While the new wave of banking regulation may portend of doom and gloom to some, there is still a light at the end of the tunnel for many businesses.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed two years ago as a result of the economic downturn, contains about 400 new regulations for the banking industry.
“That’s a significant increase in regulation for the industry,” says Paul Murphy, president and CEO of Cadence Bancorp LLC. Some of these regulations, he says, go beyond where the problems existed and into areas that were already well regulated, which could potentially lead to over-regulation. In addition, Basel III, the new capital standards guidelines for the international banking community, will begin to be phased in over the next three years. By 2015, all banks will be required to have the same definition of and same types of capital requirements, which theoretically will create more stability in the system. This means that banks will need more capital to do the same amount of business that they did prior to the changes.
“The question becomes, ‘How are you going to raise the capital required to be in compliance?’” says Murphy. “Over time, banks will have to charge a little more than they have been and their net interest margins will have to be wider to provide for the additional capital requirements. And while we are concerned about too much regulation, the safety of the financial system is key to America’s growth. I believe the regulators are aware of these issues as we move through this process.”
Smart Business spoke with Murphy about the regulatory climate for banks and how it will impact small- to mid-sized businesses seeking loans.
What has been happening to small banks?
The number of banks sold in 2010 was 130, and 118 of those had less than $1 billion in assets. In 2011, 124 banks were sold, and 112 of them had less than $1 billion in assets. This year so far, 83 banks have sold, and 74 had less than $1 billion in assets.
The trend is compelling — small banks are going away and very few new ones are being chartered. Banks are getting bigger because they can effectively spread the cost of regulations across their base of assets. Bankers are in the midst of coping with these regulations, which ultimately will continue to drive banks to merge or to acquire smaller banks because the cost of compliance is significant.
How will the new regulations impact businesses?
The concern for business owners is that, as banks become more regulated, it stifles the industry, inhibiting banks from taking reasonable risks, and reasonable is an important word. You want a banker to believe in your business and support you with good loans at good rates. But if banks become too concerned about regulations, it could limit their ability to provide credit products.
Credit is the lifeblood of our economy. A healthy banking industry that is well capitalized and responsive is desirable because loans to businesses mean jobs. Banks are a critical part of our economy, and having healthy banks can lead to job creation. It is understandable why some people think there is less credit available today than there was in 2007. What is likely the case, however, is that, prior to 2007, the United States experienced credit excess, and today, we’ve settled back into modest credit availability. While some start-up businesses might not qualify for certain loans based on their risk profile, good borrowers and healthy businesses are still being funded.
How can the consolidation of banks to strong regional enterprises help small- to mid-sized businesses in this highly regulated environment?
Regional banks are big enough to have a range of products and services, work in diverse geographies and have strong capital that leads to a larger loan limits. Further, regional banks are well hedged across investments, which offer a stable, balanced platform. The size of these institutions also results in more competitive pricing when compared to smaller banks.
Also, in today’s economy, technology is critical to businesses. Regional banks can afford to invest in technology because they can spread the cost over a larger base of customers and they’re incentivized to make further investments because it can lower the customer’s cost of doing business. Banks can be true technology partners.
How can a bank help businesses operate more efficiently?
Banks can help businesses though the smart, effective use of technology. Technology lowers costs, improves controls, reduces paperwork and mitigates risks such as fraud.
For example, business owners who worry about security over the Internet should be aware that the 128-bit encryption has not been broken and has protected banking and many other data transfers across the Web safely and effectively. Further, with technology, you can have fraud protection software scanning for irregular transactions. Generally, data moves faster, account balances post quicker and more information is available to the owner of the accounts, which ultimately means greater security.
Knowing what is happening with your accounts on a more timely basis allows you to mitigate fraud. Banks can also ensure a company’s money is working for that company all the time, whether it is through such enhancements as an accounts receivable lock box or an accounts payable lock box.
Outside of banks, how else can a business acquire the capital it needs?
Another primary channel for small- to mid-sized business loans is in the private equity investment community, where you go to a group of investors who have raised capital for the sole purpose of investing. There are also angel investors, which can include family and friends willing to invest in your company.
Businesses can also get financing through factoring companies and leasing companies, which provide capital for equipment.
Paul Murphy is president and CEO of Cadence Bancorp LLC. Reach him at (713) 871-3901.
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