Small banks seethe at GAO’s downplaying of reg burden
Bankers are questioning a government report downplaying the impact regulation have had on the industry.
The Government Accountability Office recently released a report on community banks that concluded regulatory burden has had a “generally modest effect” on the declining number of banks, industry profitability and the volume of small business lending since the financial crisis.
The report asserted other factors, including “macroeconomic, local market and bank characteristics,” had a greater influence on lending, profitability and merger activity.
The tone of the report took bankers who have lived through the last eight years by surprise.
"It hit me wrong,” said Preston Kennedy, president and CEO of the $245 million-asset Zachary Bancshares in Zachary, La. “It just didn’t add up."
Kennedy, who is also chairman-elect of the Independent Community Bankers of America, said it is hard to fathom regulation having a nominal influence on the loss of roughly 3,000 banks since 2010. To make his case, Kennedy discussed a former competitor that recently decided to sell itself due largely what he described as compliance fatigue.
“They just got tired of trying to meet all the obligations of regulation,” Kennedy said without naming the bank. “It was just one of those throw-your-hands-up deals.”
At 173 pages, and supported by 175 footnotes,and surveys and interviews with bankers, there there is little question that the GAO sought to back its findings with a substantial level of detail.
Still, bankers and trade group officials are adamant that the conclusions landed way wide of the mark, and that compliance sits near the top of the list of industry problems.
The GAO's conclusions run counter to “reports by other agencies,” so bankers are likely to react to its report with “skepticism or disinterest,” said Peter Dugas, managing principal at Capco’s Center for Regulatory Intelligence in Washington.
A survey conducted by the Federal Reserve and Conference of State Bank Supervisors found that regulatory costs for community banks rose by 8.8% in 2016 from a year earlier, to $5.4 billion. The survey identified compliance with the Bank Secrecy Act and TRID as the most onerous regulatory issues for small banks.
Dugas also pointed to a February 2017 Economic Letter by the Dallas Fed that determined that small-business lending by community banks was languishing, adding that heavy regulatory burden was a key contributing factor.
“It’s not entirely accurate to say regulation has minimal impact,” Dugas said.
The GAO report fails to “address the full impact of the regulations that impact the operations of a bank,” Dugas added. “There are hundreds and hundreds. And it’s more than just rules. There’s examiner guidance and speeches and enforcement actions.”
Bankers’ sour reaction comes as no surprise to the GAO.
The report hints at that sentiment, observing that a majority of the 466 community bank CEOs surveyed blamed compliance for increased documentation, and longer underwriting periods, for small-business loans.
Bankers “are experiencing what they believe is death by a thousand cuts,” GAO Managing Director Lawrance Evans said in an interview.
Evans, however, didn’t back away from the report’s conclusion.
“The data on small business loans is imperfect, but when you look at it and analyze it rigorously, you can explain a significant chunk of what’s taking place with macroeconomic fundamentals," Evans said. "Are regulations having an impact? Yes, but the market is likely more important than what you’re hearing.”
The GAO report has its supporters.
Aaron Klein, policy director of the Center on Regulation and Markets, called the report "exhaustive and mostly right, adding that regulation "is not the barrier to bank lending."
One area of agreement between the GAO and bankers is that data for small-business lending could be improved.
Rather than capturing data about the size of borrowers, call reports focus on loan size, which is an imperfect measure of small business lending, the GAO said. Larger loans to small businesses are excluded, while smaller loans to larger firms might be included in the data.
“Limitations in the data banks report to bank regulators make it difficult to determine how small business lending by community banks changed after 2010,” the GAO report said.
The GAO claimed it was able fill many of the gaps in data by using alternative data sources. Banker groups seized on that admission to cast doubt on the report’s central premise.
A spokesman for the American Bankers Association said the GAO might have produced results more in line with the banking industry's experiences if it had access to better data.
“If the researchers had better data to work with they could have found even stronger evidence backing what we hear from our bankers everyday – the increase in regulation on the financial sector since 2010 has driven up compliance costs for banks and reduced lending to small businesses,” spokesman Ian McKendry said.
Different agencies have different definitions for small business loans, adding to the confusion, Dugas said, though he added the GAO’s admission of data problems “undermines the entire report."