A gathering of community bankers, many of whom lend to farmers and finance local real estate purchases, heard several officials confirm what they already know — that federal banking rules may be hurting them.
Though economic conditions in the country are generally improving, quarter-by-quarter, several banking executives said community banks may be lagging.
Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association said there are 280 community banks in the state, which have 2,500 branches and employ 25,000 people.
During the ninth annual bankers outlook luncheon Jan. 9 in Madison, she told 500 members that the real estate, manufacturing and agricultural economy has improved, but the perennially low interest rates have put a burden on local banks.
However, she added that statistics from the third quarter of 2013 show that 96 percent of these banks are profitable. "We're definitely on the mend."
New banking regulations, she said, are putting an additional strain on local banks. In the year 2000 banks were required to produce 775 "data points" per quarter for the government and now banks must provide 2,000 data points for regulators.
Generating that extra information for regulators entails "a lot of extra expense" for banking institutions, she added.
Poels said the continued "slow, steady recovery" has been hampered by lack of loan demand as businesses take a cautious approach to borrowing and have little interest in going into more debt.
In this environment mergers and acquisitions of smaller banks will continue, and Poels expects to see a decline of three-five percent in the number of bank charters in Wisconsin over the next few years.
Esther George, president and CEO of the Federal Reserve Bank of Kansas City, said that community banks play a key role in the U.S. economy, adding that they face particular challenges.
In her speech at the outlook forum, she emphasized they were her own views and not those of the Federal Reserve. The U.S. economy has faced obstacles over the last few years "from without and within" but with real gross domestic product (GDP) growth and steady progress, the future is looking brighter.
Consumer spending accounts for 75 percent of the U.S. economy and with gains in employment and real disposable income growth the projection is brighter.
Though the business climate has remained cautious — there are questions about U.S. and global economies — George said those concerns are fading as the economy strengthens. That leads her to "expect continued growth" unless some major disruption happens to come along.
The United States needs a "vibrant system of banks" to maintain its economy, and George shared Poels' concerns that thousands of smaller U.S. banks have had "relatively flat earnings" since 2012.
That comes as no surprise, she said, since the continued extended period of zero interest rates has led to low profits among many banks.
The Fed's "Quantitative Easing" program of purchasing assets ($85 billion per month) has kept short-term interest rates near zero for several years.
After two decades of banking policy focused on deregulation, the pendulum has swung back the other way, she said. The Dodd-Frank Act was a response that took banking institutions to task for their role in the financial crisis of a few years ago.
The new banking regulation was intended to keep an eye on banks that are "too big to fail" to prevent another near-meltdown of the U.S. economy, but George fears that it is hurting smaller, community-based banks.
Assets have continued to become more concentrated in larger institutions, she said. In 1997, 90 percent of assets were in traditional banking activities and by 2013 that number had dropped to about two-thirds of assets.
Community banks have lost market share to big firms, she said, while still maintaining the business model associated with traditional banking activities.
"The viability of community banks is an important consideration in this economy," she said. "These banks provide more than half the small business loans in the United States" and offer credit in far-flung rural areas.
They are getting hammered by the regulatory burden and the low interest rates. Both disproportionately affect community banks and could hurry the rate of bank consolidation, she said.
Some in the banking industry are calling for a two-tier system of regulation — one for the big institutions that are deemed "too big to fail" and another for community banks. "Regulatory complexity incentivizes gaming the rules," she added.
While she doesn't necessarily think a two-tier system based on size of the banking institution would be the solution, she does think that regulators might consider treating banks differently based on their business model – traditional banking activities versus commerce.
The segment of the banking industry made up of community banks is critical and their concerns need to be addressed, she said, adding that policy makers should consider alternatives to the current framework.
Though community banks and those that fall into the too-big-to-fail category are inextricably linked, she said, rules are needed for all sizes of banks that are "understandable, enforceable and equitable."