‘Too big to fail’ regulations forcing small lenders to get bigger

by Ryan Smith22 Aug 2016
Here’s a little story about unintended consequences: Once upon a time, a bunch of big banks helped wreck the economy and ended up needing government bailouts. The government didn’t want to bail out big banks anymore, so it created a lot of rules and regulations to avoid it in the future. But the rules and regulations were so stringent that smaller banks couldn’t afford to abide by them. So to handle the costs, those small banks started merging – creating more big banks that the government doesn’t want to bail out.

This financial Mobius strip has hit a peak last year, when mergers and acquisitions by U.S. banks spiked to around $18 billion, the highest level since 2009, according to Bloomberg. And it looks like that mark will be surpassed this year.

Why is it happening? In a word, regulation. According to Bloomberg, in nine out of the 10 largest deals completed so far this year, the banks being sold cited increased regulation as a driver behind the sale. The Fed’s extension of low interest rates isn’t helping either, as banks see their profits erode.

“It’s harder to grow earnings, grow revenue in the environment we’re operating in for all the banks,” Huntington Bancshares CEO Steve Seinour told Bloomberg. “And there’s still more regulatory expectations and more burden, if you will, coming. Those factors will influence more combinations in the foreseeable future.”

Huntington Bancshares is part of those “combinations” – the firm just completed its takeover of FirstMerit Corp.

Deals like Huntington’s, even at the current pace, aren’t going to create any Wells Fargo-style titans, according to Bloomberg. Many smaller banks don’t want to cross higher asset thresholds that trigger even greater regulatory oversight.

“There’s a reluctance of banks to join the ranks of what we call systemically important financial institutions,” attorney Kip Weissman told Bloomberg. “A lot of banks that are $20 or $30 billion are reluctant to go to the $50 billion size.”

But since those higher regulatory tiers trigger additional regulations, banks that do hit one of them will feel driven to grow even more, Bloomberg reported. For example, a bank that crosses the $10 billion threshold will probably need to grow its assets to at least $12 billion to get “an appropriate return,” Bloomberg reported.

And the regulatory forces that pressure small banks to combine can have a negative impact on local economies.

“(The smaller banks are) the pillars of their communities,” Bill Hickey, a principal and co-head of investing at Sandler O’Neill, told Bloomberg. “When a community bank goes away, that generally is not a good thing.”


  • by | 8/22/2016 11:44:49 AM

    Dodd Frank must be shut down. Dodd and Frank know nothing about the banking biz. These 2- morans Barney Frank and Chris Dodd re wrote a banking business killing law that slows down making money for our country and people. The CFPB must be shut down one man runs the CFPB , Richard Coraday a non banking person . He's just an attorney that enjoys destroying business's , people that have an excellent chance of earning a nice living he's a sick man. How this person Coraday was chosen by who else Obama to attack banks and never worked in a bank in his entire life goes to show you we need change a big one and that's stopping the democrats with their socialist laws. Writing laws for business's they know nothing about.

  • by KF | 8/22/2016 3:04:24 PM

    As a CEO of a small credit union for 37 years now I can tell you in certain terms that the cost of regulation has become a complete NIGHTMARE. Our credit union is healthy but struggling to keep up with the unbearable burdens put upon us since Dodd Frank. In fact, the amount of over-regulation and scrutiny feels like a "witch hunt". We have had to stop doing fixed rate second mortgages due to the increased cost of new forms to be in compliance with the newest round of regulations.


  • by gary | 8/22/2016 6:28:35 PM

    The reason that Barney Frank and others put the Dodd Frank into play- Payoffs and money that was sent their way. Proof of the pudding is that Barney Frank owns an appraisal management company. That means he stands to get paid as long as someone has to order an appraisal
    through this firm. SO this was set up to give banks an unfair advantage. The banks contributed to Hillary Clinton and the Clinton foundation. The banks can own 49.9% of the appraisal management company and not disclose that a portion of the money goes to the bank not showing in the APR. They do not have to disclose the fact that they make huge money on spreads. This was done to place the blame on brokers yet all the programs they say caused by brokers that caused the meltdown are still there. In fact there are programs that charge commercial companies and small businesses as much as 100% interest by advancing on cashflow. Where is the protection for the small business owner. People do realize that Dianne Feinstein's husband got he contract to liquidate the post offices commercially from OBAMA. No one ever got a chance to bid this and I am sure it is quite nice as far as fees. WHose foundation do you think this went to. The CFPB and the appointees are all in it together . They think they will have no one to answer and if they get caught doing something wrong than they will simply be pardoned.
    Unemployment numbers are bogus because it does not take into consideration those millions upon millions that stopped looking for jobs.
    Conflicts of interest run in a non ending fashion and the only way to stop this insanity is to throw all them out, prosecute for conflicts and crimes against AMERICA. Maybe even IMPEACH the crooks.


Should CFPB have more supervision over credit agencies?