What financial reform means for community banks
The recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act is considered the most significant piece of banking legislation since the Glass-Steagall Act was passed in 1932.The magnitude and scope of this 2,300-plus page act is immense and was intended to address the broad abusive practices made apparent in 2008 – and to prevent such a crisis from occurring again in the future. However, many agree that traditional banks did not cause the crisis and have been crucial to supporting our economy in the aftermath.This law directly hits community banks with onerous new regulatory burdens and restrictions. Despite ongoing rhetoric from Congress and the administration about their concerns for traditional community banks, I believe the end-result will be very negative for us and our communities. Here’s why:• In the words of President Obama, “we’ll crack down on abusive practices in the mortgage industry.” But if supervision of those less regulated remains inadequate, the “shadow” banking industry will resume its “business as usual” approach, which was not in the best interests of consumers.So even though we never engaged in such malpractices, we are directly targeted to receive the most severe impact on our limited staff and financial resources. For the big banks, life will become a little more complicated. Some of their past activities will be limited or banned, such as proprietary trading. They will seek new avenues to generate income. The impact of increased expenditures for adding teams of lawyers and compliance specialists will be somewhat inconsequential to these large institutions due to economies of scale, while the effect upon small banks will be significant.• The law doesn’t really fix the “too big to fail” problem. A handful of mega-banks still dominate the industry. Such banks could never be allowed to fail for fear of inciting public panic. Ultimately, taxpayers and banks such as ours could remain on the hook.Despite the intent to prevent future bailouts, some of the same practices that contributed to the mortgage crisis are still in effect. For example, the Federal Housing Administration continues to actively promote mortgage programs with little or no down payment as well as modification of existing loans without verification of the borrowers’ capacity to repay. These strike me as the type of practices that got our country into this mess.
The greatest financial scandal was the collapse of Fannie Mae and Freddie Mac in September 2008. Yet Fannie and Freddie were not even addressed in the Dodd-Frank financial reform, as their problems were considered “too complicated.” In the meantime, Fannie and Freddie continue to exist with liabilities in excess of $5 trillion shored up by more than $150 billion of taxpayer dollars. Ironically, as Congress continues to use Fannie and Freddie as an instrument to gain traction in the home-buying market, these mortgage giants have again become our biggest competitors by flooding the market with 30-year fixed-rate loans at artificially low interest rates.
The automobile industry was exempted from the supervision of the newly created Consumer Financial Protection Bureau. It seems a further contradiction that on the day after the Dodd-Frank bill was signed into law, the government allowed General Motors to purchase the major subprime auto lending company, AmeriCredit. While perhaps a profitable strategy for GM, doesn’t offering subprime auto rates averaging 17 percent fly in the face of what reform of the financial industry was supposed to accomplish?I can’t imagine the legislative and media outrage if banks were offering car loans at an interest rate in the teens to 20 percent or more.• Billed as legislation that will benefit and protect the consumer, the Dodd-Frank Act increases costs for regulatory compliance and reporting the additional cost of higher insurance limits, and reduces the income that banks receive from debit transactions. These costs and decreases in income will likely lead to higher fees to consumers.It’s important to understand that community banks are essential to our customers, our staff and our community. I remain confident that Piscataqua Savings Bank, and other strong-willed community banks, will find solutions to these challenges in the months ahead. Our resolve to work in the best interests of our customers is unwavering.
Jay S. Gibson, president and chief executive of Piscataqua Savings Bank, Portsmouth, also serves as chairman of the New Hampshire Bankers Association.