WASHINGTON/CHARLOTTE, North Carolina Community bankers on Wednesday pressed lawmakers to make sure the new Wall Street financial reform law does not inadvertently crush their businesses.
Small-bank representatives said last year's Dodd-Frank reform law does not do enough to spare them from costly regulations or level the playing field with banking behemoths such as Bank of America (BAC.N) and JPMorgan Chase (JPM.N).
"The cumulative burden of hundreds of new or revised regulations may be a weight too great for many smaller banks to bear," Tommy Whittaker, president of The Farmers Bank in Portland, Tennessee, told a Senate banking subcommittee.
Supporters of the law say small bankers' concerns are overblown because they are exempt from many of its provisions and they directly benefit, for instance, by having to pay less into the fund used to cover the costs of bank failures.
But these benefits will likely be overshadowed by struggles to absorb compliance costs and reforms that hit small banks' core business of fees generated from customer accounts, analysts say.
"On the surface I haven't seen anything yet that is going to give community banks an advantage over big banks where they are going to take customers away," said Gerard Cassidy, a bank analyst with RBC Capital Markets.
Analysts said it is difficult to predict precisely what new costs banks will be forced to bear because many of the rules are still being finalized by industry regulators.
But the new costs would hit smaller lenders just as they have struggled to match the earnings of their larger counterparts, which have recovered more fully since the 2007-2009 financial crisis abated.
Banks with less than $10 billion in assets have posted higher losses, and lower returns on shareholder equity than their bigger rivals since the financial crisis peaked in 2008, according to Federal Deposit Insurance Corp data.
In fourth quarter 2010, banks with more than $10 billion in assets reported a return on shareholder equity of 6.98 percent, on average. That amount is well above the 1.44 percent average return on equity achieved by banks with $1 billion to $10 billion in assets.
Despite the law's intent to end the idea of "too big to fail" institutions, big banks are still able to raise money more cheaply than their smaller competitors, FDIC data shows.
In the fourth quarter of 2010, the average cost of funding earning assets for banks over $100 billion was 0.67 percent compared with 1.24 percent for community banks, according to the FDIC.
HITTING SMALL-BANK BUSINESS MODEL
Small banks also face troubles that have little to do with the Dodd-Frank law.
For instance, unlike their bigger rivals, smaller banks rely almost exclusively on real estate-related lending, and have few supplementary businesses -- like investment banking or wealth management -- to provide revenue during a downturn.
A big concern for small- to medium-sized banks is how Dodd-Frank and some recent regulatory decisions focus on the deposit business, which they rely on more than big banks, said Brian Foran, an analyst with Nomura Securities.
Recent guidance from the FDIC, for example, seeks to limit the amount of overdraft fees banks can charge their customers.
In recent years banks of all sizes have moved to a model where they offer free checking and make money instead through fees charged to customers and merchants.
Foran said the law takes a swipe at that model, as supporters said it well should, raising the question of where small- and medium-sized banks in particular can make up the lost revenue.
That lost revenue, the still-struggling housing market and compliance costs could drive smaller banks to merge, said Jeff Davis, a bank analyst with Guggenheim Securities LLC.
And while regional banks may be able to add staff to handle new compliance matters, smaller banks that have already slashed staff may be unable to add new employees.
"You just can't make that work in this environment," said Jeff Davis, a bank analyst with Guggenheim Securities LLC.
(Editing by Steve Orlofsky)