Small Banks on the Ropes: The survival prospects for small banks remained Topic A on BankThink this week. Veteran industry lawyer William Aukamp argued that community banks keep throwing in the towel because of compliance costs, which were already substantial even before Dodd-Frank. A reader concurred, commenting, "Regardless of the merit of any of the regulations, there is a point where the mass of requirements will begin to smother the smallest businesses. Congress and regulators need to take this into account when issuing new laws and regulations, but they do not." Regular BankThink contributor Harvard Winters rebutted last week's rebuttals by American Banker editors Rob Blackwell and Paul Davis of Slate blogger Matt Yglesias on whether the U.S. has too many banks. While Yglesias' roundly booed argument was "imprecise," Winters wrote, there are a number of small publicly traded banks that are producing weak returns and perhaps should be acquired for their shareholders' sake. Winters made a business case for consolidation, rather than a policy one like Yglesias, but one commenter saw little difference between the two: "These authors' opinions are tainted by their own motives and self-interests, not on their actual experience within the industry." However, another reader agreed with Winters that there are sound economic reasons why the number of banks should decline. "The simple fact is we will continue to see fewer and fewer community banks over time. Wishing it so, or denying its inevitability, is wasted effort. … Far too many community banks do not adapt, innovate, reinvest or select the right talent. Getting good people is the ultimate key to success, but it is hard to attract and retain them using such as small asset base."

Regulatory Rows: The day before the final version of the Volcker Rule came out, "Risk Doctor" columnist Clifford Rossi warned than if it included a ban on portfolio hedging, the regulation would needlessly limit banks' ability to manage risk just to satisfy populist bloodlust. "Regulation made in response to a single isolated event such as the London Whale incident is simply bad policymaking and shows a predilection to take an overly simplistic approach to a complex but highly useful risk management practice," he wrote. "Such approaches certainly play well to the vast majority of individuals who have no idea what portfolio hedging is other than what they read in the papers." The American Bankers Association's Wayne Abernathy commented that broadly speaking, "a simplistic approach like the Volcker Rule can actually make the banking industry riskier rather than safer." But the advocacy group Better Markets was incredulous about Rossi's headline, which asked whether the Volcker Rule would end up "another example of knee-jerk regulation." "LOL," the nonprofit organization tweeted, adding sarcastically, "Like all that non-regulation before the last crisis that cost US $13+ trillion." After American Banker clarified via Twitter that the headline referred to specific provision and not to the Volcker Rule in its entirety, Better Markets maintained that a ban on "so-called portfolio hedging" could not be deemed knee-jerk a year and half after JPMorgan Chase's big trading loss. Hey, everybody's entitled to an opinion. … Speaking of policy-wonk pugilism, former Fed lawyer Melanie Fein, who now represents money market funds, pulls no punches in her rebuttal to Boston Fed President Eric Rosengren's recent Wall Street Journal op-ed, which called for more stringent regulation of these vehicles than the SEC has proposed.

Small-Dollar Lending: Jane Daugherty, an academic, argued that state regulators like New York's Benjamin Lawsky need to do a better job of differentiating between dodgy online lenders and respectable operators. Meanwhile, Nicholas Bianchi and Rob Levy of the Center for Financial Services Innovation presented the findings of their research into why consumers are increasingly turning to small-dollar short-term credit. The study "is intended to inform the development of high-quality credit products and other financial services that promote success ... for millions of small-dollar credit borrowers," the authors write.

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