Small U.S. banks fear new regulations may be costly

By Chavon Sutton - Analysis

NEW YORK (Reuters) - Community banks that avoided the excesses of the lending boom and survived the financial crisis without too much trouble are now increasingly worried that they will get penalized by the U.S. government's regulatory crackdown.

While there was reckless behavior by some of America's smaller banks, and a number are paying the ultimate price through failure and government seizure, there were many who stuck to conservative lending practices and turned away business if it was high risk.

The Obama Administration is proposing a raft of new regulations aimed at preventing banks and other companies from taking on risks that could again threaten the whole global financial system.

The only problem -- the demands of the new regime could hurt smaller banks more than their larger brethren.

"We support the strong systemic risk regulation over too big to fail institutions because it will protect taxpayers and the economy from future economic crises, said Karen Thomas, executive vice president of government relations for the Independent Community Bankers Association (ICBA).

"But we want the reform to be more targeted to those institutions that caused the problems, not community banks."

Community banks say the proposals to create a new Consumer Financial Protection Agency, remove the thrift charter, and require banks to hold a financial interest in loans they originate, are among changes that put an undue burden on some of the institutions that did not engage in abusive practices.

"It seems to me that we already have strong and strict consumer protections," said Frederick Schea, Chief Executive of First Savings Bank of Perkasie, an Upper Bucks County, Pennsylvania bank with $1.1 billion in assets.

He said the creation of a new agency will likely lead to "additional fees on top of already high fees we pay for FDIC deposit insurance and other regulatory fees."

HITTING EARNINGS

These fees can soon cut into margins.

For example, River Valley Financial Bank, an Indiana-based bank with $384 million in assets, pays $80,000 annually in regulatory fees. Last year, it reported $2.5 million of net income, making regulatory fees equivalent to three percent of its earnings.

"I'm not happy about having a new regulator for compliance because another one could cost up to an additional $80,000 for us," said Matthew Forrester, the CEO of the bank.

Other related costs include limits on leverage and expenses for compliance and audit staff.

Some of these costs went up after the 2002 Sarbanes-Oxley corporate governance law, passed in response to the Enron and WorldCom scandals. The law was much criticized in corporate circles for increasing the cost of auditing.