Bank of America Chief Executive Brian Moynihan's recent comments on the inadvisability of starting up a new bank point to everything wrong with our current banking environment.
Moynihan said he wouldn't recommend that investors launch a new bank due to the industry's excessive regulatory burdens and dominance by large institutions like his. In other words, the banking industry's barriers to entry have become so impenetrable that they completely rule out new competitors entering the market.
The data shows that investors are indeed being boxed out of the industry. Regulators have approved just two de novos since 2011, compared with an average of 100 new banks formed per year since 1990, according to the Richmond Fed. As Federal Deposit Insurance Corp. Chairman Martin Gruenberg has noted, the "trickle" of applications poses tangible economic problems, with de novo banks providing credit and services to communities that may be overlooked by larger institutions.
The question, then, is what can be done to re-energize investment in new bank charters. Moynihan himself points to the answer: tiered and proportional regulations. As he notes, community banks are overburdened by needlessly excessive regulation that is disproportionate to their size and risk.
Streamlined Rules for Main Street
Federal regulators made a down payment on easing entry barriers when the FDIC in April reduced the period of heightened supervisory monitoring of new banks. However, the agencies can more thoroughly refocus the regulatory system through their current Economic Growth and Regulatory Paperwork Reduction Act review of outdated, unnecessary or unduly burdensome rules.
That means regulatory changes that will have a substantial and noticeable impact on Main Street institutions, including reforming the call report, easing restrictions on raising capital, raising asset thresholds, and even rolling Consumer Financial Protection Bureau rules into the decennial EGRPRA review.
Unfortunately, in response to a congressional inquiry, the federal banking agencies in March cited several statutorily mandated reforms in a rundown of progress on the current EGRPRA review. With all due respect to the agencies, expanded access to the 18-month exam cycle and Small Bank Holding Company Policy Statement — both of which were required under the FAST Act transportation law — have no bearing on the distinct EGRPRA mandate. Federal regulators should avoid settling for a handful of minor changes alongside more meaningful reforms they are already required by Congress to implement.
Meanwhile, numerous bills pending in Congress would do much to roll back the excessive regulatory burden facing community banks. House Financial Services Committee Chairman Jeb Hensarling's Financial CHOICE Act and House Speaker Paul Ryan's “Better Way” agenda offer a comprehensive rundown of pro-community bank policies, such as easing mortgage rules on portfolio loans and providing relief from the Basel III capital standards.
Strict Oversight of Wall Street
Of course, the flip side of tiered and proportional regulation is appropriate oversight of the nation's largest and riskiest financial institutions. There is much evidence that these institutions enjoy a taxpayer-financed freedom from failure, which incentivizes risky behavior and offers competitive advantages over the rest of the industry. But while there are many potential solutions to this problem — from limitations on the federal safety net to an outright breakup of the largest banks — questions remain about the political will for additional Wall Street reforms.
Nevertheless, there is no shortage of support for common-sense regulatory relief for community banks. By advancing reforms to help existing community banks promote economic growth and encourage the entry of new institutions into the industry, Congress and the financial regulators can right many of the wrongs in our nation's banking system.
Camden R. Fine is president and CEO of the Independent Community Bankers of America.