I am the President and CEO of the Bank of Zachary in Zachary, La., and earlier this year I got the opportunity to tell Congress a little bit about the hidden cost of federal regulations and how these costs impact small business and economic growth on Main Street.
The Bank of Zachary was founded in 1904 and today is a $200 million institution with deep roots in the Louisiana communities we serve. With three offices and 46 employees, we are a small business and we lend to other small businesses and small business owners.
We are locally owned and make decisions locally. Thus we are relationship lenders, as opposed to transactional lenders, and our customer relationships span generations. We rely on direct, personal knowledge of the borrower, local economic conditions, and other “soft data” to underwrite customized loans and other services tailored to the unique characteristics of our customers and communities. This is our competitive advantage over larger banks. We are a part of the fabric of our community.
Our story is the story of the more than 6,000 community banks scattered across this great country. Though we hold less than 20 percent of U.S. banking industry assets, we service a disproportionate market share of small business loans 55 percent supporting a sector responsible for more job creation than any other. We provide small business credit in good times as well as challenging times. We don’t walk away from our small business customers when the economy tightens. Instead, we provide the financial bridge to help them weather the hard times and to prosper in the good times.
This type of small business lending cannot be duplicated by a bank based outside the community. As a recent study by Harvard University’s Kennedy School noted: “In certain lending markets, the technologies larger institutions can deploy have not yet been proven as effective substitutes for the skills, knowledge, and interpersonal competencies of many traditional banks.”
My concern is that this extraordinary engine of small business growth is threatened by an exponential growth of regulation in recent years. Compliance has become a major distraction for community bank managers. Any community banker will tell you that their job has fundamentally shifted from lending and serving customers to struggling to stay on top of ever-changing rules and guidance.
Every aspect of community banking is subject to new regulation, but the impact is especially severe in the area of mortgage lending. Banks need more scale to accommodate the increasing expense of compliance, which includes hiring, training, software, and other costs.
I believe this increase in regulatory burden has contributed significantly to the loss of 1,342 community bank charters in the U.S. since 2010. The number of banks with assets below $100 million shrunk by 32 percent, while the number of banks with assets between $100 million and $1 billion fell by 11 percent.
A financial landscape with fewer, larger banks will reduce access to credit for small businesses.
The good news is that there are readily available legislative solutions to this pending crisis. Working with community bankers from across the nation, the Independent Community Bankers of America developed its Plan for Prosperity, a platform of legislative recommendations that will provide meaningful relief for community banks and allow them to thrive by doing what they do best serving and growing their communities.
Each provision was crafted to preserve and strengthen consumer protections and safety and soundness. And while it contains nearly 40 separate legislative recommendations, they are organized around three pillars:
Relief from mortgage regulation to promote lending;
Improved access to capital to sustain community bank independence;
Reforming oversight and examination practices to better target the true sources of risk.
Beyond the industry’s own plans, we also are encouraged by legislation introduced in the Senate and the House.
For instance, the Community Lending Enhancement and Regulatory (CLEAR) Relief Act of 2015 introduced by Sens. Jerry Moran and Jon Tester in the Senate and Rep. Blaine Luetkemeyer in the House, advances three priority provisions of Plan for Prosperity: qualified mortgage status and an escrow exemption for any mortgage held in portfolio by a community bank with less than $10 billion in assets, and relief from the SOX 404(b) internal control assessment mandate for community banks with less than $1 billion in assets.
The Community Bank Access to Capital Act, introduced by Rep. Scott Garrett in the House and Sen. Mike Rounds in the Senate, would exempt banks with assets of $50 billion or less from the Basel III regulatory capital rule, which was originally intended to apply only to large, internationally active banks. It also would exempt community banks with assets of less than $1 billion from internal control attestation requirements.
The Financial Institutions Examination Fairness and Reform Act, introduced by Sens. Moran and Joe Manchin and Reps. Lynn Westmoreland (R-Ga.) and Carolyn Maloney (D-N.Y.), would go a long way toward improving the oppressive examination environment imposed on community bankers by creating a workable appeals process.
The need for a legislative solution is urgent. The sharply increasing resource demands placed on community banks by regulation and examination and the destructive impact they have on small business lending threatens an important pillar of our economy. I’m encouraged that Congress has lent us a listening ear and look forward to working with lawmakers to craft common sense solutions for Main Street.
Preston Kennedy is President and CEO of Bank of Zachary in Zachary, La.