Reform

A Modest Proposal

While the CFPB’s Acting Director wards off the advances of a frustrated pretender to the throne and outrages the ideologists with threats to make the CFPB more reasonable than radical, other voices are taking a more low-key road to regulatory reform. As one example, former OTS supervisory official, and current investment banker, C.K. Lee, urges the FDIC, OCC, and FRB to consider a three-pronged approach to enhancing the health of the community banking business.

The first prong involves one near and dear to the small, withered heart of this blog’s author: approving more de novo banks.

Only six new banks have been chartered since 2010, and more than 2,000 have gone away. The attendant lack of dynamism and entrepreneurial disruption is palpable. Community banks are losing critical funding and payment market share to large banks and fintech companies. Traditional banks are crowding around discrete areas of the American wallet: middle-market commercial loans, owner-occupied commercial real estate and small business lending. Mortgage and consumer lending are increasingly offered by big companies that can afford to comply with costly rules. Customer contact and loan pricing is increasingly automated and regulated. New bank founders need the flexibility to build diversified portfolios, certainty around the capital required to implement a given business plan and certainty around the timeliness of the approval process. Greater transparency in these areas would contribute far more to stimulating new charter development than revising handbooks and holding conferences. Agency leaders can give that clarity right now, and they should.

It’s hard to argue with those assertions. Actually, in an age dominated by politicians and regulators who think like trial lawyers–staking out a position and then marshaling the facts to support it–it’s easy to argue against them. However, we will not.

Lee’s second prong involves lessening the burden, on small banks, of onsite bank examinations, which are costly in terms of both time and money. Lee urges regulators to use “the massive amounts of information” that such banks provide the regulators on a regular basis to perform “remote” exams, with onsite exams used as “spot checks as needed.”

Further, the rigid application of compliance regulations are eliminating small dollar lending programs at many community banks—to the detriment of the very customers these rules are supposed to be protecting. Wouldn’t community banks be better off if they could diversify their loan portfolios by offering products needed by their communities? Wouldn’t the industry be better served if examiners’ efforts were focused on large banks, where the customer experience needs improvement, and the consequences of failure are more severe?

Sure it would, but if the number of onsite examinations of small banks was reduced, what would the regulatory agencies do with the inexperienced examiners who need to get on-the-job training somewhere and the indeterminate number of “crazy uncle” examiners that the agencies are having a hard time “riffing” but need to stash somewhere until retirement? If they stick them in large banks, a bank employee might actually know the agency higher-ups and not be shy about picking up the phone and bitching and moaning.

Finally, Lee suggests that while the entry phase of the banking life cycle needs relief, so does the exit phase. This concern is no surprise coming from a guy who advises banks on mergers and acquisitions.

Banking is one of the few industries where the government approves the sale of the company—and takes months, if not years, to do so. Even the smallest transactions are subject to geographic competition tests normally seen when titans merge and make no sense in this age of digital banking. The list of incentives for regulators to say “no” is long and getting longer. Third-party protest groups have no direct skin in the game, yet have great influence over the process. Meanwhile, stakeholders, customers, employees and communities are all in limbo. Regulators could address these concerns by setting deadlines, actively brokering conversations between all parties and holding public hearings in a matter of days, not months. Restoring a timely process could make a big difference in resolving these issues.

As Lee notes, none of these changes requires new or amended laws or regulations. Instead, they require a simple change of attitude. That change, in turn, requires the right people at the top.

Unfortunately, few of the beltway types that frequently occupy regulatory chairs have a business executive’s skill and experience in gathering information and making timely decisions. These skills are badly needed now in the regulatory arena. As the new administration gets its team in place, the president should know he can make a significant difference in banking just by choosing the right people to occupy the regulatory chairs—and then letting them do their work.

With Randy Quarles and Jerome Powell recently installed at the Fed, with Joseph Otting now at the OCC, and with Jelena McWilliams apparently headed to the FDIC (and making all the right noises about community banking regulatory relief), the “badly needed skills” may be there at, or on their way to, all three agencies. If any of them are listening to the voices of experts in the trenches like Mr. Lee, let’s hope that we see some badly needed reforms, the sooner the better. 

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