During this time of unprecedented regulatory oversight in banking, one wonders if all the red-tape imposed upon banks serve to protect consumers? Or, hinder the delivery of much-needed economic stimulus for those who need it most?
To begin to answer the question, I find it important to dissect banking into two very broad categories: small banks and large banks. Small banks (or Community Banks) are generally defined as financial institutions with under 1-Billion dollars in total assets (Independent Community Bankers of America). However, even within this broad spectrum of "community” banks, there exists large differences between truly small banks (maybe a single location or just a branch or two), and, "community" banks operating within several communities with hundreds of employees and many branches.
The need for the delineation arises from the operational models and financial goals of each. A small community bank operating on a single community has tremendous interest in promoting the entire spectrum of business success within that community, largely due to the lack of diversity a small bank enjoys in a single town. For example, if a community bank in Texas derives 70% of their revenue from oil & gas related commerce, their ability to hedge against oil & gas fluctuations will drive a preponderance of their business model. On the other hand, a larger community bank operating across a tourist community, industrial community, and in a large retail area is far better poised to endure an industry-specific slowdown in one area.
Now back to the regulatory oversight dilemma. As the many consumer protection branches of the government operate to regulate banking activities, very few allowances are made for the significant differences that exist across banking. Small banks are very often regulated by the same laws - in the same way - as very large banks. While volume in a particular area may be much lower at a small bank, regulations impose compliance demands which are equally impactful at the implementation level. In other words, satisfying a new lending law at a small bank often means absorbing the same operational blow that a large bank is able to offset through increased volume. A simple example follows: Bank 'A' does 50 mortgage-backed loans a year, whereas bank 'B' does 3000 of the same loans. New regulation on those loans may require $100,000 of new software, compliance upgrades, and training. This example demonstrates how bank 'A' has absorbed a $2,000-per loan cost, where bank 'B' suffers only $33.34-per loan cost. While this example over-simplifies the net effect, it does showcase the manner in which regulation has a disproportionate impact.
The end result of this effect is reduction of affordable access to the consumer. Many regulations serve tremendous value and - while efforts should be made to achieve equality in impact - are necessary and should continue to shape banking. On the other hand, some regulations are simply knee-jerk reactions to bygone practices that will never again impact consumers.
Through a reduction of regulatory oversight, and more importantly, an efficient implementation of regulations as they impact institutions of broadly varying size is critical to improve the consumers' access to critical banking services. These bank services represent the backbone of economic recovery.