Recently, Robert Hopkins, senior branch executive of the St. Louis Fed's Little Rock Branch, talked with Richard Trammell and Cole Martin regarding the state of community banking in Arkansas today following the July 21 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Trammell is the executive director of Arkansas Community Bankers (ACB), which represents 134 state-chartered banks in Arkansas. Martin is chairman and CEO of First Security Bank of Clarksville, Ark., a $105 million asset bank, which is part of a $4 billion holding company. Martin currently serves as president of ACB.
Robert Hopkins: How do you define a community bank in 2010?
Richard Trammell: From ACB's standpoint it is any bank chartered in Arkansas that gathers deposits locally, makes loans locally and makes decisions locally, which in essence defines most banks in Arkansas today.
Hopkins: How does the U.S. benefit from having a dual banking system in 2010 and beyond?
Cole Martin: From my perspective, it provides banks, and ultimately their customers, balanced and improved choices. During the financial reform debates, I was concerned that we would move away from that and end up with one super regulator. I'm pleased we did not end up there. I think that would not have served the country well.
Trammell: The state banking regulators are locally situated and are in a better position to assess what is going on in local markets, pick up on issues or problems earlier and help banks address them before they become
Hopkins: What are your overall impressions of the final Dodd-Frank Act in meeting the administration's goal of ensuring we never have a recurrence of the recent financial crisis?
Martin: Our primary position all along has been that community banks do not need any new regulations; we did not create the problems that led to the crisis and therefore do not need more regulatory burden. Having said that, and knowing that reforms were going to take place, we fought successfully for a number of things.
Trammell: I don't think we can answer that question yet. The first phase was putting a new regulatory framework in place; Congress and the president did that with the passage of the Dodd-Frank Act. The next phase will be the federal regulators interpreting the intent of the Act's provisions and crafting regulations for financial institutions and others to follow. So, it is too soon to judge if this piece of legislation ensures their overarching goal is met. I will say, because they did not address Fannie Mae and Freddie Mac, it is doubtful that this legislation alone will prohibit
a recurrence of a similar crisis.
Hopkins: Some believe that community banks fared well and were in fact winners as a result of the Dodd-Frank Act. Do you share that view?
Martin: We went in to the reform debate determined to mitigate the impact on community banks, which did not cause the recent crisis. From ACB's perspective, I think we were largely successful. From a single community-bank perspective, that's less clear to me. Smaller community banks cannot afford any more regulatory burden, and we are bound to get more regulation as result of the Dodd-Frank Act.
Trammell: We focused on the amendment process, knowing that new legislation would likely pass. So, we worked toward getting reforms that would be beneficial to community banks. In this context, I think you can say we had some wins. One of the positives is an asset-based deposit insurance process; no longer are the assessments based on just deposits. So, community banks will be paying a proportionally smaller share than in the past. This is fair. We also now have a resolution framework to unwind so-called too-big-to-fail institutions. And they are now going to regulate non-bank entities (e.g., payday lenders), which has never occurred before and will level the competitive playing field for community banks.
Hopkins: How do you see the Act impacting community bank profitability and customers?
Trammell: It's certainly going to make it more difficult when you layer additional cost on for regulatory compliance. Depending on the magnitude, we may see an acceleration of community banks merging to get the economies of scale to handle the added regulatory burden and compete with larger financial competitors.
Martin: I agree that there will be more regulatory burden and associated costs. From a customer perspective, they likely will see more inconvenience and more paperwork and, perhaps, higher debit/credit interchange fees and generally higher prices. The question will be how much the community banks can pass along the added cost from new regulations to the consumer. That is, can they remain competitive while passing on additional cost? That remains to be seen.
Hopkins: How do you see existing community bank business models changing as a result of the Dodd-Frank Act?
Trammell: I recently asked a number of the ACB board members what they see as the "new normal." Four things emerged: tighter loan underwriting, less aggressive deposit gathering, balance sheet and margins shrinking, and increased regulatory burden. I'm not sure that translates into a new business model for community bankers, but these are the changes they see for the foreseeable future.
Hopkins: What changes to community banks' products and services do you see following the passage of the Dodd-Frank Act?
Martin: Until we see the specific new regulations, I don't think we know what new products and services will result. We will see a continued conservative mindset for the near future.
Hopkins: How do the community banks you represent see the economic recovery unfolding?
Trammell: Arkansas just recently begun to feel the effects of the recession. So, I see slow growth ahead for awhile longer. This downturn, while severe, will end and we will see solid growth. We just need to have more clarity from the changes recently enacted, which will build confidence in business and their customers.
Martin: I think we are in a period of stagnant growth for awhile. There is a lot of waiting and watching for signs of improvement. There is so much uncertainty related to the Dodd-Frank Act and the recently passed healthcare legislation that, for example, banks and their commercial customers are on hold until they gain a clearer picture of the business environment and the impact from these sweeping but as yet undefined legislative changes.
Hopkins: Looking out 10 years, what does the environment look like for community bankers?
Trammell: My crystal ball is not that clear. I still think there will always be a need and opportunity for community banks and bankers because the small communities across this country depend on them. I think we will see more community banks merging going forward in order to gain scale and remain competitive. Community bankers have been creative, innovative and resilient. They will figure out a way to deal with change and do so profitably.
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