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Opinion

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Illinois Business Journal

November 2012

Community banks: Compliance is threatening to make them an endangered species

If you havent yet read page one of this edition, you might be surprised by the above headline that says compliance is the biggest challenge facing community banks today. Before doing the research and interviews for this story - and until recent conversations with our banking Smith friends - I might have guessed that sustained low interest rates into 2014, paired with community banks already-tight margins and limited fee income, were their biggest hurdles. But it is indeed true. Compliance, a snowballing amount of it, is far and away the biggest threat to community banks. From what community bankers, their trade associations and lobbyists are telling us, its sucking them dry. If you havent yet read page one of this edition, you will see that Basel III (top story by Al Ortbals) is being deemed by bankers as the 10,000-pound elephant in the room; it is gaining international herd momentum, threatening the very survival of community banks. My story (page one, middle) on the Dodd-Frank Act and other pieces of federal legislation (we didnt have the space to talk about state compliance regs, too) shows how community banks are under increasing pressure from more and more rules that are being imposed upon them every calendar quarter. Sure, the big banks have to follow the same rules. And that means the big banks are getting inundated with compliance requirements from federal regulators, too. But big banks are what their name too obviously implies: big. Theyve got the people and the financial resources with which (to at least try) to keep pace with the regulatory onslaught. According to the Illinois Bankers Association, the median size bank in Illinois has fewer than 40 employees. A typical community bank today has at least three employees dedicated to regulatory compliance, six times greater the personnel than what was needed five years ago prior to the financial meltdown. Does it not seem obvious that in their desire to protect consumers, the major banking industry regulators - the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau (the entity created under Dodd-Frank) have overreached? Kinda sounds familiar, doesnt it? Like when the feds over-raised and over-tightened lending standards in response to the subprime mortgage meltdown? Its not as if federal regulators arent aware that theyre choking the life out of community banks. Community bankers have made their voices heard loudly and clearly in Washington. For example, a petition opposing Basel III, first circulated in July by the Independent Community Bankers of America and calling for an exemption for smaller institutions, has garnered nearly 15,000 signatures representing nearly 4,200 banks nationwide. It has since been presented to regulators. In another example, both the Illinois Bankers Association and the Community Bankers Association of Illinois have accompanied their members - executivelevel bankers from institutions in Southwestern Illinois and across the state - to the nations capital repeatedly over the past two years to testify to the overwhelming, nonstop slew of compliance rules and regs. Dennis Terry, president and chief executive officer of First Clover Leaf Bank in Edwardsville, is among those who has persistently worked to convince regulators that the vast number of compliance rules and regs, the cost of implementing them and the unrealistic timeframe in which banks are expected to make this happen could well mean the end of a good many community banks - and the end of a lot of good that they provided to their local communities. He and his colleagues dont seem to be getting through to the rule makers, however, that there need to be two sets of rules: one for the big banks and one for the smaller institutions. Were grateful to have nationally respected industry leaders like Dennis Terry in our corner. We hope he and others are successful in getting regulators light bulbs to turn on. In recent Congressional testimony, the American Bankers Association told the House Subcommittee on Financial Institutions and Consumer Credit that the cumulative impact of years of added regulations has reached the tipping point, dramatically increasing compliance costs and threatening the future of community banks. About 1,500 community banks have disappeared from their communities just over the past several years due to this issue. It would be sad to see the demise of any of our community banks due to a onesize-fits-all regulatory structure that does not fit these institutions, their business plans or the communities they serve. Ask your community bank executive what you can do specifically to send a message to Washington that in this case, more isnt better. Kerry L. Smith is president and chief executive officer of the Illinois Business Journal. She can be reached at ksmith@ ibjonline.com.

Illinois should adopt a progressive income tax and put its fiscal house in order
The Point/Counterpoint is one of the more popular features of the Illinois Business Journal. Readers tell us that they like to get both sides of an issue and decide for themselves where they stand. For that reason, Kerry and I dont take stands on Point/ Counterpoint issues - at least not in the same edition. Ortbals This months Point/Counterpoint topic is the referendum to amend the Illinois Constitution that is on the Nov. 6th ballot. The amendment would require a three-fifths vote to increase a benefit under any public pension or retirement program. Opinions both for and against are quite well presented by our Point/Counterpoint authors. There is no reason for me to break with our tradition and comment on the subject. However, the fact that we are holding a referendum to amend the Constitution on such a picayune subject when the state is sinking faster than the Lusitania, I find ridiculous. What a waste of time and money! If we are going to go to the trouble of amending our Constitution, we ought to fix our problems - not pussyfoot around them. Earlier this year, the state of Illinois adopted a FY 2013 budget that is expected to yield a $8 billion deficit. This you can add to the $8 billion backlog of unpaid bills, the nearly $80 billion in unfunded pensions and the nearly $45 billion in unfunded health insurance obligations. A lot of the state budget is out of the legislatures control - transfers of funds to local governments and service on debt, for example. That part of the budget that it does control -discretionary spendingwhich covers everything from education to public safety, has been cut drastically over the past 12 years. Higher education has taken a 40 percent haircut over that time period. Public safety, more than 20 percent. And theres no end in sight. Its not, as some would have you believe, that Illinois is a spendthrift state. Illinois already ranks 45th in taxes, 42nd in per capita spending and 50th in number of state workers per capita. We cant cut our way out of this. Im not saying that we dont have to modify our public employee pension plans; and we have. No retirees should be receiving a half a million dollars per year in public pension, as a few do, but the average is only about $22,000. Modifying our pension program is not going to right the ship. A fundamental flaw with Illinois budget is our regressive, flat income tax. Aside from being unfair in that it disproportionately afflicts the poor and lower-middle class, it provides a faulty base for the states fiscal house. As we have seen nationally, growth in income has become increasingly more lopsided over the past 30 years. This leaves states like Illinois dependent for more and more of their funding on taxpayers who are doing worse and worse. If you were launching a new business, would you develop a business plan that based the bulk of its revenues on customers with the least ability to buy? I think not. And an economic downturn simply exacerbates the problem. The wealthy have done just fine over the past four years, but as you work your way down the food chain, you find higher and higher unemployment, underemployment and stagnation or outright decline of wages. For a government that derives most of its income from a flat income tax, that spells disaster. The flat tax hits the state in the wallet in another way. Because low and lowermiddle income individuals and families spend everything they make, any taxes they pay means less money they have to spend in the economy. And that reduced spending means less sales tax for the state and local governments. Thats not true with the upper-income strata. Modest increases in taxes on the wealthy dont impact their spending habits at all. If, rather than dithering over the silly referendum on the November ballot, we were to pass a constitutional amendment to create a graduated income tax like our neighbor Iowa, we would raise more than $6 billion per year more in income tax revenue while reducing taxes on more than half of Illinoisans. And that would generate more spending by those 54 percent and more sales taxes for state and local governments. If youre worried about being the odd man out, dont be. Thirty-five other states have graduated income tax structures. Its about time we joined them, established a pragmatic income tax structure and put our fiscal house in order. Alan J. Ortbals is vice president and chief operating officer of the Illinois Business Journal. He can be reached at aortbals@ibjonline.com.

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