who suggested a tightening of
commercial lending standards was in order. Not to be overlooked for smaller banks are efforts to “protect” consumers
with such changes as the Regulation Z standards that went into effect April 1, governing real-estate escrow accounts.
At CNB, near the dead center of rural Nebraska, that means “a lot more overhead to deal with, the paperwork,” said McQuillan. The new mandate means banks must establish escrow accounts on new residential loans—or, effectively, stop making mortgages.
“We never have done escrow,” McQuillan said. “If I’m going to lend, I believe it will be to someone who’s well-qualified for that loan and can pay their real estate taxes in a timely manner and their insurance in a timely manner.” Starting an escrow department, he said, “is very expensive, much more expensive to automate via software for the amount of real-estate loans we do. There’s no way to make money on it, or even break even.”
As a result, he’s already turning down prospective homebuyers. “What we’re seeing,” McQuillan said, “is that the smaller community banks, they’re going to have to get out of that business.” And in Greeley, where the entire population of the surrounding county is less than 3,000, there aren’t a lot of big-name mortgage lenders those borrowers can turn to.
A Broader View
Such is the law of unintended consequences, regional bankers say. McQuillan’s leadership role with the independent bankers group gives him access to regulatory ears in Washington, where he can make the case for community-bank exemptions to such sweeping regulatory changes. There’s no guarantee, though, that reason will prevail when dealing with a one-size-fits-all regulatory mindset.
The bigger issue involved with cherry-picking problems that policymakers identify as urgent issues is that bankers are left to guess the lay of the regulatory land in the months to come, then adjust practices in anticipation of changes that may or may not come. That uncertainty, coming on top of the biggest financial crisis in seven decades, prompts even more conservative banking practices that conflict with a goal of vibrant economic recovery.
Small business, in particular, is being affected by the regulatory-reform movement in various ways, and not just as it relates to banks, says John Fager, chief marketing officer for Topeka-based CoreFirst Bank. Already mind-numbed by looming
changes in their requirements for employee health-care coverage, Fager said, owners of smaller companies are “taking a wait-and-see approach instead of doing projects that would let them expand, create jobs and get money pumping through the economy faster.”
That’s a recipe for job-killing among businesses that account for two-thirds of the nation’s employment, he noted. “Until we get some certainty and know more about what is going to happen, they’re probably going to stay with that” approach, Fager said.
“I do wonder how we’re going to stimulate the economy by over-regulating and affecting those areas that are the most likely—and have been in past—to show growth and improvement,” he said.
He pointed to the real-estate bubble, noting that even within that ill-fated run-up, many small businesses did things right, borrowed money, paid it back, made profits, and expanded their businesses. That’s unlikely to happen again, Fager said, if banks and business owners alike believe Washington is going to change the rules in mid-game.
“We’re a small business ourselves,” he said, noting that uncertainty isn’t limited to the borrower’s side. “We’re still making loans in the businesses that have been strong, and they’re the right kind of loans to make.” But if regulators are defining bank stability by focusing on borrower cash flow one year and property valuations the next year, the likely reaction from banks is to scale back lending sharply until new parameters have been defined.
Which, in Fager’s view, does not bode well for a prompt recovery. Assessing calls for more regulatory reforms, he said, “I don’t think we’ve seen the end of what the new game plan is going to be.”
Causes for Concern
More disconcerting than issues of uncertainty, said UMB Bank’s CEO Peter deSilva, is what is known about regulatory reforms being considered in Washington. Citing the Senate and House bills offered by Sen. Christopher Dodd and Rep. Barney Frank, deSilva said efforts to bring additional oversight to financial regulation could have dramatic effects on bank operations nationally and regionally.
Of particular concern, he said, are provisions in each bill to form a consumer-protection entity with broad, undefined powers. Moreover, because its director would be a presidential appointment, that bureaucracy would be inherently political.
The bills do address some necessary reforms, he said, including provisions to tax banks with more than $50 billion in assets and using that money to offset any losses from large-institution failures. “I’ve always believed that if you’re too big to fail, you’re too big to exist,” deSilva said. “No organization should be able to bring the U.S. economy to its knees” by virtue of failing.
But the legislative focus on mega-banks is misguided, he said, because it would remove from Federal Reserve oversight on all banks with less than $50 billion in assets.
“The Kansas City Fed (branch) will regulate zero banks—zero—if this legislation passes in its current form,” deSilva said. “The St. Louis Fed will regulate zero banks. This is really a reshaping of the Fed system.”
As for the uncertainty factor, he said he wasn’t worried much about changes in regulatory practices per se. “We already have numerous regulators in the bank every day; that will continue,” he said. “But while it’s very hard to anticipate what the new rules are going to look like, I’m not worried about the regulators; I think the consumer protection bureau would be the greatest threat to the industry.“That’s the one that could really create confusion.”
Widening Impact
One problem with such widespread uncertainty is that it’s not limited to customers of federally chartered banks—reluctance to ramp up business activity is part of the collective psyche of lender and borrowers alike in this environment.
And it doesn’t stop with the business side of banking.
“Regulatory reform being debated in Congress will have a lot of impact on banks of all sizes,” said John Dicus, CEO of Capitol Federal in Topeka, which makes residential home loans, not commercial ones. “It could be very interesting to see how it will play out, whether it’s bipartisan or not, now that they’ve figured out how to pass things like the health-care bill. Who knows what will get a fair hearing in committees, in either body or in a conference committee.”
Not all of them, he notes, but enough to make a difference.
“When you have an industry in which they’re wanting to change the way it’s regulated and try to close the barn door after the cows left—unfortunately, that will affect institutions that didn’t do anything wrong last time,” Dicus said.
Mark Larrabee, president of state-chartered Arvest Bank in Mission, said that even though his bank was in sound financial shape—and still actively lending—“we’re having candid conversations with our clients about the changing business environment and what they should anticipate.”
It doesn’t matter whether regulation, tax policy or health-care reform is driving the change, he said: “Any time the rules are changing, the reflex is that you pause and see how it affects your business.
In that sense, he acknowledged, the lack of a vibrant lending climate can become a self-perpetuating cycle. “Lending is important to economic growth and sustainability,” Larrabee said. “When credit is withdrawn, it’s more difficult to do business.”
So how long can these doldrums linger?
“That’s a great question,” Larrabee said. “I feel like we’ve reached a bottom, but it’s difficult to see what will re-engage employers to hire people. It’s not just difficult right now to finance growth, but with health-care changes and other new federal mandates on what it costs to have employees, where’s the enthusiasm to grow? We have 70 percent of our economy tied to consumer spending, and with consumers not employed, there’s no money to spend.”
Latest projections on job growth offer little comfort, he said.
“They say that by summer, they’re hoping job creation reaches 300,000 a month,” Larrabee said. “At that pace, it will take three years before we get employment back to where it was, let alone absorb the work force that will have come along since that time.” 