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The Unfortunate Knock-On Effects of Financial Reform

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This morning, we published our very first post as a contributor to the Forbes Moneybuilder blog. In the post, we described how recently imposed limits on overdraft fees and potential future limits on debit interchange fees will severely impact the bottom lines of banks around the country. But rather than quietly suffer the consequences, these banks are going to have no choice but to impose fees elsewhere, such as previously-free checking accounts.

Our belief, as we describe in the blog post, is that banking customers will soon become jaded, once they realize that they are paying higher prices for decreased service at bigger banks, and instead they will seek out smaller banks and local credit unions. These institutions have a reputation for offering better interest rates on loans, lower fees, and better customer service, so consumers may be better served making the switch away from the multi-national banking cartels and bringing their banking back to the community.

After we published, we got a letter from a commercial loan officer at one of these smaller banks, with about $1 billion in assets. Fortunately for us, he agreed with most of our points. However, he also pointed out something that we overlooked – that these regulations could potentially hurt these smaller banks even more.

Hey Tim,

Saw your article on Forbes as I was browsing earlier. Congrats on the article.

Wanted to let you know that I think you were spot on with your assessment of the new Banking Regs changing the way the game is played. I’m in the Banking world, having worked for a Big Boy (Wachovia), now for a smaller community Bank (~$1Billion), and we are hoping this may level the playing field a little.

These Regs however, will cost us a great deal more (as a % assets) than it does for the “too big to fails”. The fear is that it will delay the small fries from beginning to grow again (a.k.a. make loans). I heard an economist a couple weeks ago talk about the major consolidation of banks over the next few years… There are something like 8,000 now (seems to dwindle every Friday night), but he says he and his cohorts expect to see 4,000 – 5,000 as a result of closures, mergers, etc.

Scary to think that the Community Bank, as you described as the group with “an opportunity to grab a bigger piece of the pie”, may be getting less.

As you know Reg E deals with the Overdrafts, etc. that will soon require all customers to “opt in” in order to use the Bank’s “old” way of dealing with overdrafts. The back office process of reaching out to customers, keeping track of who opts in/who doesn’t, etc. is requiring several banks to go through 3rd party vendors to help, thus increasing our overhead for a smaller number of customers. Postage, paper, etc is not the problem, its the staff, training, etc. The Big Banks will have that too, on a much larger scale, however one 25 Reg E staffer for 10,000 employees is a much better ratio than 1 Reg E staffers for 100 employees. Its the additional fixed costs.

The consensus amongst several community bank CEOs in my state, is that many of the new regulations meant to prevent some of things that had a hand in the financial crisis, will further hinder those banks that never played the sub prime game, or messed with the Default Swaps to begin with (among other issues)

I have found myself defending the Banking industry as a whole, as the perception of the industry is that ALL are responsible for the actions of just a few. The vast majority are Banks did not receive TARP are considered Well-Capitalized. Sorry to Ramble, but the Risk based Capital ratio is yet another topic that intrigues me. For a bank to be considered “well-capitalized”, the ratio of total risk based capital to risk assets has to be 10%. But in reality, the regulators are whispering in our ears that they would rather see it higher. That’s makes a huge difference! That’s never on the national news though. What’s on the news is that Banks’ have the capital now, but still aren’t lending.

Thanks again for the article, (I’ve passed it all around to our Retail folks here at the bank.)

Mike T.

So unfortunately, unless local banks see a significant influx of deposits from jaded banking customers, their growth is going to be stunted, and they may be forced to impose many of the same fees that their larger cousins are already putting into effect.

Even though these regulations were meant to penalize those “too big to fail” banks that caused the financial crisis, those banks will be able to absorb the consequences fairly easily, while many of the smaller and arguably more responsible banks will take the brunt of the punishment.

So could someone please explain who these regulations were meant to help, exactly?