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Regulations Could Wipe Out Your Local Bank, Leaving Only Mega-Banks

December 4, 2013 by Sam Rolley 

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PHOTOS.COM

A “tidal wave” of Federal regulations meant to protect American financial consumers from predatory practices of Wall Street banks is creating big problems for Main Street banks and credit unions, small bank advocates told Congress on Tuesday.

Currently, the number of banks in the United States is at its lowest level since the Great Depression, due to a combination of regulatory hurdles that are forcing many community banks out of business and lack of the same government support of larger institutions enjoy.

Since 2008, 486 small banks throughout the Nation have been shuttered by the FDIC. In many cases, the smaller banks were forced to close because of risky lending practices that were not mitigated by a Federal bailout like the risky practices of mega-banks.

Furthermore, while most of the financial rules imposed by the Dodd-Frank Act, the international Basel 3 capital standards and new regulations on credit cards apply mainly to larger banks, the spillover that pertains to smaller banks is devastating to those institutions which are not “too big to fail.”

“The overwhelming tidal wave of new regulations in recent years is having a profound impact on credit unions and their ability to serve some 96 million member owners nationwide,” Linda Sweet, head of the Big Valley Federal Credit Union in Sacramento, Calif., told a House Small Business subcommittee hearing Tuesday.

The heavy regulatory burden on small banks could mean a future where American financial consumers will be forced to choose between a handful of “too big to fail” institutions for all of their banking needs.

“We’re moving towards a system where we’re going to end up with several very large financial institutions, and that is going to leave needs unmet. Small businesses and consumers are going to find it much harder to get their financial needs met,” Hester Peirce, a senior research fellow at the George Mason University’s Mercatus Center, explained.

In January, a series of new Consumer Financial Protection Bureau (CFPB) rules for mortgage lenders will take effect, burdening mega-banks and community banks equally. Many smaller banks will likely lack the revenues to stay in the mortgage business because of the rules, according to financial experts.

“It will decrease the amount of mortgages that we make,” B. Doyle Mitchell, president of the Washington-area Industrial Bank, told lawmakers on Tuesday. “There will be a lot of people that won’t get home mortgage financing.”

Lawmakers on both sides of the aisle have expressed support for a two-tiered financial regulatory system to exempt community banks from some Federal regulations.

One example of legislative efforts to help smaller banks is Representative Blaine Luetkemeyer’s (R-Mo.) Community Lending Enhancement and Regulatory (CLEAR) Relief Act. The bill, which has 87 co-sponsors but hasn’t moved since April, would exempt small financial institutions and their loans from a handful of regulations imposed by the Dodd-Frank and the 2002 Sarbanes-Oxley Acts.

Representative Gary Miller’s (R-Calif.) Regulatory Relief for Credit Unions Act, which hasn’t been touched by Congress since June, would similarly exempt credit unions from certain Federal regulations.