Community bankers frustrated with the barriers to raising capital now have some friends in high places.
Three state banking regulators — Mark Kaufman of Maryland, James Cooper of Indiana and John Ducrest of Louisiana — said Wednesday that heightened regulatory, economic and policy concerns are deterring worthy state-chartered banks from winning big investors.
"This is not just a problem for broken banks trying to recapitalize," Kaufman, commissioner of the Maryland Office of Financial Regulation, said during a panel discussion at a meeting in Washington sponsored by the Conference of State Bank Supervisors. "It is an issue for healthy banks in terms how they are going to grow … and how they are going to succeed."
His peers agreed. "One thing we've learned is that the quality of capital matters a lot," says Cooper, the deputy director at the Indiana Department of Financial Institutions. "The issue is whether or not these banks can earn a return that allows them to generate capital. … They're really not yet in that mode of growing."
The commissioners were among roughly a dozen state regulators who helped the CSBS put together a white paper on hurdles community banks face in raising capital. The paper is scheduled to be released Thursday.
Banks under $1.5 billion of assets are having the most "structural problems" in landing available capital, mainly from private investors, Kaufman says. A big example, he notes, is the definition of a "controlling interest" in a bank holding company. Currently, a shareholder with a stake of more than 24.9% is deemed to have a controlling interest, which prompt further regulatory vetting and requirements. This often deters private-equity players from investing in smaller banks; they could easily trip the threshold with the larger amounts of capital they want to invest.
"That's why we hear people [private investors] say $5 million doesn't work for us but if you want to sell the whole place, we'll talk to you. And we think that's the problem," Kaufman says.
The commissioners stopped short of offering definitive solutions despite repeated efforts by reporters to elicit them. The meeting and white paper, they say, were intended to draw the attention of policymakers, regulators and industry officials.
"If you wait until you need capital in the worst way, then that's exactly the way you're going to get it," Kaufman says. "We need to look at ways, if not to attract capital, then certainly ways not to impede" it.
The white paper on capital is the first among several on hot topics that CSBS plans to release in the next several months.
Bankers complain often about compliance challenges, particularly fair lending rules, Ducrest, commissioner of the Louisiana Office of Financial Institutions and chairman of the CSBS, said in discussing other hot buttons. "Just a handful of loans can cause a larger issue and put you in a holding pattern for a longer period of time," Ducrest says. "We just have to find a better approach on compliance for small banking."