Remember during the 2008 financial crisis, when everyone was screaming about regional banks based in Minneapolis, Pittsburgh, and Salt Lake City? Yeah, me neither.
Still, even though the crisis was centered on the struggles of global banking behemoths on Wall Street, regional banks across the country got hammered with the same regulations designed for Citigroup and the other global mega-banks. The 2010 Dodd-Frank Act’s one-size-fits-all regulation affected Wall Street banks like Citigroup with $1.8 trillion in assets, as well as smaller banks with much lower asset totals, such as Zions ($59.9 billion assets). This convoluted, illogical situation placed the financial burden on regional bank customers, like small businesses and homeowners. As Zions’ CEO put it, “Overregulation hurts bank customers [and] destroys incentives to engage in banking.”
Americans deserve smart financial regulation, which will ensure they have the tools needed to grow. Yet right now we don’t, to put it mildly, have it. Improperly calibrated regulation is a key reason our economic recovery has been so tepid. This isn’t really about banks. It’s about regular working people trying to feed their kids, trying to make a living.
When it comes to the economy, everything is connected to how successful our small businesses are. When a successful new business opens, it augments the businesses around it, increases surrounding home values, and adds to the fabric of its community.
None of this growth would be possible without the essential role played on Main Streets across the country by regional banks. In many cases, community banks do not have the scale to make business loans and the big Wall Street banks – with their diversified portfolios – are focused on other, more complex markets. Regional banks fill this gap by supporting businesses and subsequent job growth on Main Street through lending while maintaining the same strong, close relationships with their local communities that community banks offer.
For the last several years, though, an improperly calibrated regulatory environment has hampered regional banks’ ability to help businesses in all 50 states to achieve the American dream. The regulatory environment that emerged after the financial crisis uses a one-size-fits-all approach that affects banks regardless of their risk profile. The ire reserved for Bear Stearns, AIG, and Lehman Brothers has unfairly captured simple, traditional regional banks like Zions, Huntington and Fifth Third.
By lumping regional banks in with risky Wall Street banks, and therefore forcing them to spend time and money complying with ill-advised regulations, the economy suffers from a shortage of much-needed lending – lending that could kick-start economic growth to reach higher levels. Restricting the banks that provide support to our Main Streets does nothing to enhance the stability and soundness of the financial industry. Instead, it only hurts the consumers and small businesses that rely on these institutions.
A recent study found that systemic regulations imposed on regional banks reduces lending by up to eight percent annually – totaling $20 billion over five years; it’s no surprise that recent FDIC data on lending has shown many areas of lending are still below 2007 levels. Furthermore, while the median loan request from small businesses is $100,000, typically just 40 percent of that is actually provided.
Instead of focusing on a bank’s size alone, it is much more productive to develop a multi-factor system to assess a bank’s true risk level. Regional banks are far less risky than their Wall Street counterparts, with the assets of the top 15 regional banks equivalent to one Wall Street bank, and are much more ingrained in their communities, following a similar business model as community banks. By using several factors, including business model and interconnectedness, to determine risk, regulations could then be eased on the more secure banks and would free up capital to put towards economic growth.
No one is calling for an end to needed financial regulation, but there is harm in incorrectly tiered regulations that limit lending and hurt Main Street. It’s time to put an end to one-size-fits-all regulations that that harm our regional banks and instead allow them to serve their customers to keep our economy growing. By easing regulations on these institutions, our nation’s consumers and small businesses will be better supported. When voters say the economic system is rigged, there is evidenceto support that view. The key is that it’s mostly bad government doing the rigging.
Kyle Hauptman is the executive director of the Main Street Growth Project.
The views expressed by authors are their own and not the views of The Hill.