More small banks are selling themselves, and executives say Washington regulations are a big reason why. In a period when low interest rates are squeezing small banks, the costs of adhering to new regulations are taking a toll. Executives from at least half a dozen small banks that have agreed to be acquired in recent months said the increasing regulatory burden was a factor in their decisions.
The executives said the new rules aren’t scaled for banks of their size. While the Dodd-Frank financial overhaul law and other new rules were aimed at reducing the problems caused by big banks, small banks must deal with them as well, and the costs don’t necessarily get lower as the banks get smaller. The moves also come at a time when sluggish economic expansion limits banks' ability to expand enough to absorb higher costs.
Many bankers think smaller banks now must have at least $1 billion in assets to cope with the increased
regulatory burden. That is pushing some bank executives to look to sell. In all, there were 204 bank mergers in 2013 in which the target bank had less than $1 billion in assets, according to financial-research firm SNL Financial.
"The $100 million or $200 million bank or credit union doesn't have the same tools and financial resources that the larger institutions have," said Richard Garabedian, a banking lawyer with Luse Gorman Pomerenk & Schick in Washington and a former Federal Reserve lawyer.
In all, there were 6,812 banks in the U.S. at the end of 2013, compared with 8,534 at the end of 2007,
according to the Federal Deposit Insurance Corp. To be sure, in most bank sales there are several factors at play. Still, higher regulatory expenses are weighing heavily. A paper last May from officials at the Federal Reserve Bank of Minneapolis said a third of the smallest banks, those under $50 million in assets, could become unprofitable if they had to hire just two additional compliance employees.
One issue some small banks say they are having a big problem with is the Consumer Financial Protection
Bureau's new "qualified mortgage" rules, or QM, which require lenders to make sure borrowers can afford the mortgages they take out. Some banks say following the rules, which took effect in January, has been complicated and time-consuming.
A CFPB spokesman said the agency takes seriously community banks' concerns about regulation and has
taken measures to help them comply with CFPB rules. Similarly, an FDIC spokesman said the agency has reached out to community banks and provided them with technical assistance and other information and resources.
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