It's not often that a banker from a town the size of Laredo, Texas, gets to meet with the chair of the Federal Reserve Board. So when I recently had the opportunity to speak with Janet Yellen in her Washington, D.C., office, I made the most of it.
I reminded her of the challenges faced by community banks like my own and of the regulatory burden that is costing the United States an average of one community bank a day. I was far from the first person to relay that message. She told me she hears almost daily how the Dodd-Frank Act and the Consumer Financial Protection Bureau are making it difficult for community banks to survive.
Created in response to the Great Recession of 2008, Dodd-Frank was meant to safeguard the U.S. banking industry from near-collapse. While that's a worthy objective, it has had the unintended consequence of making it almost impossible for community banks to exist. The creation of the CFPB, stress testing, new compliance regulations and cumbersome reporting requirements are all taking a toll on smaller lenders. We don't have the operating margins that large banks have, and we simply can't afford the overhead necessitated by these changes. But Dodd-Frank makes no distinction between a multinational banking superpower and a locally-owned community bank.
Instead of trying to create a one-size-fits-all regulatory environment, I suggested to Ms. Yellen that the Fed take a tiered approach to enforcement. This approach would protect both large banks and the small community banks that are the backbone of the American economy.
As a community banker, I live and die on the lending decisions I make. I deal with a relatively small pool of borrowers. My one advantage over the megabanks is that I can make local lending decisions based on my knowledge of the community and my customers. I know the local economic climate and I know the people I'm lending to. I know their families, their employers, and their reputations. But by today's standards, if a loan applicant doesn't fit in the prescribed box, it's not possible for me to give that person a loan. That's one big reason why mortgage lending is down 30% for first-time homebuyers.
If community bankers are required to ignore our knowledge of the local market, we've lost our decision-making discretion and the ability to compete with big banks and contribute to our community's growth. We might as well be just another bank-in-the-box, with lending decisions made hundreds of miles away at a centralized loan processing facility that has no knowledge or understanding of how that loan will benefit both the borrower and the community.
As I reminded Ms. Yellen, current banking regulations and the cost of compliance are having a major economic impact not only on community banks but on communities themselves. That, after all, is who both she and I are here to serve.
Ignacio Urrabazo is president and chief executive of Commerce Bank, a member of International Bancshares Corp. in Laredo, Texas.