, Salem, MA


February 28, 2013

Watson: Difficult options for banking regulation

Last week, I wrote about the Dodd-Frank Wall Street reform bill and its slowly unfolding rules and consequences. The original bill, and the ongoing process of writing provisions that guide the details of its implementation, are resulting in thousands of pages of regulations.

Preparing for last week’s column, I had a number of conversations with Mike Wheeler, president of Beverly Cooperative Bank, and William Howard, chairman of the bank’s board. Wheeler pointed out how unnecessary it is for Beverly Coop — a small, community bank with a responsible lending record — to be given additional regulations.

He has a valid point. This week again, Mr. Howard and I discussed that issue and the larger question of how to respond to the specific actions of the very large banks where they contributed to the 2008 financial crisis.

Regarding community banks — banks with less than about $1 billion in assets — Howard acknowledged that some of them got into trouble when the housing bubble burst. But their mistakes were not the machinations of the larger, investment banks. Instead, some community banks simply got overoptimistic about the seemingly ever-rising value of homes, and so lent too aggressively to ordinary subdivision developers — especially in fast-growing regions like Florida, Alabama and California. Their errors may have been primarily errors of judgment. Depending upon the kinds of loans they extended, there may or may not be new regulations that could be applied.

For example, is there a need for additional rules about capital leverage that would further define or limit the ratio of land development loans to risk-based capital? And if so, is this something better done by Dodd-Frank, or the FDIC?

When considering community banks like Beverly Cooperative, however, Howard said that perhaps the regulations can be appropriately tailored to create exceptions and qualifiers that recognize which banks, or bank actions, don’t need additional oversight.

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