Want to Change Bank Regulation? Get in the Game

Banks and bank boards have numerous complaints related to new federal regulations impacting their bottom lines, beginning with the Dodd-Frank Act. Tom Lykos of Commerce Street Investment Management, a unit of Commerce Street Holdings LLC in Dallas, Texas, argues that the industry’s greatly increased regulatory burden won’t be lessened until bankers become more proactive in the legislative process and directly make their case to Washington.

What should banks do to combat new regulations?

Bank management and directors should appreciate that onsite regulators conducting exams are not the enemy. Regulators don’t develop policies or laws; they’re tasked with implementing them. Frustrations directed at on-site regulators are ineffective. If senior management and bank boards of directors want regulations to change, they need to become proactive in the legislative and rulemaking processes via the courts, administrative agencies and with the lawmakers directly.

How should boards be proactive?

The initial focus of their individual and collective efforts should be on the members of the House of Representatives who have the ability and incentive to support their constituents’ businesses along with the community banks that serve them. Their appeal should communicate the impact that the Dodd-Frank Act, the Affordable Care Act and tax policy changes have on banks and the businesses they serve. Regulation overload is forcing small businesses and consumers out of business.

What are the most burdensome parts of Dodd-Frank for community banks?

Banks need relatively sophisticated employees to set up and maintain the compliance process. Furthermore, the application of the rules and regulations varies a great deal, creating uncertainty. If the goal is to merge small banks out of business, there are more efficient ways than imposing regulatory burdens. Dodd-Frank was passed in the midst of a crisis and as a result, unnecessary regulation has been imposed on community banks when the initial intent of Dodd-Frank was to address weaknesses in too-big-to-fail banks. Community banks don’t present a systemic risk to the financial system, nor to the communities they serve. A more rational approach would be for policy makers to devise a regulatory scheme based upon the size and function of an institution and the activities in which they are engaged.

What is the most difficult task for you in raising money for community banks?

The question is, “How do you raise additional capital for healthy community banks when they have fallen out of favor with investors?” While addressing modifications to Dodd-Frank, the White House and Congress need to make it unequivocally clear to the public and investment community that community banks play a vital role in the economy and that they are supportive of them.

Do you see that happening?

For specific banks in specific markets, capital is available. However, in general, due to regulatory burdens and uncertainty, it is difficult for many community banks to produce the kinds of returns that attract fresh capital to the sector. These perceptions can change if policymakers clearly state the importance that community banks play in small business growth and define how they will be regulated.

How do you raise capital in this environment?

Bank management and boards must demonstrate that they can implement their growth strategies. Successful capital raises also depend a great deal on the investor base to which the offering will be made. Lastly, institutional investors are motivated by different criteria than community-based investors.

Why haven’t we seen more acquisitions?

There is a disconnect between buyers and sellers regarding bank valuations and pricing. There are more targets than acquirers, but fewer attractive target franchises. The regulatory approval process is perceived as too costly and time-consuming for smaller institutions and boards are delaying plans until after the 2012 presidential election when the regulatory environment has stabilized. Plus, shareholder activism has been relatively limited.

What is your short-term outlook on mergers and acquisitions?

In communities with vibrant, expanding economies, M&A activity may pick up as the pricing improves. I also believe that if shareholder activism increases, you may see a corresponding increase in M&A activity. Shareholder meetings should be better attended and shareholders more vocal if viable options are presented for their consideration. However in the near term for much of the sector, neither the regulatory nor operating environment will change dramatically. Both Congress and the president are preoccupied with other issues and will remain so unless compelled by the industry to address the economic consequences of overregulation.

Tom Lykos