How We Can Help Banks Focus Less on Regulations and More on Main Street | U.S. Chamber of Commerce
Jul 20, 2017 - 3:00pm

How We Can Help Banks Focus Less on Regulations and More on Main Street


Director, Capital Market Competitiveness

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The Dime Savings Bank of Williamsburgh in the Brooklyn.

Main Street businesses need a variety of different types of financing to fuel growth, pay suppliers, or meet the weekly payroll.  As a result they use different banks to fit different needs – global banks to finance trade deals or mid-size and community banks to meet day to day needs. 

Our 2016 Corporate Treasurers survey found that Main Street businesses are finding that banking regulations are impacting their ability to obtain financing and driving up the cost of credit. 

In March, M&T Bank Chairman and CEO Robert Wilmers penned an extraordinary letter to his bank’s shareholders.  In unusually pointed and compelling language, Mr. Wilmers lamented one of the most senseless provisions of the Dodd-Frank Act:  the $50 billion asset threshold for enhanced prudential supervision.  M&T Bank – a Mid-Atlantic bank with a traditional, low-risk business model – is now subject to a never-ending series of burdensome rules and standards. 

Mr. Wilmers walked through the Kafkaesque implications of this “one-size-fits-all” approach to regulation, with particular attention to its impact on Main Street lending:

  • Comprehensive Capital Analysis and Review and stress tests have “wrested decisions regarding the allocation of capital from regional banks that have a vested interest in the health of their communities and placed them in the hands of distant regulators. A small business owner’s experience and the informed perspective of a bank have been discounted to the detriment of all involved.”
  • As a consequence of this process, “banks must effectively hold as much as 140% more capital for a small business loan than for a loan to a larger firm—remarkably, small business loans are actually treated more punitively than even the potentially risky trading assets predominantly held by the largest banks.”
  • Heightened liquidity standards “require banks to use the funds entrusted to them by their customers to purchase government securities classified as ‘liquid.’ In other words, banks are effectively mandated to use deposits to fund the needs of government rather than those of businesses and consumers.”
  • Compliance with these rules and regulations has come at an extraordinary cost.  M&T Bank’s compliance costs climbed from $90 million in 2010 to $440 million in 2016, representing nearly 15% of the bank’s total operating expenses.

M&T Bank is hardly alone.  Arbitrary thresholds and overly burdensome regulations have impacted banks of every size and in every region.  The real victims have been the banks’ depositors and applicants for credit – savers, small businesses, homebuyers, entrepreneurs, and many more.  

The tortured legislative history of the $50 billion threshold reveals it to be something of a drafting error, mistakenly written into law as competing proposals and draft bills were compiled into the final, 848-page Dodd-Frank Act.  Fortunately, there is now a broad consensus that this arbitrary and groundless number misses the mark.  Regulators and members of Congress–including even ardent supporters of tough regulation–have called for reconsideration of this broken policy.

Representative Blaine Luetkemeyer (R-Mo.), the chairman of a key subcommittee of the House Financial Services Committee, introduced a bipartisan bill that rethinks how we approach supervision and prudential standards.  Rather than the arbitrary and groundless asset threshold, the bill uses logical criteria: assess a bank’s risk profile on its size, interconnectedness, substitutability, complexity, and cross-jurisdictional activity.    

It is critical to note that the Luetkemeyer bill is just the starting point in efforts to get bank regulation right.  Supervision and prudential and standards need to be properly calibrated across the board, not just for certain banks.  

This core regulatory principle–that regulations should be properly tailored–is true even for the largest banks, which contribute to small business lending and economic growth. The Federal Reserve System’s Small Business Credit Survey in April 2017 found that more than 50% of small businesses applied for credit from a large bank, while the Chamber’s own survey in March 2017 found that “large global banks” were the primary financial services firm for 14% of all small businesses.

Congress must not lose sight of banks’ critical role in economic growth and job creation, and should enact broad reforms.  Many of these reforms are contained in the recent report by the Department of the Treasury, offering recommendations for a financial system that balances economic growth and financial stability.  The Treasury report has received bipartisan praise for its measured and thoughtful analysis, and we look forward to working with Congress and the financial regulators to implement its recommendations.

On Friday, the Dodd-Frank Act will turn seven years old.  These seven years have provided certainty where there was once speculation; hard data as opposed to conjecture.  Actual experience has proven that the $50 billion asset threshold has no place in a well-reasoned, properly tailored system of bank regulation. 

Such a system is critical if we want our banks to focus on what they do best: lend to families and Main Street businesses.  As Mr. Wilmers noted in his shareholder letter, it’s a time for a “reform of the reforms… Consumers, small businesses and, ultimately, our communities will be the better for it.  Change was needed but now change is needed again.”

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About the Author

About the Author

Brian Daner
Director, Capital Market Competitiveness

Brian Daner is a director at the U.S. Chamber's Center for Capital Market Competitiveness.