Anticipating Change: How Financial Reform Will Affect Your Community Bank

The U.S. House of Representatives recently passed “The Wall Street Reform and Consumer Protection Act of 2009,” a banking reform bill aimed at preventing another major financial crisis. The bill, which passed 223-202, creates new regulations and oversight for large banks and Wall Street.

The bill’s most notable feature is the creation of two new agencies, the Consumer Financial Protection Agency (CFPA) and the Financial Services Oversight Council (FSOC). The CFPA will monitor and make rules for home real estate purchase and financing transactions. FSOC will monitor financial institutions that pose a large-scale risk to the banking industry. Recently, Senator Christopher Dodd (D-CT), chairman of the Senate Committee on Banking, Housing, and Urban Affairs, introduced the bill to the Senate. Now that the Senate is negotiating the bill’s provisions, there is a high likelihood of a substantial makeover. Most of the attention will be on the bill’s provisions affecting large banks and Wall Street firms, but how will the bill affect smaller community banks?

The Independent Community Bankers of America (ICBA) supports strong federal oversight over large banks and Wall Street firms. Given the rapid expansion of large banks into smaller communities, federal regulators may be reluctant to let large banks continue unrestrained growth. Additionally, consumer and real estate mortgage loans are two areas that the newly proposed agencies will heavily regulate for large banks, most likely causing large banks to reduce their number of loans. This presents an opportunity for community banks to step in and offer services in areas once dominated by large banks.

The bill, through its heavily regulation of risky investments by large banks, effectively ends the “too big to fail” notion. The bill creates greater parity between large banks and community banks. The CFPA, for instance, will contain a special unit for community bank regulation, ensuring that regulations for large banks will not disproportionately affect community banks. The bill also limits the CFPA’s reach into community bank management. Community banks with less than $10 billion in assets would not face a bank examination by the CFPA and would keep community bank examinations. The CFPA will also be barred from imposing fees against community banks and will not have enforcement powers for violations of consumer laws for community banks. Enforcement powers will remain with current state bank regulators.

In general, the bill reflects the consensus that community banks were not responsible for the recent financial crisis. Overall, the bill treats community banks as vital parts of the financial system and permits some flexibility for regulators to deal with problems specific to community banks. Although the ICBA expressed reluctance over certain provisions regarding the CFPA, most notably the proposed agency’s focus on consumer policy at the expense of safety and soundness enforcement, the ICBA endorsed the overall bill. In the Senate, the focus will undoubtedly be on large institutions, but as the bill currently stands, it is something that community banks can live with. The bill ends “too big to fail,” creates investment opportunities for community banks, and preserves the dual banking system of community bank regulation. The bill is a long way from its final form, but it is shaping up as beneficial legislation for the nation’s community banks.

Posted by: Junis L. Baldon

Categories: Bankruptcy & Banking Law