Now that a long-awaited opportunity has arrived to make the regulatory and examination framework more conducive to community and regional banks, how will we measure the success of any reforms? For me, a satisfactory outcome cannot just be changes to the Dodd-Frank Act?
The time has come for bankers to be active and bold in urging policymakers to achieve common-sense changes that will benefit banks’ customers and communities, and lessen the wear and tear on those working at the bank.
But it wasn’t just the fallout from the financial crisis, with the pendulum swinging toward regulatory toughness, which has had bankers concerned. There has been acknowledgement that regulatory burden is a problem for community banks since at least 1996, when Congress passed the Economic Growth and Regulatory Paperwork Reduction Act. The law requires regulators to conduct a review every 10 years to identify any outdated or unnecessary rules.
Dodd-Frank is just the latest in a long string of policy out of Washington that harmed the greatest banking system devised by man. What I hear from Louisiana bankers goes beyond Dodd-Frank. It’s a host of onerous regulations and accounting standards along with an examination process that often seems devoid of collaborative problem-solving and at times unnecessarily heavy-handed. We can do better than this.
Bankers want to do the right thing. They want to have good relationships with examiners, and they value examiners’ eyes on their operations. It should be noted that members of Congress of both parties, senior officials at the federal banking agencies and the Conference of State Bank Supervisors all support regulatory relief in some form.
The industry has done such a good job identifying the many flaws of Dodd-Frank that we have sometimes given the impression that once that law is fixed, that bankers are all good to go. We need broader reform.
First, the regulatory framework needs to be rationalized in a way that results in cost savings to bank operations and enhances institutions’ ability to serve bank customers. The cost savings must be real or the burden will continue to have unintended consequences. We have heard bankers speak of lowering the benchmarks used to measure bank performance due to the increased expense of regulations.
Second, Congress needs to rebalance the relationship between the examined bank and the bank examiner. The Financial Choice Act, authored by House Financial Services Committee Chairman Jeb Hensarling, which is the regulatory relief garnering the most attention, includes provisions to restore greater transparency and accountability in the bank exam process.
The standards for positive outcomes from a regulatory relief process should include a rebound in return on equity and growth in new bank charters. A business that has no new entrants is one that is unhealthy. Banking needs to be attractive to capital, and with sensible regulatory and examination reform, capital will flow to those looking to form banks.
Of the proposals made thus far, the Financial Choice Act has the best opportunity of achieving these benchmarks. What jumps out when reading this bill is the reform of the regulatory process in Title VI.
Under this section, every financial regulation would require a much more meaningful cost-benefit analysis. All bank agencies would be on budget through the regular appropriations process. All agencies would be governed by bipartisan commissions. All major financial regulations would require congressional approval prior to becoming effective. The “Chevron doctrine" that requires the judiciary to give deference to financial regulators’ interpretation of law would be repealed.
Reading through Title VI, which is titled “Demanding Accountability from Financial Regulators and Devolving Power Away from Washington,” one is struck by the power of these proposals. These structural and procedural changes, with a reform of the examination process, would have a tremendously positive impact on economic activity, customer service by bankers and community bank employee morale.
Enactment of the Financial Choice Act would make working at and being a customer of a bank great again.
Robert T. Taylor is chief executive of the Louisiana Bankers Association.