Straight Talk: Flexible regulation?

John Ryan, president/CEO of the Conference of State Bank Supervisors, made the point at a recent industry meeting in Des Moines that all of the net industry consolidation in the last 20 years has taken place among banks with fewer than $100 million in assets. Furthermore, he said, banks with fewer than $100 million in assets have the lowest rate of failure. Draw your own conclusions about why all the consolidation among those banks – certainly an inability to deal with excessive regulation is a plausible theory..Over-regulation is a two-fanged snake for smaller community banks. First, the baseline cost of compliance means that smaller banks pay proportionately more to comply with all the regulations than larger institutions. And second, it prevents community bankers from leveraging their strength, which is customizing service to specific needs. With fewer customers, smaller institutions are in better position to make individual judgments about how to best serve each customer. Regulation, on the other hand, doesn't like judgment, it likes policies. Regulators don't like customization; they like standardization. Examiners don't like exceptions; they want everything to be the same..Regulators and consumers are on separate paths and the distance between them grows every day. Smaller banks are caught squarely between these two paths. While regulators are pushing bankers from institutions of all sizes to standardize their decision-making with cookie-cutter precision, the public is crying for individualized attention. People want to be recognized as the unique individuals that they are. No one likes to have their entire life deconstructed by credit scoring software before they even get a chance to introduce themselves. People have great stories and great dreams; years ago, before the regulatory vice squeezed too hard, bankers could listen to those stories and help those people realize their dreams. Today, they are hardly allowed to finance much more than the plainest vanilla credits..At the Iowa Division of Banking's Day with the Superintendent (see page 14-15 for coverage), Ryan advocated for a supervisory system that regulates to the institution, not to an arbitrary standard. I hope that's possible. Of course, customers want regulatory supervision from their government that protects them from dishonest or illegitimate financial schemes, but they also want bankers who are allowed to use their judgment, share their experiences, and offer products designed and priced just for them. Right now, we have a banking environment in which we are being told the customer can't have both. The government is trying to provide protection at the expense of personalization. The result pleases neither banker nor customer, and I would bet even most regulators don't think it's working either.