PACB sits down with the Chairman of the Senate Banking Committee Subcommittee on Financial Institutions and Consumer Protection to discuss the current state of community banking and what the future holds for our industry.
Allison Coccia (AC): Senator, what do you believe is the state of community banking today?
Senator Pat Toomey (PT): Our rural banks and financial institutions are among the smallest financial institutions in the country, and they are struggling in the current regulatory environment. In 2005, I helped to start a small bank in the Lehigh Valley of Pennsylvania and the western part of New Jersey with the goal of lending to small businesses and local residents. While I have some firsthand and personal experience with the regulatory environment as it existed then, it has clearly gotten much worse. I think sometimes people from urban and suburban areas may not fully appreciate the extent to which, in rural areas, a town’s local bank is often a citizen’s first and sometimes only exposure to the financial system. These banks survive by offering exceptional service to their customers, personalized products, and fostering an ongoing, long-term relationship. Unfortunately, wave after wave of more red tape from Washington is hurting these small banks and, in turn, is negatively impacting job creation and economic growth in rural communities across our state.
AC: What are the struggles of small banks today?
PT: In 2010, Congress and the President attempted to deal with threats to our financial system through Dodd-Frank. They claimed that this legislation was intended to address risks posed by a handful of the largest institutions in the world. That said, even the smallest institutions have been caught up in Dodd-Frank’s regulatory framework even though these firms pose relatively little risk to the system. In fact, this regulatory burden has been disproportionately felt by banks that are small and rural. Even though some of them have the healthiest balance sheets, business models, and relationships in the entire financial sector, many compliance costs are fixed costs, and small institutions have a smaller revenue source with which to absorb them.
Due to the current regulatory climate, America is essentially no longer launching new community banks – a troubling development that undermines our economy. And I understand why it is happening. It is hard for me to imagine taking the risk of starting a new bank today given the avalanche of new regulations and compliance costs that institutions now face.
AC: How do small banks even begin to deal with the massive amount of regulatory compliance the government expects of them?
PT: Frankly, regulatory compliance will continue to be a significant challenge for small banks unless Washington enacts sensible regulatory reform. At a hearing that I convened before the Subcommittee on Financial Institutions and Consumer Protection, I heard from community bank leaders, including Terry Foster, EVP/CEO of MCS Bank in Lewistown, Pennsylvania, who testified about the enormous burden that excessive regulations have put on his staff, the bank customers, and their bottom line.
And when banks task employees with additional compliance work, they are not doing anything to actually serve their customers. Loan officers aren’t making loans. Financial counselors aren’t providing needed advice. Every time a rule is changed, banks must go through many steps, which are costly, in order to fully implement the change. Banks must hire lawyers and consultants to understand the new rule, determine its applicability, engage IT staff and contractors to perform requisite system changes, update internal controls and procedures, re-train staff, and print new forms that meet the new requirements.
As one witness, Carrie Wood from DuBois, PA, said, “rules are often changed in the name of consumer protection, but when regulators make it harder for me or more expensive to serve my members, that is not consumer protection.”
AC: What’s one example of how burdens placed on community banks could impact daily life in Pennsylvania?
PT: There appears to be one particular industry that depends heavily on very small banks, and that is agriculture. It is often the case in rural agricultural areas that there is only one financial institution-and it is often a very small community bank or credit union–that provides credit to the agriculture community in that community. In fact, more than 70 percent of all the loans that are made to agricultural America today are made by small and very small banks. They are an absolutely essential part of the financial services industry for rural and agricultural America. So the cost and burden of excessive regulation felt by small banks ultimately ends up negatively impacting farms in rural Pennsylvania since they will likely have a harder time getting affordable credit and other financial services.
AC: Is there anything you’ve been working on to help community banks?
PT: As a member of the Senate Banking Committee and chairman of the Subcommittee on Financial Institutions and Consumer Protection, I have been working for some time now to try to provide some common sense regulatory relief for the smallest financial institutions. We were successful in passing out of committee the Financial Regulatory Improvement Act of 2015 which contained dozens of measures designed to streamline regulatory treatment for smaller institutions. This measure contained several bills that I was proud to author, including measures to lengthen the exam cycle, relieve small banks from the burden of CFPB direct examination, and provide targeted relief from the Volcker Rule. I am very disappointed that we have not been able to get more bipartisan support so that we can secure Senate passage. However, I will continue to work on behalf of community banks so that we can bring new businesses and jobs to every local neighborhood in Pennsylvania.
This interview can be found featured in the January 2016 issue of Transactions. Not a subscriber? Visit the Transactions page on this website or call PACB at 717-231-7447 to start receiving the magazine.