Small banks lament rules Community banks lament excessive regulation

WASHINGTON – Federal banking regulators said Wednesday that community banks should not face the same post-Wall Street meltdown scrutiny that mega-banks do, but local bankers said that’s exactly what’s happening.

At a hearing before a Senate Banking panel, community bankers said that in the wake of the financial crisis, the regulatory pendulum has swung too far and their institutions are under a tremendous amount of stress.

“There needs to be an understanding from Washington what reality is in Wichita, Kansas,” Frank Suellentrop, a Wichita-area bank official, told the hearing. “There is a stark difference in what we’re doing than what they’re doing in New York or Washington or other banking environments. It’s much more of a customer relationship approach.”

Suellentrop, chairman and president of Legacy Bank in Colwich, Kan., and Salvatore Marranca, a banker from upstate New York, both said federal and state regulators show up at their banks with increasing frequency. They examine lending practices, deposit compliance, data processing, mortgage business, taxes and more.

“There are very few times in my small, one-light town in Little Valley, N.Y., that I don’t have examiners in my bank,” said Marranca, president and chief executive officer of Cattaraugus County Bank. “And we are a 109-year-old institution, highly rated, low-risk profile and not a complex organization. This takes me away from lending, away from my customers.”

Marranca, chairman of the Independent Community Bankers of America, an industry trade group, said his experience was “the same as the vast majority of banks across the country.”

In response to the Wall Street crisis, Congress passed the Dodd-Frank Act last year, a sweeping overhaul of financial regulation with added consumer protections. The crackdown was aimed more at the larger financial institutions with assets of $50 billion or more. Community banks generally contain less than $1 billion.

Federal banking regulators testified that they were adjusting their oversight of community banking.

“Banking supervision should be conducted in a way that is effective for all institutions, but it should also be scaled to the size and complexity of the supervised firm,” Michael Foley, a senior banking official with the Federal Reserve Board, told the panel.

But Marranca said that’s not the reality.

“Every regulation that has landed at Wells Fargo or Bank of America has landed on my desk,” he said, naming two of the nation’s largest banks. “There needs to be some tiered regulation.”

The banking landscape has been changing as smaller banks get swallowed up by their mega-size cousins. It’s especially true since the financial crisis.

The 10 largest banks now hold more than three-quarters of all bank assets, compared to 2002 when they held slightly more than half, according to the community bankers group.

Community banks were not immune to the risk-taking that toppled other larger institutions. McClatchy Newspapers reported last year that the Federal Reserve Board’s failure to crack down in 2005 on the use of special debt securities enabled even smaller banks to take on high levels of red ink and shift the borrowed capital into risky real estate loans.

A report by the Federal Deposit Insurance Corp. came to the same conclusion. About 30 Kansas banks have closed in the last five years, according to Sen. Jerry Moran, a Republican from the state and member of the banking panel.

He asked Suellentrop, whose bank was established in 1886, if he was worried that community banking could “become a thing of the past.” The Kansas banker, whose father, grandfather and great-grandfather all preceded him as president, said, “There is a concern with the number of community banks that continue to decline. Many bankers are frustrated by the rules and regulations and are looking to possibly get out of the banking business in the next several years.”