Bankers’ Hours column: New regs do little to help small banks

Pat Dalrymple
Bankers’ Hours
Pat Dalrymple

There’s been a lot of fanfare regarding the bill coming out of Congress that amends some of the famous (or infamous, if you’re a banker) Dodd-Frank Act. Some have intimated it spells the end of the massive, and confusing, law passed in the wake of the economic crisis (we don’t use the word “Recession” anymore) of 2008.

In reality, if this is all Congress and the administration can do after over 12 months in power, Dodd-Frank is slated to be around for quite a while.

Also, some have hailed it as a victory for so-called “community banks,” small- and medium-sized institutions, many of which are based in smaller towns and markets, but that’s not really true either.

In voting for the new legislations, lawmakers, even including some Democrats from less populated states, have referred to the need to reduce the regulatory burden on little banks, but it will probably do very little in that regard.

A key element in the new legislation involves raising the threshold for certain capital calculation and regulatory oversight requirements. The trigger asset size was raised from $50 billion to $250 billion. The same revised thresholds would apply to the so-called annual Stress Test mandate. This requires extremely large banks, the TBTFs (Too Big to Fail) to perform an analysis to determine at what point in a financial meltdown they might, well, fail, and what they’re doing to protect against it.

This helps little banks in little towns? I mean, I can’t even get my mind around 1 billion, but 50 of them? That statutory maneuver doesn’t seem to do much for Last National Bank of Downriver, Montana, does it?

Another feature is relief from new information-gathering regulations on ethnicity and other items for home loan applicants. Banks that make under 900 residential mortgages per year will be exempt from collecting the information. The problem with this is, few small banks make many 30-year fixed rate mortgages, which comprise the majority of these loans, because of interest rate risk. Don’t borrow short and lend long is the first lesson in Banking 101.

Some banks do fund some of these deals, and keep them in portfolio, but most of the really small guys don’t. If they do them at all, they generally pass them along to the secondary mortgage market very quickly, like in a couple of weeks, and the purchasers of the mortgages are very, very big. So the info needs to be gathered anyway.

Some lawmakers, especially from some western states, are supporting the measure because, in their words, “Home town banks in my state can’t stay in business because of the regulatory burden, and they’re being gobbled up by mega-banks.” Maybe, in some instances, this is true. But the uptick in bank acquisitions is probably more driven by economic reasons than regulatory ones.

Take our fictitious $100 million institution in Downriver, Montana. It’s been through a tough time. Almost got taken over by the feds at the start of the Meltdown, and probably been under a regulatory agreement for close to nine years that virtually keeps the bank from doing much of anything to pull itself out of the hole, including making loans. But the management and directors held on. They’ve disposed of all the bad loans, and finally have started making money again. Maybe their capital (net worth) is up to the solid benchmark of 10 percent of assets: $10 million. The business is actually worth something.

Down at the co-op or diner, over coffee, someone is bound to take a look at the recent stock market run-up and say, “Boy, I wish I had some stock now; all I have is about 20 shares in Clarence’s bank.” (Rueful laughter, before everybody takes another bite of Emmeline’s super-sized glazed doughnuts)

But the Downriver region has growth potential, and so does Last National. Along comes Chase, and offers one and a half times book value (net worth) to buy the bank: $15 million. Say that you own just a tad of the total stock, maybe 2 percent, and you figured it’d never be worth anything, not even for your grandkids. All of a sudden that worthless stock will put $300,000 in your pocket. You’d probably vote to sell in a heartbeat, and then move to lock the Chase rep in his room at the Antlers Motel until the contract is signed.

And the purchase price is, literally, nothing to Chase. It’s not petty cash, nor chump change, or even pocket change. Chase is rolling in dough, and probably spends that much in a quarter trying to figure out what to do with all of the excess loot.

It’s what they call a win-win situation.

Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is

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