J. Knox McConnell, CEO of the First National Bank of Keystone, W.VA., has been written up recently in the community banking pages because of his bank's 38% return on equity.

He runs a $110 million bank with such a loyal staff that one employee even tarred a spot in the roof that was causing a leak over her desk.

What bothers Knox most is excessive government regulation.

"The Lord's Prayer is 120 words, the Gettysburg Address was 128 words, and Regulation DD is 50,000 words," he notes.

Specifically, he reports that First National was No. 4 in profitability among all American banks in 1991. Yet, he says, the Comptroller's office made him spend $500,000 on equipment to match asset and liability maturities.

"We spent $35,000 last year on meetings to comply with regulations," Knox adds.

Sit-Downs with Regulators

Apropos this problem, he recently wrote me to offer a suggestion: "A group of bankers, say, 10 chief executive officers from the smallest banks to the largest should meet with the comptroller of the currency, or the appropriate regulators, and talk about excessive regulations.

"We should not be in an adversarial role with regulators. We are due an examination next week. The examiners will come into this bank like the Texas Rangers - and I do not mean the baseball team. This is wrong!"

I wondered if regulators liked Knox's idea, so I contacted Mark Sniderman, a friend who's an associate director of research at the Federal Reserve Bank of Cleveland. He replied:

Advisory Panel in Place at Fed

"Our bank already has a small-bank advisory council, currently consisting of 11 members. The council meets at our bank four or five times over an 18-month period, and then a new group is impaneled.

"Council meetings, which last roughly half a day, are attended by the Cleveland Fed's president, first vice president, and a few other bank officers.

"Generally, we present information to the council members about economic conditions, monetary policy, and regulatory developements. They, in turn, inform us about economic conditions in their communities and provide feedback about banking conditions and the regulatory process at work in the field.

Hearing It from Bankers

"Council members can talk with us face-to-face about regulatory proposals that are out for comment. We can get a feel for how the examination process operates at their institutions and where the red tape is thickest.

"And for purposes of monetary policy, a first-hand account of what their customers are saying helps us to get behind all the statistics we look at.

"Not all Federal Reserve banks have what we call a small-bank advisory council, but each Fed bank attempts to have a relationship with community-oriented financial institutions in its own way.

"In addition to getting input from small banks through advisory councils, most (if not all) Federal Reserve banks have representatives of small banks on their boards of directors."

My only thought would be that if acute bankers like Knox McConnell do not already know about the Fed's advisory councils, then someone is not doing a good job of publicizing these programs.


I do know that every regulator I talk to is worried about the problem of "micromanagement" of the banking system.

Some low-level examiners may love telling bankers what to do, but the higher you get in the regulatory structure, the more the officials worry that the new laws have given them too much authority and pressure to micromanage.

When bankers ask, "Why don't you tell Congress to back off in the creation of this legislation?" many regulators respond: "After the S&L mess, we have no credibility with Congress. It is you bankers who have to get Congress to back off."

Maybe the advisory councils that Knox McConnell suggests and that some, like the Fed of Cleveland, already operate can be an important step in getting control over bank operations and policies away from the regulators and back in the hands of the banks.

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