Bank regulators told they are ‘bayoneting the wounded’ with rules

Federal bank regulators came under harsh criticism Wednesday from lawmakers who said an onslaught of new rules threatens to put smaller financial institutions out of business.

Top officials from the Federal Deposit Insurance Corporation (FDIC) maintained they were taking steps to soften the blow of new regulations in testimony Wednesday before a House Financial Services subcommittee.

But they acknowledged that their efforts to rein in Wall Street after the economic crisis are raising costs for community banks around the country.

To keep up with the hundreds of new rules required by the Dodd-Frank financial reform bill, banks say they have been forced to hire additional compliance officers and consultants. They must also pay for internal and external audits and buy new software to adhere to the new regulations.

Those costs come in addition to the impacts of the rules themselves, and amid complaints that bank examiners have become overly zealous in their scrutiny of financial institutions.

By holding community banks to the same standards as Wall Street giants, regulators are “bayoneting the wounded,” said Rep. Patrick McHenry (R-N.C.).

“How are community banks expected to exist under this hostile regulatory environment?” McHenry questioned during the hearing.

Since January 2008, 469 banks regulated by FDIC have failed, according to the agency’s chief economist, Richard A. Brown. More than 400 of those reflected deposits of less than $1 billion, a threshold generally used to distinguish community banks from large institutions.

Brown maintained that an agency investigation looking at the challenges facing community banks indicated that “they will remain a viable and vital component of the overall U.S. financial system in the years ahead.”

But lawmakers questioned that assertion, arguing the forthcoming rules are pushing smaller institutions to the brink of financial ruin. Of particular concern, several lawmakers said, is the set of international banking standards known Basel III, which are being put in place in response to the worldwide credit crunch.

Rep. Carolyn Maloney said smaller institutions should be exempt from the rules, which could drive banks out of business or force them to merge with other lenders.

“They’re not global competitors, they’re community lenders helping communities,” the New York Democrat charged.

Doreen Eberley, director of FDIC’s Division of Risk Management Supervision, said the agency is weighing more than 2,500 public comments submitted by banks and other interests seeking to influence the Basel III rule.

Though she declined to discuss the ongoing rule-making process, Eberley FDIC was taking the comments “very seriously.”

Eberley said the agency was cognizant of the impacts of regulations on community banks and had taken measures to increase outreach to banks struggling to understand and implement new rules.

She said the agency was moving to bolster training programs and had developed a website designed to give financial institutions “a line of sight for regulations coming down the pipe.”

Members of the panel, however, countered with reports from their home districts of community banks being bullied by their regulators.

McHenry said he had received complaints about bank examinations that have taken more than a month, and examiners leveling severe penalties for minor infractions. Maloney said banks are sometimes wary to appeal examiner findings for fear of reprisal.

Rep. Gary Miller (R-Calif.), meanwhile, said regulators are keeping banks from issuing loans over certain limits to credit worthy borrowers in the building industry.

Eberley maintained there were no such regulations in the books, but Miller said the tight lending practices stem from the flurry of new rules.

“I think the regulators are being overly restrictive,” he said, arguing that the behavior of regulators is hampering the industry’s recovery.