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Are Small Banks Big Banks' Pawns in Assault on Dodd-Frank?

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As a former banker, I watched in amazement and disgust as the country's largest banks morphed from trusted fiduciaries of customer financial assets to unrepentant predators of consumer financial assets in just a few decades.

I also watched as federal regulatory agencies morphed from policing the condition and conduct of the nation's financial institutions to defending abusive bank practices from state consumer protection laws.

Not surprisingly, these two tragic scenarios proved unsustainable and came close to destroying the financial system, in the United States and around the world.

In the wake of the 2008 financial crisis Congress sought to reform a financial system so totally abused by nefarious practices of its largest institutions and lack of supervision by regulators, that — but for a trillion dollar bailout — it could not function.

Forceful legislation was desperately needed to protect the nation and the public from any recurrence — and to protect the banking industry from itself.

But in a process akin to allowing foxes to influence a farmer's potential improvements to his hen house, Congress allowed the very banks that caused the financial crisis to comment on, critique and compromise the reforms designed to forestall future crises.

Not surprisingly, the resulting Dodd-Frank Act contained only modest curbs to the ability of the too-big-to-fail banks to continue pillaging the country.

Not satisfied that they had not only escaped virtually unscathed — but been allowed to grow even larger — the too-big-to-fail banks have tried every tactic they could think of to weaken reforms.

In an effort to make such outrageous efforts appear more palatable, the American Bankers' Association – the traditional trade group of the largest banks — has now tried reframing arguments in terms of the purported burdens the act places on smaller banks.

Last Wednesday, Bill Grant, chairman of ABA's Community Bankers Council, testified before the House Financial Services Committee on the Dodd-Frank Act's supposed effect on community banks' lending and investment activities. Mr. Grant claimed that substantial costs of the new regulations "weigh most heavily on community banks" and "may drive many community banks out of these lines of business."

He also maintained that "the reaction to the financial crisis has layered on regulation after regulation that does nothing to improve safety or soundness and only raises the cost of providing credit to our customers."

If the ABA is serious about representing the real interests of smaller banks, I offer two suggestions to differentiate this effort from the one the TBTF banks have been waging since reform was first proposed after the government bailout:

1. Distinguish between reform issues relating to community banks and those relating to TBTF, systemically-important financial institutions.

2. Have community banks denounce the unfair, deceptive, abusive acts and practices of larger banks in such areas as credit cards, overdraft programs, personal lending, and mortgage lending, servicing and foreclosure, and seek to have reforms more specifically applied to the big banks that employed these practices, rather than smaller banks that did not.

The financial crisis was caused by the largest financial institutions in the country, aided and abetted by federal regulators that, in the words of the Homeland Security and Governmental Affairs Committee, "failed to foresee the largest financial collapse in the past 75 years."

Without question, reforms should have the greatest impact on the larger institutions that demonstrated the greatest need of reforming.

But, if community banks aren't willing to separate themselves from their larger counterparts, they risk appearing to be agents — or dupes — of the bigger banks.

Either way, it’s hard to see why Congress should entertain any calls for reduced reforms, when doing so places the nation in greater jeopardy of another crisis.

Jim Wells is president of Wellspring Consulting International which seeks to expand access to financial services for transaction-based consumers. He previously worked for Citibank and HongkongBank.

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Comments (9)
I couldn't agree more that the community banking industry has to step up and define the line between the top 19 and the rest of the banks with respect to regulation. If we don't most of us will soon be extinct.
Posted by Rhsmith999 | Monday, May 14 2012 at 10:38AM ET
Absolutely. It boggles the mind to think that the CEOs of 6,000+ community banks would accept being painted with the same brush as scoundrels like Jamie Dimon, Brian Moynihan, Ken Lewis and Angelo Mozilo. Now, community bankers are seeking differences in regulation, but not reputation. I'd have thought it would be the other way around.
Posted by jim_wells | Monday, May 14 2012 at 12:08PM ET
Its the cost of adminstering regulation. I doubt the larger banks will allow adoption of a policy that lowers the reglatory requirements for the community banks and not them. But to impose the same cost or business disruption as the larger banks is a huge problem.
Posted by Mark_Gallagher | Monday, May 14 2012 at 1:38PM ET
Just like Jim, I am a former banker and have watched in shock and awe as our nation's largest banks transformed the U.S. banking system from one that was the envy of the world to one that has embarrassed bankers like me who dedicated 20 years of my adult life to improving the quality of life in my community. Now as president and CEO of the Independent Community Bankers of America (ICBA), I continue to be appalled at the tactics that these same large banks and their trade groups are using to manipulate the views of unsuspecting community bankers.

The Dodd Frank Act was passed by Congress in an attempt to curb the abuses of the nation's Wall Street banks. While we agree at ICBA that it did not go far enough in reining in the too-big-to-fail banks, it is disingenuous for trade groups representing the megabanks to suggest that sections of Dodd-Frank aimed at curbing high-risk behaviors and strengthening capital at systemically risky financial institutions should be overturned in the name of regulatory relief for community banks. The truth is that what they really want to overturn are the regulations aimed directly at them.

The only way for community bankers to avoid further regulatory burden and to achieve tiered regulation is by differentiating their business model from that of Wall Street. They need to stop letting their good reputations be used by Wall Street to muddy the water. I am sick and tired of Wall Street's message that we are all one industry and we need to speak as one voice. Of course this is what they want, as long as it is their voice. Dodd-Frank did not cause the financial collapse. Wall Street caused the collapse. And community bankers on Main Street should not and will not allow Wall Street to hide behind their skirts.
Posted by Cam_Fine | Tuesday, May 15 2012 at 4:48PM ET
From all the agreement in these comments I join Clara Pell to say 'Where's the beef?"

Where's the point-by-point disavowal of the UDAAP that have become the hallmarks of mega-bank businesses? The 'tricks & traps' Elizabeth Warren described so specifically leading up to the CARD Act. Where's the call for restoration of Glass-Steagall to level the playing field in banking without casino gambling? Where's the call for IG inspections of CRA examinations of mega-banks that have shown no deterioration over the last 3 years despite a lending freeze that continues to deny loans to all but those with the highest credit scores?

After the ACB's stunning sell-out to the Big-Bank lobby, I'd think this would be the historic moment the ICBA would have been waiting for.
Posted by jim_wells | Wednesday, May 16 2012 at 9:42PM ET
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