Increased compliance regulation is invading the customer relationship and exhausting locally-owned and managed community banks into consolidating at a historic rate.
Since 2010, the year major banking compliance regulation was passed in the form of Dodd-Frank Wall Street Reform and Consumer Protection Act, the United States has lost over 1,800 banks, and 94% of that consolidation has occurred among the smallest banks, less than $250 million in assets (FNB Osakis is $64.5 million in assets). I mentioned in my last post that consolidation in the community banking industry is especially troublesome for rural areas due to the loss of locally-owned and managed banks that play important roles in teaching personal finance, driving economic development and providing community leadership. In this post, I’m going to show you why this consolidation is occurring.
Since the passing of Dodd Frank, there have been many studies attempting to absolve compliance regulation from increasing the pace of consolidation in the community banking industry. As the leader of a small locally-owned and managed community bank, and a fifth generation banker, I can lay out the ways compliance regulation has impacted our business model and competition within our marketplace. Data can tell you a lot of things, but it doesn’t capture the story, nor the frustration of generations of bankers whom feel the integrity of their business model is at stake.
The customer relationship is the core of the business model for locally-owned and managed community banks. Investing in You is our mission at FNB Osakis—life-long, generation spanning relationships are what we’ve done for 115 years. Embedded in those relationships are the accountability and trust that the compliance regulations are increasingly trying to coerce within the growing, larger banks. This compliance regulation is invading our customer banking relationships with an assumption that locally-owned and managed community banks need the same policing as large banks and credit unions, and doing so with disproportionate costs to both the banks and its customers.
***
My grandfather, Newman Olson, Jr, and current Chairman of our Board of Directors, used to tell stories of how simple banking was; loans were promises documented by a single piece of paper. Geographically speaking, the local bank was the only place to keep your money.
Enter technology. With the ability access bank accounts online, comes more choices for the consumer. Mobile banking and the Automated Clearing House allows funds to be deposited without ever having to walk into a bank. Debit cards and ATMs allow people to get cash nearly anywhere. Absolutely great convenience, giving people a branch of their Bank in their pocket.
As technology evolves, new customers can nearly do anything without ever physically entering a branch of their Bank. This type of relationship brought a need for compliance laws and other banking regulations that ensured that Banks were collecting the information necessary to “know their customers,” as well as communicate via disclosures information that is common sense, such as the costs of a mortgage, the fees associated with an account, etc. These are all conversations that happen daily at the First National Bank of Osakis, and I’m sure many other locally-owned and managed community banks.
In order to adhere to the regulations set forth by Federal and State laws, Banks are required to heap mountains of paper on each customer. We are required to spend staff time and knowledge keeping pace with constantly-changing laws. We are required to purchase expensive legal software to draft agreements for their loans and deposit accounts that even the Bank officers would admit are complicated to understand. We are required to hire expensive consultants for independent audits to verify we do, in fact, know our customers and treat them honestly.
Unfortunately the costs are disproportionately expensive. The largest banks in asset size are more than 1,200 times bigger than your average locally-owned and managed community bank. This allows them to spread their costs among hundreds of thousands of customers. Additionally, locally-owned and managed banks have to compete with the proprietary technology these large banks can develop at fraction of the cost that a locally owned and managed bank has to pay 3rd party vendors to provide. Even more expensive, because of a reliance on 3rd party vendors, locally-owned and managed banks must spend additional time and expense proving to our regulators that we have vetted these vendors and understand the complicated legal contracts we must negotiate to keep our customers’ data safe.
The combination of increased liability, assumed distrust, and tiresome transparency required by regulators is forcing locally owned and managed community banks to sell. And they are selling and merging at pace that could mean half as many community banks of less than $250 million by the year 2028.
During the last economic recession, we learned why having Too Big To Fail Banks puts too much of our livelihoods at stake. Whole communities are potentially at risk because their wealth is controlled miles away from them by people with no regard to the impact their decisions have on future of those communities.
Dodd Frank and the formation of the Consumer Financial Protection Bureau was the regulatory reaction to Too Big To Fail Banks. Since enacting this regulation, the problem of Too Big To Fail has only increased. In 2008, when the Large Banks received their bailout funds, they held 78.2% of the bankable assets in the United States. As of 2017, the top 125 of Banks in the United State have 82.8% of those assets, with the smallest 5,000 banks having 7.2% of the assets.
The compliance regulation and capital requirements were well-intentioned, but the inclusion of locally owned and managed community banks to the very onerous requirements set forth only added another disproportionate expense. Locally-owned and managed community banks had only two options, comply and accept the costs or drop the product completely and focus on niche areas, becoming less diversified and more susceptible to future sector-driven economic shocks. Although, its truly a no-win situation, as with more niche areas comes regulation requirements due to higher “concentrations.”
Most importantly, movement toward only niche areas is especially problematic in rural areas that require financial institutions to be “jack of all trades” in order to have healthy economic growth in their communities. The relationship a customer has with their bank and their community is the key to communities sustaining generations of economic cycles. I can only speak about the boardroom of our Bank. We do not want to be limiting our product offerings. It’s not good for our community and it is not good for our customers. Unfortunately, it appears to be happening in other boardrooms, as the trends are showing that small community banks are getting pushed out of the consumer/retail lending markets that made up over 36% of their loan portfolios in 2010 is down to 28% in 2017.
Whether intentional or not, the failure for our leaders to acknowledge the unique qualities that make locally-owned and managed community banks self-regulated in its areas of compliance is contributing to their unprecedented consolidation and needs to be corrected as soon as possible with regulatory relief targeted specifically at locally-owned and managed community banks.
There’s only two ways to stop consolidation in the community banking industry—having customers that care about their banking relationship, and regulation that acknowledges locally-owned and managed community banks are, and have always been, acting with their customers best interests in mind.
I’m asking you to contact your legislators ASAP, point them to this post and demand that they exempt the good guys, locally-owned and managed community banks, from costly, intrusive, and redundant compliance regulations. They are considering regulatory relief legislation at this moment.
I’ve written it before and I’ll write it here again: where you bank matters.
I ask you to continue to vote with your money and invest it in a locally-owned and managed community bank.