Rep. Blaine Luetkemeyer said at a community bank symposium this week that the Dodd-Frank Act “was not meant for community banks” because small institutions “were not part of the problem.”

The “problem” he was referring to, of course, was the financial crisis of a decade ago, and his point was that community banks didn’t cause the crisis and should not be regulated as if they did.

It’s an argument community bank advocates have made repeatedly as they have pressed for regulatory relief — one that rarely gets challenged.

While it’s true that small banks didn’t cause the financial meltdown, they were not exactly innocent bystanders. Hundreds of community banks failed and countless more needed to be bailed out, not because big banks dragged them down, but because they too got caught up in the housing frenzy by loading up on construction loans even after regulators had urged them to slow down.

Rep. Blaine Luetkemeyer, R-Mo.
“We’ve got a big problem with regards to access to credit as well as the cost of credit in financial services as a result of Dodd-Frank,” Rep. Blaine Luetkemeyer, a Missouri Republican, said. Bloomberg News

This is not to suggest that community banks do not deserve some relief from Dodd-Frank and other laws and regulations put in place after the crisis.

As percentage of their assets, small banks now spend more on compliance than larger banks do, Thomas Hoenig, the recently retired vice chairman of the Federal Deposit Insurance Corp., said at Wednesday’s symposium hosted by the American Enterprise Institute. Bankers say correctly that these additional costs can inhibit their ability to make investments they need to remain competitive.

There is a danger, though, that in the current deregulatory climate in Washington, the pendulum could eventually swing too far in the wrong direction.

The regulatory relief bill passed by the Senate and expected to soon be passed by the House contains a number of provisions related to capital, mortgage lending and data collection that will ease some burdens on small banks. But bankers don’t want Congress to stop there and Luetkemeyer, who chairs the House subcommittee on financial institutions and consumer credit, has promised that the House will push for further rollbacks to regulations that he believes are constraining lending.

“We’ve got a big problem with regards to access to credit as well as the cost of credit in financial services as a result of Dodd-Frank,” the Missouri Republican said Wednesday. “So it’s important we pass this bill, and it’s important that we start taking some of the straw off the camel’s back, and we in the House have a lot of little bills that will [do] that.”

That is music to bankers’ ears, but it’s debatable whether community banks, many of which are highly profitable, need additional incentives to lend.

Data from the FDIC shows that banks’ consumer, commercial real estate and multifamily loans are at all-time highs, so a case could be made that lending is not all that constrained. Yes, commercial and industrial lending has been relatively flat of late, but bankers say that’s more a function of lackluster demand than it is an unwillingness to lend. Even construction and development loans, while nowhere near pre-crisis levels, are up nearly 70% over the past five years.

The arguments by Luetkemeyer and others bring to mind the state of the industry in 2006, when regulators issued guidance that urged banks to tap the brakes on commercial real estate and construction lending, particularly in markets that appeared to be in danger of overheating.

Community bankers vehemently objected to the guidance at the time, arguing that they knew their markets better than regulators did. They had also stressed that regulators had little to worry about because they had learned their lessons from real estate bust of late 1980s and early 1990s and strengthened their underwriting.

That, of course, turned out to be wrong. History repeated itself anyway. Who’s to say it won’t happen again?

Alan Kline

Alan Kline

Alan Kline is a senior editor at American Banker overseeing its consumer finance and national/regional banking coverage. He also helps direct coverage of the annual Most Powerful Women in Banking rankings.

BankThink submission guidelines

BankThink is American Banker's platform for informed opinion about the ideas, trends and events reshaping financial services. View our detailed submission criteria and instructions.