December 2012

Banks Cope with Regulations

By George N. Saliba, Managing Editor

Banks are generally well capitalized, but they are saddled with new regulations in a down economy.

Banks today are faced with ever-complex government regulations, which spawned from the dark days of the 2008 financial crisis. These rules – when combined with the low interest rate environment and other factors – are squeezing banks’ profits.

The Dodd-Frank Wall Street Reform and Consumer Protection Act - which stands at 2,300-plus pages and represents the most sweeping change to financial regulations since the Great Depression - was signed into law in 2010. Separately, Basel III is an upcoming regulation which may hit community banks especially hard.

Overall, the compliance personnel needed to handle the new regulations command higher salaries, and some banks lack the economies of scale needed to effectively distribute these and related costs. Even mega banks are facing stiff compliance costs, with one claiming the regulatory environment will force it to spend $3 billion over the next several years.

More Impacts

Speaking specifically about Dodd-Frank, John E. McWeeney, Jr., president and CEO of the Cranford-based trade group New Jersey Bankers Association, says, “If we were in a really vibrant economy now, and the banks were doing a lot of lending and making a great deal of money, it would be easier to absorb these additional costs. But, since the economy is still soft, with slow and low growth, it is harder to do that.”

In broad terms, if banks struggle to meet regulatory requirements, this could spur further consolidation in New Jersey, where the number of Garden State-headquartered banks has already dwindled from 150 in the year 2000, to 110, today.

Kenneth E. Kobylowski, acting commissioner of the New Jersey Department of Banking and Insurance, said at the recent New Jersey Bankers Association Fifth Annual Bankers Legislative Day, “Dodd-Frank has thousands of pages of approvals that are required and are yet to come out. There are 259 mandated rule makings, 180 suggested rule makings, 63 reports and 29 studies. Unfortunately, it is government doing what government seems to do best …

“We are hearing in the community banking area that you may need to merge, simply because you are trying to achieve economies, to meet the regulatory burden. That, to me, is almost beyond comprehension – that institutions may need to merge not because they are successful and want to expand their footprint, or because they couldn’t make a go at it and are looking to be acquired.

“Instead, government regulatory burden is requiring them to do so. There could be no clearer incidence of the tail wagging the dog.”

Also at the event, Andrew P. Sidamon-Eristoff, treasurer of the State of New Jersey, said, “Apparently, there have been no new [bank] charters granted nationwide, for a few years, now. That’s not good news for anybody. The commissioner spoke at length about the advantages of a New Jersey charter, and we are delighted to be able to support the department in any way we can, in convincing members of the industry to consider a conversion.

“At the end of the day, we have got to see new charters formed, and if the regulatory climate is preventing that from happening, then we really have some soul-searching to do.

But, that’s your (the bankers’) problem, in a way. However, it is a really serious, serious issue for all of us concerned with the industry and with our economy.”

Other Banking Concerns

Beyond regulations, the lending environment, again, is not particularly good for banks, with credit-worthy corporations often sitting on piles of cash, waiting to see the final outcome of healthcare reform and tax laws, before making investments.

The businesses that often do seek loans at this time are not always well qualified, and when banks make loans, the cost of borrowing is at historically low levels.

However, NJ Bankers’ McWeeney says, “Again, there is a lot of capital sitting on the sidelines, both with individual investors, as well as with the business community. If we start seeing some more optimism and pick-up in the economy, we think that could accelerate lending.”

At the NJ Bankers’ event, Kobylowski noted that banks have, of course, been impacted by the decline in commercial and residential real estate.

He added, “We also know that the foreclosure process ties up capital for extended periods of time. We’re working with our colleagues in the judiciary, on that. They are the folks who need to pull the labor and oar, on that.

“Also, I know that you are supportive of legislation that is kicking around in the state right now, that creates a summary action to foreclose mortgages on vacated and abandoned residential properties. While I can’t comment on any specific piece of legislation, you can be assured – when and where appropriate – that our department will work with the administration and Governor Christie’s office to provide feedback information, when we can be helpful.”

The Economy

It is indeed the economy that has many bankers talking, because if it strengthens, that could make regulations’ impact less burdensome, since banks would be earning more money.

On the bright side, one can underscore that New Jersey has added nearly 85,000 private-sector jobs since February 2010, and that personal income in the Garden State has been at an all-time high for a number of quarters. Housing permits are up 35 percent for the first eight months of this year, and automobile sales increased 9 percent for the first eight months of 2012. New Jersey Business magazine’s economic forecasts (see page 53), provide a more complete perspective on the economy, both here, across the nation and around the globe.

The 50,000-foot View

Returning to Dodd-Frank, the long-term effects may ultimately limit credit in the marketplace (think: fewer lenders). As for how banks and businesses can cope with Dodd-Frank, McWeeney says, “The message is pretty simple: Banks are still engaged in the process of having a dialogue with legislators and regulators, and as these rules and regulations come out from the legislators, usually there is a comment period. I think it is important for the banking industry to remain engaged and have dialog, so that we can at least try to tweak some of the rules and regs to make them less onerous.

“On the legislative front, there is always the possibility that some parts of Dodd-Frank could be repealed. Obviously, that would take an act of Congress, and the president to sign it, but there might be some specific items, where, in a bi-partisan way, people could say, ‘Well, this didn’t have the impact that we thought it would, and we should re-think it.'”

Conclusion

McWeeney says, “The bottom line is that [Dodd-Frank] is not going to be the death knell of banking. We have a lot of concerns with it; there are some positive components. But, the banking industry is strong and sound. It is just a question of: Are we going to free up banks to be greater engines of economic growth, or are we going to have all these rules and regulations, which may restrict our ability to support the economy?”  

Vincent Schweikert, Vice President & Publisher
973-882-5004. ext. 110
v.schweikert@njbmagazine.com

Anthony Birritteri, Editor-in-Chief
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a.birritteri@njbmagazine.com

George Saliba, Managing Editor
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g.saliba@njbmagazine.com

Lisa Fragati-Criscuolo, Advertising Manager
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l.criscuolo@njbmagazine.com

Gloria Owens, Account Executive
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Doug Prefach, Account Executive
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