Category Archives: community banks

Good news (big banks) and bad news (community banks) from U.S. tax reform & CECL changes

“While there has been much written about the impact of the recent tax reform law on banks’ bottom lines,” the ABA Banking Journal writes, “less has been said about what it means for financial institutions in the capital markets. Specifically, if bank capital is a form of currency, how is tax reform shaping the deal-making environment for community banks to midsize and regionals?”

Brian Nixon provides some answers in “Tax Reform and table-setting,” in the recent ABA Journal.

Sadly, the bottom line is, the U.S. tax reform recently passed may help community banks in a very indirect way — by making access to certain types of capital more readily available — the same rule changes, and other regulatory changes scheduled for 2018-2019, will help large institutions much more. But the direct impact, when combined with 2018-2019 changes in capital classification requirements by the Federal Reserve, will have a much stronger, and more direct, impact.

community banks - Federal Reserve - CECL Implementation Roadmap 1For example, a 2017 analysis by Stonecastle concludes that when one combines tax reform with new tier-2 financing requirements. community banks “will see an “increased need for capital (so that banks can maintain their well-capitalized status). Even further, he expects that Tier 2 suborbinated debt “is likely the most cost-efficient form for this additional capital.” (Right-click image for larger view.)

Smaller banks “should fully appreciate” what the coming change essentially means: “as much, if not greater, [obstacles] for bank regulatory capital compliance.” More than 1,000 U.S. banks (heavily concentrated in small and community banks, “will struggle to maintain their capitalized status” when new standards for CECL (Current Expected Credit Loss) accounting are implemented.

Community banks “may have no alternative but to raise expensive equity to meet regulatory compliance.”

Bank Black USA

It’s been 49 years, and some months, since Martin Luther King encouraged blacks (and all Americans) to move more of their assets into black-owned and -operated community banks.

Sadly, Dr. King’s cri de couer has not yet been fully realized — and, indeed, over the last generation, has been reversed. As we’ve noted elsewhere, minority banks across the board continue a steep decline; there are now only 20 black-owned banks in the country.

top 4 black-owned banks in US - asset growth - Bank Black USANow, Bank Black USA proposes to do something about it. The organization has targeted an ambitious $500 million in increased assets for black banks by Martin Luther King Day, 2018.

As we’ve noted elsewhere, regulatory solutions seem to have failed both the minority banking and inter-related community banking sectors. Growth — and voluntary action like the program Bank Black USA is suggesting — may be the answer.

An inter-related plight:
Minority banking and community banks

“I’m very self-conscious about it,” said B. Doyle Mitchell Jr., African-American president of the $390 million-asset Industrial Bank. “When you have 1,500 people in the room and three blacks, you know you’re one of only three.”

Describing his presence at a recent banking conference, Mitchell spoke to a larger issue: The continued plight of minority-owned and -operated banks, and — arguably, related — the squeeze on community banks that began nearly a decade ago.

decline in black banks, 2001-2014. source: FDIC. photo credit: Washington PostThis is paradoxical on many levels.

For one, the United States, as most recognize, is rapidly becoming a “minority nation.” It’s estimated that whites will be less than 50 percent of the population in a little more than a decade — sometime early in the 2030s.

By contract, non-minority-owned banks hold 99 percent of all US banking assets. And the Federal Deposit Insurance Corporation recognizes just 157 minority-owned community banks in the U.S. — out of 5,870 total. That’s about 3 percent.

The number of black-owned banks has declined to 20 (not a typo) in 2017, from 48 in 2001. (See table nearby. Source: FDIC.)

Regulation vs. Growth strategies

Another paradox is this: the lack of diversity in banking and financial services continues despite long-standing effort to regulate greater minority participation — in both ownership and management — into existence.

As Ellen Ryan notes in an article for Independent Banker, “The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 says regulated financial institutions are ‘strongly encouraged’ to disclose their diversity policies and practices online and submit self-assessments to their primary regulator. Each agency has developed standards for assessing these policies and practices.”

Would a strategy of attending to the growth and health of the community bank sector have softened this trend — or reverse it in the future?

It’s difficult to say; the United States hasn’t tried it.

Make *real* banking reform work for communities

Freedman's Bank Texas bank US bank reforms Charles Cooper

Texas bank regulator Charles Cooper discusses the plight of community banks and small-business lending in a cogent article for the Express-News, reprinted by permission.

AS A STATE REGUATOR, [I've found] nothing is more evident than how community banks impact Main Street America — in Texas and across the country. They are deeply invested in the community where their customers live and work, helping local businesses and residents, and generating economic growth from the bottom up.

Collectively these banks are responsible for almost half of all small business lending and three-quarters of all agricultural lending in the United States. At a time when the big banks offer cookie-cutter solutions and some are pulling back on their local presence, it is good to know that our citizens can rely on the local community bank that better understands their needs.

But in recent years, community banks have been hampered by regulations defined at the federal level. After the U.S. financial crisis nearly a decade ago, federal policymakers focused on how regulation could head off future crises. And so, a large number of new regulations and procedures were adopted.

Texas banking regulation Charles Cooper US bank reform Dodd-FrankThere was just one problem: Many new rules addressing too-big-to-fail institutions also applied to community banks that posed no systemic risk to taxpayers.

Due to this increased complexity, compliance costs have increased for community banks. A recent study by the St. Louis Federal Reserve Bank estimates community banks spend about $4.6 billion every year in regulatory compliance. These higher costs have been a contributing factor to a decline in the number of banks, in turn limiting access to credit and banking services for consumers.

IN TEXEAS, WE HAVE gone from 644 banks in 2009 to 464 today.

Fortunately, there is an opportunity to solve this problem. In the U.S. House of Representatives, the Financial Services Committee chairman is Texas’ own Jeb Hensarling, who has jump-started congressional efforts to right-size regulation for a post-crisis environment.

As Texans, we should be proud one of our own is playing such a critical role at the federal level.

In addition, similar reform efforts are underway in the Senate. Combined, these developments offer hope that regulatory reforms just might make their way into law.

Perhaps the best place to start is where there is bipartisan support. In my recent visit to Washington, D.C., I met with members of the Texas delegation and others in Congress. The one unifying topic — regulatory right-sizing for community banks.

WHAT COULD REFORM look like?

The Conference of State Bank Supervisors, whose members regulate 78 percent of all U.S. banks, supports creating a common definition for a community bank, and then exempting all those that qualify from federal rules aimed at bigger and more complex banks.

Such a definition — based on a combination of factors such as assets, local ownership and lending in the community — would enable legislators and regulators alike to create a regulatory regime tailored for community banks.

This idea of a community bank definition, and the accompanying right-sized regulation, is not a novel one.

US bank failures by state FDIC mapThe Federal Deposit Insurance Corp. uses a common definition to perform its community bank research.

Governors at the Federal Reserve Board support applying different rules for big and small banks.

In an executive order, President Donald Trump recently directed his administration to make sure that regulation is “effective, efficient and appropriately tailored” for financial institutions.

When folks head in the same direction, you tend to get results. With the political winds in Washington favoring community banks, I am optimistic we can achieve common-sense regulation that permits community banks to do what they do best — serve their communities.

Charles G. Cooper is commissioner of the Texas Department of Banking and chairman of the Conference of State Bank Supervisors.

Casualty rates slow, but casualties mount (an update)

US banking failures Freedman's Bank Bankrate.com

The good news is, big banks have been bailed out (cc: US Taxpayer, $700 billion), and small bank failure rates slowed in 2016 and so far in 2017….

the bad news is, U.S. policy drove nearly half such banks out of business from 2009 to 2016, and there appears to be no relief in sight for the institutions that supply most of the capital to small businesses.

Click here for Bankrate.com’s list
of the banking casualties since 2009

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Dodd-Frank turns 6

This summer (July 21) will mark the sixth anniversary of Dodd-Frank…

with what critics say is “no end in sight” to the squeeze on small businesses served by the small community banks the bill — sponsors originally said — was designed to help.

(At 22,000 pages, and having spawned 27,000 pages of new regulations, the act certainly had a major impact.)

Research out of the Minneapolis Federal Reserve suggests that adding just two members to the compliance department to process these regulations makes a third of small banks unprofitable.

At the end of 2014, there were 20 percent fewer community banks today than there were before this legislation took effect, and they continue to disappear at a rate of one per day.

In a typical year in recent American history, 100 new banks are created, but since Dodd-Frank passed, only three have been created in total.

Meanwhile, the big banks are now 80 percent larger than before the financial crisis.

Small banks, it’s true, have only 10 percent of the banking industry’s assets, but make one-quarter of the country’s commercial loans, two-thirds of its small business loans, and three-quarters of its agricultural loans.