Regulatory Burden, Community Banks, and Voices

There is no doubt that community banks are suffering under a plethora of stifling and, in many cases, unnecessary regulations. For several decades ICBA has been a loud and persistent voice for regulatory restraint and proportional or tiered regulation for community banks—whose very banking models are based on one-on-one customer relationships.

Late last week the FHFA sued the nation’s 17 largest financial firms for misrepresenting the quality of assets sold to the GSEs. Two weeks ago JP Morgan Chase agreed to pay $88.3 million to settle Treasury allegations that it violated U.S. sanctions against Cuba, Iran, Sudan and Liberia. Today many of those same financial firms are being investigated for allegedly taking kickbacks to the tune of $6 billion from reinsurance companies on mortgages. The case has been referred to the Department of Justice. And not long ago Goldman Sachs settled a fraud lawsuit for $500 million dating from 2007. And of course Bank of America faces multiple lawsuits, both class action and individual, stemming from the systemic misrepresentation of Countrywide Mortgage, which BofA acquired in 2008. And how many of you recall the headlines in September 2004, when the nation of Japan actually kicked the private banking arm of Citibank out of the country for gross violations of its banking laws? Sadly, I could cite many more examples of egregious behavior by shadow financial firms, subsidiaries of mega-firms and several of the largest financial firms themselves, but the point is made.

Community banks need look no further than the headlines of wrongdoing and misrepresentation by the nation’s largest financial firms to answer the question of why community banks stagger under mountains of regulatory burden. Financial regulations are enacted to correct and prohibit bad practices in the marketplace. And as the headlines above and many more attest, the vast majority of bad practices are perpetrated by lightly regulated shadow financial firms and/or arms of the nation’s largest financial firms.

Why? Well the flip answer would be “because they can,” but it is much more complex than that. Greed certainly plays a big role, investor and stock pressures another, and the arrogance that comes with simply being “too big to fail.” Moral hazard breaks down when managers know that they can bet other people’s money, and if they win (and don’t get caught skirting the law) they win big. If they lose, they will be propped up by the government and likely suffer no personal consequences. So why not take a chance?

And of course it is the community banks that suffer the real consequences of greed and misconduct at large and shadow financial firms in the form of staggering regulations to correct these misdeeds. There are those who say community banks should join as one voice with the largest financial firms in the nation. Well, as a lifelong community banker, I think I will keep my own voice, thank you very much, and continue to make the case that regulations should be applied to those who engage in bad acts or practices and should not be foisted on those who play by the rules.


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