Beware the dangers of regulatory “overreach” and a one-size-fits-all approach to community banking oversight, several industry participants testified at a Capitol Hill hearing Wednesday (Feb. 5).

The 119th Congress has begun, and with the latest iteration of the House Committee on Financial Services been seated, the hearing chaired by Rep. French Hill, R-Ark., was titled “Make Community Banking Great Again.”

During testimony and question-and-answer that marked the roughly four-hour hearing, bankers and state banking regulators told lawmakers that they should take steps to ease the path to new bank formation (de novo banks). And according to testimony from some participants, Congress should also look toward repealing Consumer Financial Protection Bureau (CFPB) rules tied to overdraft fees and small business lending data collection, arguing that open banking rules should also be delayed.

In his opening statement, Hill said, “I want to bring a banker and businessman’s vision to the committee,” and said that the roster of banks has been shrinking in the U.S. through the past few decades, and only 82 de novo bank charters had been issued since 2010. 

“Community banks have suffered immensely as increased regulatory requirements force them to devote more and more resources to lawyers and check-the-box compliance programs instead of serving their customers,” the Republican contended.

And along those lines, starting a new bank means wading through several years and expensive processes that span several agencies. Witness Patrick J. Kennedy Jr., founding partner of Kennedy Sutherland and executive chairman of TransPecos Banks, said that the decline in bank charters has happened in the wake of the 2010 Dodd-Frank Act.

Testimony from Rebeca Romero Rainey, president and chief executive officer of the Independent Community Bankers of America, posited that regulatory mandates designed for systemically risky, high-volume, transaction-based institutions “are a poor fit, and indeed destructive to, community banks.” 

She cautioned against a “one-size-fits-all” regulatory approach that burdens smaller banks that have comparatively fewer resources on hand — including legal and compliance teams — than larger banks (and consolidation is swelling the ranks of larger banks, too). 

Suggestions to Lawmakers

Her testimony also underscored her organization’s opposition to credit card routing mandates that, as part of legislation that may come before the current Congress, would add additional cost burdens through compliance. 

Susannah Marshall, commissioner of the Arkansas State Bank Department, said that community banks, as they grow, facing growing regulatory requirements — akin to a cliff that, once crossed, requires a slew of consultants and lawyers and technological buildouts. She recommended that federal regulators “directly engage” with state supervisors on developing regulatory frameworks.

Questioned by Rep. Bill Huizenga, R-Mich., about risk and regulation, Marshall noted that regulation for community banks is “top of mind.” And later in the session, Romero Rainey illustrated that for de novo banking, nuances matter, and the one-size-fits-all charter does not reflect that “a community in Oklahoma does not look the same as in downtown New York City.”     

Cathy Owen, president and CEO of State Holding Company and Executive Chair of Eagle Bank & Trust Company in Little Rock, Arkansas, stated that the host of new rules introduced through the past several months by the CFPB will prove harmful to community banks, and Congress should move to stymie the CFPB’s efforts to cap overdraft fees, because the result will be that banks will, in turn, be forced to end overdraft services entirely. The “rational regulation” of the industry, she said, would also entail placing the CFPB under the congressional appropriations processes.

Taking a different tack, Mitria Wilson Spotser, vice president, Center for Responsible Lending, told the committee that the CFPB has, in fact, rules — such as those for overdrafts and business data collection — tailored to the size and complexity of the various FIs.

Among her own recommendations were to raise the deposit insurance cap for small business accounts and require FinTechs to comply with existing consumer compliance laws, which would level the playing field between those digital upstarts and community banks.