Community banks face fallout from proposed reforms aimed at Wall Street

By Bob Keefe and Paul Donsky

The Atlanta Journal-Constitution

WASHINGTON -- Financial reform legislation designed to rein in abuses by big banks and Wall Street firms may have some unintended fallout: more pain for Georgia's hard-hit community banking industry.

Under legislation making its way through Congress, small community banks would have to "geocode" deposits to track where they come from; collect and submit additional data to the government about loan applicants and meet a whole host of regulations from a new federal agency designed to protect consumers from risky Wall Street investments that most community banks don't make in the first place.

All of that means more paperwork, more expenses and more hassle, community bankers complain.

“It’s a piling-on effect for us," said Dan Blanton, CEO of Georgia Bank & Trust in Augusta. "It’s kind of gotten to the point where I think Congress wants us to be a nonprofit provider of financial services.”

Billy Mayhew, CEO of Douglas County Bank, said reforms should be focused on big Wall Street firms that sparked the financial crisis, not on small banks like his that are suffering amid the resulting economic downturn.

“A lot of the new rules and regulations don’t have anything to do with Wall Street," Mayhew said, "and they are hurting us."

It's not surprising Georgia's community bankers are skittish about new regulations they say will cost them more time and money. The state is mired in one of its worst banking crises in history.

Since 2008, 37 Georgia banks have failed -- most of them small community lenders. The number of bank failures is more than any other state. And at least half of Georgia's 300 community banks are in enough distress to be facing increased federal oversight.

Yet most of the bank failures in Georgia had nothing to do with the problems Congress is trying to cure on Wall Street.

Industry leaders say most of the bank failures in Georgia resulted from the meltdown of the real estate market and the lousy economy -- not from risky investing and mismanagement the likes of which shook the foundations of Wall Street and prompted President Barack Obama and congressional Democrats to pursue financial industry reform.

“Community banks did not cause the financial crisis, but like many other businesses and Georgians, they are struggling with the consequences," said Joe Brannen, president of the Georgia Bankers Association.

Brannen said banks already must comply with more than 1,700 pages of consumer regulations. Adding more will only strain resources of community banks, he said.

“These banks would have to divert staff, technology and money to simply collecting data and filing new reports,” Brannen said.

That doesn't mean community bankers are entirely against the sweeping financial reform regulations that could get Congress's final approval next week.

Brannen said his group supports about 90 percent of the Restoring American Financial Stability Act making its way through Congress.

By far, the bulk of the legislation is aimed directly at big banks and Wall Street trading houses and designed to end taxpayer bailouts of banks deemed as "too big to fail."

Community bankers like that because it puts them on a more level playing ground with big banks and because it gets at the root of the financial industry meltdown.

"If you ask any community banker, they'll say, ‘No, we don't want new [paperwork and regulations] ... but yes, we do need to crack down on Wall Street,' " said Cam Fine, president of the Independent Community Bankers of America trade group.

Opponents to the banking bill have rallied around the potential effects of the legislation on community banks.

Community bankers "are frankly scared to death they're going to have too much regulation," said U.S. Sen. Saxby Chambliss (R-Ga.).

Backers of the bill, namely Democrats and the Obama administration, acknowledge that community banks may face some unintended new regulatory hurdles because of the bad behavior of big Wall Street firms.

But White House economic adviser Diana Farrell said community bankers could actually benefit because the proposed legislation will require their competitors such as payday loan companies and auto dealers to meet the same consumer protection regulations as banks.

David Axelrod, senior political adviser to Obama, said big bank lobbyists and Republican opponents to banking reform have overstated potential threats to community banks for political appeal.

Unlike Wall Street firms, "community banks are quite popular," Axelrod said. "So those who are lobbying against this bill would sooner make community banks the face of the opposition than Wall Street, and have in my view used community banks for their purposes."

Fine, of the independent bankers group, agreed, saying community bankers have become "political pawns" in the fight over the legislation.

In an unusual statement this week, Fine's group, which represents nearly 5,000 small and community banks, chastised lawmakers for using community banks as a political bargaining tool.

"Basically the opponents of the [legislation] are trying to use the good name and reputation of community banks as a shield to hide their true agenda, which is to advance the causes of Wall Street banks," Fine said.

Highlights of overhaul

Proposed financial reform legislation being debated in Congress would:

• Create new Consumer Financial Protection Bureau, housed within the Federal Reserve, that would require all banks -- including community banks -- to submit detailed information on deposits and loans and require them to get government approval for mortgages, loans and other financial products they sell.
• End taxpayer-financed bailouts of "too-big-to-fail" financial firms. It would set new capital requirements to make it undesirable for financial firms to get too big. It also would create a pool funded by the biggest banks that could be tapped to prop up large institutions to maintain economic stability. Community banks would not have to pay into the large bank fund.
• Limit how big banks can trade their proprietary funds and also limit how they can trade risky investment vehicles such as derivatives.
• Create a nine-member Financial Stability Oversight Council composed of financial regulators to identify and address risks posed by large institutions and certain types of financial products before they're able to damage the economy.