Woes over the Dodd-Frank Act

Editor's Note: U.S. Rep. Dennis Moore (D-Kan.) chairs the subcommittee on oversight and investigations for the House Financial Services Committee. The subcommittee oversees departments and programs under the committee's jurisdiction, as well as conducting investigations on matters related to the committee. .Last month, the subcommittee conducted two field hearings in Rep. Moore's home district. On Monday, Aug. 23, the subcommittee hosted a hearing entitled: "Too big has failed: Learning from Midwest banks and credit unions." It was conducted at the Capitol Federal Conference Center at the Johnson County Community College's Regnier Center in Overland Park, Kan. On Tuesday, Aug. 24, the subcommittee hosted a second hearing called: "Empowering Consumers: Can financial literacy education prevent another financial crisis?" It was conducted in the Simmons Media Room at the Robert J. Dole Institute of Politics at the University of Kansas in Lawrence. .A field hearing conducted Aug. 23 in Kansas gave bankers an opportunity to share their concerns over the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act. Bank leaders from small and mid-size banks complained that the new legislation will make it much more difficult for their institutions to succeed, while reducing credit options for customers.."The unfortunate reality is that far from creating good policy, Dodd-Frank reflects political punishment and compromise," testified Jonathan Kemper, chairman and CEO of Commerce Bank, Kansas City, Mo. "While traditional banking didn't cause this financial crisis, we are being saddled with the costs. And the solutions are riddled with loopholes and carve-outs favoring politically powerful entities which limit the overall effectiveness of the legislation…."Dodd-Frank may have profound unintended consequences for banking in the United States. The policy of government price setting will tend to devolve into a utility model for financial services, focusing on the recovery of defined costs rather than profits, making capital attraction and formation difficult, if not impossible, for traditional banks.."Let's be clear: Dodd-Frank misses the mark. The 2,300-page financial regulation bill is excessively complex, with new agencies established and much uncertainty about what the final rules will be. The financial industry has serious concerns about where this is going.".Mariner Kemper offered similar sentiments. "Although the Dodd-Frank Act was designed with the good intention of addressing excessive leverage and the too-big-to-fail issue, it has unfortunately become a mechanism to regulate bank profitability as well as product design and competition," said the chairman/CEO of UMB Financial, Kansas City, Mo.."The profits of small and medium-sized banks are being attacked," explained David Herndon, president and CEO of First State Bank of Kansas City, Kan. "Recent legislative and regulatory actions have dramatically decreased income and increased operating expenses. Increased deposit insurance premiums, compliance costs and restricting interchange fees are examples. It appears to me and many of my banker friends the government and regulators have begun choosing winners and losers. If so, small and medium-sized banks will regrettably be the losers." Herndon is the immediate past chairman of the Kansas Bankers Association.."A political risk of un-subsided legislative and regulatory burdens will have unintended adverse consequences," Herndon continued. "Too many small and medium-sized banks will be put out of business either by their own decisions or those by their regulators. For example, First State Bank employs 26. We know the recently passed financial reform legislation will create nearly 250 new regulations for these 26 people to read, comprehend, implement and then try to explain to clients. My concern is many small and medium-sized banks will decide the costs and risks of compliance are too great. Mergers and acquisitions will decrease the number of banks serving small and medium-sized communities or sections of larger metropolitan areas creating a void for small and medium-sized businesses.".Jonathan Kemper also talked about the likelihood of industry consolidation. "An unintended consequence of this so-called reform bill will be to lessen the stability of community banks which depend on debit and overdraft fees to support their participation in the payment system," he said. "We also fear that the many new regulations add up to a complexity which will cause smaller banks to just give up, with the result that even more banking business will end up with the very largest banks, further concentrating assets among few institutions — where all the risk had been taken in the past.."While the rhetoric has been that Dodd-Frank would eliminate future bail outs, in fact there is the strong possibility that just the opposite will occur and with the continued push to concentration, that there will be more chances for future crisis and future bailouts. In addition to the increased susceptibility to panics, we believe that there is a danger in concentrating the decisionmaking into an ever smaller number of banks," Jonathan Kemper said.."The economic vitality and growth of any region, especially the Midwest, depends on the participation and support of bankers who understand and are part of their communities. The effects of further consolidation include the severe reduction of local decision-making, which could be replaced by a concentrated national, robotic, decision process.".Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, affirmed the integrity of the community bank business model. "The community bank business model has held up well when compared with the megabank model that had to be propped up with taxpayer funding," Hoenig said. "Community bank earnings last year were lower than desired but on par with those of larger banks. However, community banks generally had higher capital ratios that put them in a better position to weather future problems and support lending.."This is an important point to note as the decline in overall bank lending, particularly to small businesses, is a major concern. Data show that community banks have done a better job serving their local loan needs over the past year. Community banks, as a whole, increased their total loans by about 2 percent as compared to a 6 percent decline for larger banks," Hoenig said..Charles Stones, president of the Kansas Bankers Association, noted that banks will have a tougher time making money in the future. "This will inevitably drive banks to consolidate. Again, who will fill the void in small town Kansas if the current local bank decides it can no longer make a fair profit, and closes? It is time for Washington to realize that traditional banks have economic value in this country.".Stones blamed troubles in the banking industry on government meddling. "Government intervention in the lending process altered decision-making and interfered with the free market system on the front end of many transactions. Expecting the same free market system to work on the back end of the process is unrealistic if it is not allowed to function on the font end."."Traditional banking needs to be strengthened and encouraged because, as in years past, we will be the engine that drives any economic recovery," Stones said.."What the economy needs now is an environment for loan demand which gives opportunities for all 7,900 banks to make good loans," said Jonathan Kemper. "We believe that Congress should be concerned that many smaller banks, now finding themselves falsely targeted by new regulation and burdened with the new costs and limited opportunity for new revenue will instead simply wither and go out of business.".Hoenig summarized: "Community banks will survive the crisis and recession, and will continue to play their role as the economy recovers. The more lasting threat to their survival, however, concerns whether this model will continue to be placed at a competitive disadvantage to larger banks.."Going forward, the community bank model will face challenges. Factors such as higher regulatory compliance costs and changing technology will encourage community bank consolidation. And despite the provisions of the Dodd-Frank Act to end too-big-to-fail, community banks will continue to face higher costs of capital and deposits until investors are convinced it has ended.".But Hoenig concluded on a positive note: "If allowed to compete on a fair and level playing field, the community bank model is a winner."