Although many business owners may still feel otherwise, the worst economic contraction in a generation is now, by official measures, history. But even if the country is able to dodge a recessionary Round II—which appears more unlikely as negative indicators continue to pile up—folks in Stones’ line of work are becoming increasingly worried. The most recent cause for concern is a mammoth package of legislation moving through Congress and being sold as financial reforms.
At more than 2,000 pages, the complete bill has essentially been vetted by no single member of Congress, let alone by the banking industry. Hence the now-infamous quote by Sen. Chris Dodd of Connecticut, the bill’s co-author, that “no one will know until this is actually in place how it works.”
So, much like the insurance industry executives awaiting the regulatory shoe to drop after health-care reform earlier this year, bankers anticipate that thousands of pages enabling regulation are headed their way. And because we still have no true understanding how the reforms will affect financial institutions’ operations, Stones and other banking figures say a certain measure of paralysis is bound to set in soon.
For how long? That’s anybody’s guess.
“The uncertainty created by this, at least psychologically, will affect the lending markets,” Stones said. “Banks just don’t know what to expect yet, and this is going to cause them to pull back even further.
“It’s not exactly a whole new ball game, it’s just an uncertain ball game.”
If one thing is for certain as the reforms move forward, he said, it’s that community banks in particular will suffer. They simply don’t have the existing staff, Stones said, to deal with the huge volumes of additional regulations that are coming.
“It’s not entirely clear yet, but we’re estimating something like 5,000 pages of regulations that will apply to traditional banks coming from this,” he said. “We’re really worried about that. We’ve always felt like we’re one of the most highly regulated industries out there, and if you add 5,000 new pages of regulations, that’s an extra burden, especially on community banks.”
Dealing with that, he said, will not be a simple matter of consulting his staff attorneys or devoting more bank resources needed to interpret the new laws. As with changes last year in requirements for mortgage-lending processes, the costs of compliance, and the added costs of documenting it, could prove to be too much for some banks.
“Hiring cuts into the bottom line, and some banks just aren’t going to be able to do that,” Stones said. “Most experts are looking at another round of consolidation like we saw in late ’80s and early ’90s; I have no idea what that number might be, but there will definitely be fewer banks in Kansas and in the U.S.—and that’s never good for the consumer.”
Max Cook, Stones’ counterpart with the Missouri Bankers Association, views development with as much trepidation. The measure that could clear Congress this month, he said, “is a piece of legislation that negatively impact community banks and is going, in turn, to have a big impact on Main Street in this country and on the ability of banks to lend.“I just think it’s going to be devastating.”
In the past 2 years, Cook said, the banking industry had seen 50 new regulations placed on it, and the new measure promises 30 more.
“You can’t keep piling on rules regulations one after another without suffocating an industry,” Cook said, “and that’s basically what this will do to community banks. I’m afraid that, in addition to suffocating the banks and causing even further cutback in lending, we’ll see fewer and fewer of these banks.”
The Economic Backdrop
Concerns over a more rugged lending landscape will reach far beyond banking circles. From the onset of America’s financial-markets crisis in late 2008, a crippling lack of loan activity has pitted lenders against both developers and construction companies in an economic deadlock: Those who want to borrow accuse banks of sitting on piles of cash to satisfy regulators’ demands for higher reserve requirements; those can lend say the credit freeze won’t be broken until more prospective borrowers can come forward with higher-quality development proposals that make the investment worth the risk.
A new layer of uncertainty for banks will only prolong that standoff, banking authorities say. But the situation involves more than just an updated definition of creditworthiness: Getting the lending/development/construction pump primed and running again would be tough enough even if there were solid signs of recovery ahead.
There aren’t.
Earlier this spring, we saw signs of hope when first-quarter GDP growth clocked in at a respectable 3.2 percent. The Bureau of Economic Analysis said that profits before taxes, taxes on corporate income and profits from current production for that period all showed healthy gains over the final quarter of 2009. But in two revisions since, the first-quarter numbers have been cut twice, from 3.2 percent down to 3.0, and, last month, to 2.7 percent.
On a broader front, consumer confidence nationally took a nosedive in June, as did home sales. The Dow Jones Industrial Average lost nearly 10 percent of its value in the second quarter. Gold prices are at record highs as hoarding continues, and the Conference Board’s index of leading economic indicators has steadily retreated since March, suggesting that the recovery to date has already peaked.
Viewed individually, none of those readings sets off major alarms. Collectively? They have many financial experts warning that another deep recession, and potentially worse, could set in as soon as the end of this year.
A Bad Time to be Ailing
For banks that are already trying to plug holes in their fundamentals, the prospect of a downturn is particularly troublesome, said Fred Hays, a professor of banking and finance at the University of Missouri–Kansas City’s Bloch School of Business.
“The FDIC problem bank list, you now have roughly 775 banks rated there,” Hays said. “We’ve gotten into trouble when over 10 percent of the banks in the country are on that list, and for some, it will get worse before it gets better.”
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