New regulations aimed at reducing the likelihood of another banking meltdown will increase overhead costs for community banks, and could reduce lending and lead to industry consolidation, according to bankers.
Banks are hiring to handle compliance issues stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the additional costs are especially burdensome to smaller banks: “There’s not a lot of fat in small banks,” said Robert A. Schwartz, a partner at New Brunswick-based Windels, Marx, Lane & Mittendorf who works with banks.
Fair Lawn-based Columbia Bank already has added staff because of earlier regulations from the Bank Secrecy Act, and Dodd-Frank increases the burden, said CEO Raymond G. Hallock.
“Six or seven years ago, you could have someone work part time on many regulatory matters,” he said. Increasingly, though, community banks need full-time staff to address the new rules.
The newest round of regulations will add up to $400,000 to $500,000 a year to his direct costs, Hallock said, “so at a 10-to-1 capitalization ratio, that means there’s $4 million to $5 million that’s no longer available to lend.”
Hallock also said he’s worried about the unintended consequences of the regulations, including a requirement that would have municipal advisers register with the U.S. Securities and Exchange Commission.
“We handle municipal deposits and provide other services to municipalities, so it’s possible I’ll have to register every teller who handles municipal deposits,” he said. “I’m sure that wasn’t the intent.”
Hallock thinks there’ll be more mergers and acquisitions involving community banks, since smaller institutions don’t have a big enough base to absorb the increased costs.
“Banks can leverage technology to comply with the Bank Secrecy Act, but not for regulatory compliance like the Consumer Finance Protection Bureau,” he said. “We’re afraid of what’s going to come out of there.”
The new regulations will “absolutely drive more consolidation among community banks,” said Lakeland Bank CEO Thomas J. Shara. “To the extent that community banks have to consolidate, it’s bad for the local community.”
Lakeland Bank, based in the Oak Ridge section of Jefferson, also recently hired a compliance attorney “to get in front of Dodd-Frank,” Shara said. “This is the first time we’ve hired one, because we see this as an ongoing issue.”
BCB Bank, too, had to hire an in-house lawyer to be sure management understood and complied with the new regulations, according to CEO Donald Mindiak.
“We’ve been streamlining our internal operations to eliminate duplication of services,” he said. “But the additional cost of compliance is of concern to us. So far we have not passed the added costs on to our customers, but it does eat into our earnings per share.”
Banks’ lending ability may also be pressured by the so-called Basel III accords, a set of international regulations that will increase banks’ capital requirements, or the amount of cash they’ve got to keep on hand, Schwartz said.
Magyar Bank CEO John Fitzgerald said of the new regulatory costs, “We don’t look at it as having a direct impact on lending.” But he said the increased expenses do have an effect on the bank’s capital, and could affect its growth prospects.
And Sun National Bank has an internal staff that’s large enough to implement the new regulations, said Tom Geisel, CEO of the Vineland-based bank, “but now there’s more on their plates,” he said. Sun National is hiring “more outside consultants to understand the interpretations of the regulations.”
Even with more regulation coming down the pike, Sun is expanding across the state, he added, noting that the bank just wrapped up a common-stock offering that brought in more than $70 million, and has hired new lending personnel for the North Jersey market.
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