As we reflect on the Dodd-Frank Act in anticipation of its fifth anniversary, it's important to assess the law's impact on community and regional banks thus far and what can be done to reduce the unnecessary burdens in the future. Rather than focusing simply on more intense regulation for the 10 or 12 largest banks that were the primary cause of the financial crisis, the law has had wide-sweeping consequences for all banks, regardless of size.
Community banks, which I'll define as banks below $10 billion in assets, weren't packaging inferior securities and selling them to unsuspecting investors. But as the former chairman and chief executive of a community bank based outside of Philadelphia, I can attest that small banks have been swept into the regulatory overkill created by Dodd-Frank. As a result, they have been forced to hire large numbers of additional staff to fulfill the law's requirements, although those rules have little to do with their safety and soundness.
But it doesn't need to be this way. Here are four steps that regulators and Congress should take to ease the hindrances and allow community banks to fulfill their purpose and serve the community.
1. Arrange a more efficient system of tiered regulation according to the size of the bank and its rating.
Banks of various sizes are supposed to receive different treatment for regulatory reviews. Supervisors also assign all banks a Camels score on a scale of 1 to 5, with 1 being superior and 5 being least desirable. If a bank is at $10 billion in assets and has a rating of 1 or 2, a regulatory review once every two years would be adequate. The annual regulation process at a bank can take anywhere from four to six weeks and involves numerous constituents, not to mention a month or more of preparation a bank beforehand. Therefore, those banks that are doing well and comply consistently with regulation can allot more time to serving the community and enhancing business.
2. Require the submission of call reports on a less frequent basis.
Call reports, filed quarterly to provide regulators with financial information about the bank, have become much more onerous over the years. They are now over 80 pages, up from 18 pages in the mid-1980s.
In addition to regulatory reviews every two years, well-rated banks with assets less than $10 billion should be able to file a new, short-form call report for the first three quarters of any calendar year. A complete, once-a-year call report process for banks with a rating of one or two would suffice. Banks that are not as strong should remain under heightened reporting requirements.
3. Refine stress-testing rules for banks under $10 billion in assets.
Unnecessary, impractical stress tests have been forced upon community banks as a result of regulations targeting larger banks. Even if certain stress tests are not required for particular community banks because to their size or assets, regulators' "suggestions" (i.e. requirements) compel smaller banks to do such tests. Banks under $10 billion should have a procedure that exempts them from the excessive stress testing that larger institutions must undergo.
4. Reduce compliance oversight.
Regulators are overly preoccupied with compliance. To make the process easier on community banks, regulators need to start with the baseline assumption that community banks are innocent of violations instead of acting as if they are "guilty until proven innocent." Consumer compliance violations are typically found at institutions such as auto dealers, consumer finance companies and payday lenders not at community banks.
Along with these recommendations, I strongly support the efforts of the Independent Community Bankers of America to pass legislation to reduce the regulatory burden on community banks that are vital our local and regional economies. It's all about fairness.
Ted Peters is chief executive of Bluestone Financial Institutions Fund, a hedge fund focused on investing in publicly traded small- and mid-capitalization banks. Until January, he was chairman and chief executive of Bryn Mawr Bank Corp. and a member of the Board of the Federal Reserve Bank of Philadelphia.