Fed council: Community bankers hard hit by increased regulatory costs

The cost of regulatory compliance will likely drive an increase in merger and acquisition activity among community banks, with new regulations regarding Section 1071 and the Community Reinvestment Act being a major concern, members of the Community Depository Institutions Advisory Council told the Federal Reserve during the council’s April 13 meeting. A recently released summary of the meeting shows members had many concerns about the cost of federal regulation, particularly at a time when many banks are facing increased labor costs. As a result, they said their institutions were designing business lines to meet regulatory requirements rather than the needs of their customers, “which ends up hurting some of the more vulnerable communities.”

The CFPB’s final rule implementing Section 1071 of the Dodd-Frank Act was a major concern for council members, as were ongoing CRA modernization efforts. “Though members’ business models have changed before due to regulation… council members expect 1071 to have an outsized impact on the industry,” according to the summary. “Some council members reported that community institutions are considering acquisitions in order to scale up and accommodate increased costs.”

Council members were also worried about government attempts to further limit fees banks can charge for overdraft services. “Limitations on fees will squeeze already-shrinking margins and prevent banks from continuing to offer or grow such services,” according to the summary. “Many community institutions serve overdraft customers, but fee limitations will send these consumers to other, possibly unregulated, lenders. The ongoing focus on so-called ‘junk fees’ ignores the economic risks banks face in providing specific products and services to their customers.”