Credit unions, community banks face ‘creeping complexity’ of regulation

The leaders of community banks and credit unions warned the House Financial Services Committee Monday that aggressive federal regulations are hindering the institutions’ ability to lend money. Patricia Wesenberg, president and CEO of Central City Credit Union in Marshfield, Wis., told the committee that while credit unions had no role in causing the financial crisis, they now “face what might be best described as a crisis of creeping complexity related to their regulatory burden.” Wesenberg said it’s not one regulation that is weighing the credit unions down, but an influx of multiple new rules. “The barrage of regulations creates an unnecessary burden without any measure of the effectiveness of these changes,” Wesenberg said. “They are costly, both in time and personnel to implement, and they are confusing to our membership. We would prefer to spend our resources on promoting our mission of financial literacy and the development of new products to serve the needs of our members within our local communities.” Wesenberg said the credit union’s vice president of lending dedicates about one-third of her time wading through regulatory changes. Marty Reinhart, president of Heritage Bank in Spencer, Wis., said while he understands why new regulations were proposed in the wake of the financial crisis, “there continues to be a disproportionate burden placed on community banks due to their more limited resources, diminishing profitability and ability to attract capital and support their customers, including small businesses.” Reinhart warns that the Consumer Financial Protection Bureau is an area of concern since the new agency’s rules will impact community banks. “The CFPB should not implement any rules that would adversely impact the ability of community banks to customize products to meet customer needs,” he said. Reinhart believes examiners who evaluate the structure of financial institutions are over regulating by requiring write-downs or re-classifications on performing loans based on the value of the collateral; disregarding the borrowers ability to pay; placing loans on nonaccrual even though the borrower is current; and moving the capital goalposts. “Community bankers nationwide have reported that bank regulators are often demanding significant capital increases above the minimum regulatory levels established for well capitalized banks,” Reinhart said. “For example, some examiners are requiring banks to maintain minimum leverage ratios as high as 8% to 9% (versus the 5% required by regulation) and minimum Tier 1 risk-based ratios as high as 10% (versus the 6% required by regulation). To bankers, the process appears arbitrary and punitive.” In September, a community bankers group complained about big bank domination of the financial landscape and noted that while the Dodd-Frank financial reform was designed to even the playing field between big and small banks, the threat of larger banks dominating the system remains. Write to Kerri Panchuk.