Flashback to 1994 and Super Bowl XXIX: San Francisco quarterback Steve Young, playing in his first NFL championship after stepping out from the imposing shadow of Joe Montana, threw for 325 and six touchdowns against an outclassed San Diego Chargers defense.
But of all of Young’s spectacular plays, the signature moment from that game was the sight of Young on the sideline, begging of his teammates, “Would somebody please get this monkey off my back?” (Of course, they joyfully did. Monkey dismissed.)
Young’s relief pretty much captures how the nation’s regional, local and community banks have felt since May, when Congress and the Trump administration approved a rollback of many constraints enacted under the Dodd-Frank Act of 2010.
The Economic Growth, Regulatory Relief and Consumer Protection Act lightens banks’ regulatory burden by giving regulators more discretion in deciding when to require stress tests of banks between $100 billion and $250 billion in assets. And it removes the designation of “systematically important financial institution” for banks with less than $250 billion in assets—meaning, in short, that only the biggest banks are now called “systematically important” and governed by the most stringent regulation.
The rollback is one that banking officials—and members on both sides of the aisle in Congress—have sought for some time. Even former Rep. Barney Frank (D-Mass.) gave the recent bill his blessing as it worked its way through Congress, calling it “mostly reasonable.”
“When you try to say that a [smaller] bank has the same systematic importance as a JPMorgan Chase, which is probably looking at more than $2 trillion in assets, that’s really not a fair comparison,” says Scott Sargent, an attorney in Baker Donelson’s financial services group. “To hold those two banks to the same standards just doesn’t make a lot of sense.”
Yes, some regulations are very necessary. That noted, banks that have spent valuable resources on unnecessary, excessive compliance constraints now have the opportunity to shift time and money toward serving their customers.
“A lot of banks right now are working on digital avenues to provide services and platforms and there’s only so much money to go around,” Sargent says. “You’ve got a pie with a finite amount of money to fund your operations. You still have to devote resources to meet those regulatory requirements when you could develop a better online banking platform or better digital services for your customers.”
Passed in the aftermath of the financial crisis, Dodd-Frank crippled small banks across the country, says David Christiansen, executive vice president and chief credit officer at Patriot Bank.
“Community banks, which generally make up the bulk of small business loans, were adversely impacted by the breadth and complexity of Dodd-Frank,” Christiansen says. “Larger banks were generally better suited to handled heightened regulatory costs than smaller banks.” The numbers back this up; “Community banks with assets under $100 million dropped from 2,600 in 2010 before Dodd-Frank was enacted, to 1,900 today. A lot of them couldn’t handle the regulatory burden, the expense ratios got out of control and they just closed up shop.”
So will new community banks now open up shop? It’s too soon to say but this much is clear: Smaller banks now have flexibility to operate their businesses for their communities. To borrow from the parlance of Super Bowl superstar Steve Young, the monkeys are off their banks and lending officers can make big gains.
“The Dodd-Frank Act spawned about 400 rule-makings in the financial sector, making it the most expensive regulatory bill since the 1930s,” Christiansen says. “Right off the bat for smaller and regional banks, the new bill makes underwriting risky mortgages a little easier. Institutions with up to $10 billion in assets can offer mortgages not subject to some of the federal underwriting requirements.”
Dodd-Frank had created the idea of a qualified mortgage where, if a lender met a variety of strict guidelines, it would get legal protections should a consumer later claim they were sold an inappropriate product.
“That’s all good stuff for both sides of the coin, I think, for the bank and for the consumer,” Christiansen says. “The new bill allows smaller banks and credit unions to continue meeting the federal standards for qualified mortgages [with fewer burdens] but puts a little of the onus on them to retain the mortgages—so it softens the blow a little bit and requires the bank to retain the risk. I think that opens the door for more lending.”
Tariq Mirza, banking regulatory lead at Grant Thornton says the Dodd-Frank rollback set the right tone for the industry.
“I’m a former regulator so I want to make sure [to guard against] anything that would compromise safety and soundness of the industry,” Mirza says. “This rollback didn’t go as far as, for instance, the bill that was introduced last year. That had some pretty substantial, far-reaching changes. This legislation struck the right balance. It provided relief to the vast majority of independent institutions in the U.S., including regional banks.”
With the Dodd-Frank load lightened, expect small and regional banks to provide more loans in their communities—helping not only the banks’ bottom lines but also the communities that they serve.
“I expect the banks in existence today will continue to grow in asset size,” Christiansen says. “They should strengthen in terms of safety and soundness. I don’t anticipate that just because Dodd-Frank is rolled back that regulators will dramatically change their safety and soundness standards. So I think the overall industry is poised to strengthen.”
That’s a touchdown-toss formula for all sides.
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Based in Maryland, Patrick Sanders is an assistant managing editor for U.S. News & World Report and formerly worked as an editor for The Associated Press and at newspapers in West Virginia, Connecticut, Pennsylvania and Indiana.
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