Over the past few years, the banking industry has been entrenched in a very volatile economic and regulatory environment. The number of regulatory enforcements and bank closings over the past three years have been astronomical. These actions have resulted in a very demanding regulatory environment that places a significant amount of pressure on banks, especially community banks.
Regulators tend to be very reactive, rather than proactive. With the identification of the failed practices of some of these banks, the regulators have realized the need to strengthen their own policy statements and new regulations. The number of new regulations in the last two years as a result of these regulatory actions has increased significantly. With the advent of the Dodd Frank Act and the new consumer protection agency created under Dodd Frank, I envision that the flurry of new regulations will continue over the next five years. While Dodd Frank places significant limitations on large banks, many fear that the unintended consequences will trickle down inadvertently to the smaller banks further down. This is what is being referred to as the unintended consequences of Dodd Frank. In fact, while the development of an enterprise risk management is only required under the Dodd Frank Bill for institutions over $10 B or more, we already see regulators imposing this requirement on banks much smaller.
I can see the possibility of a scenario that if Washington does not act in any significant manner to contain this growing regulatory burden on small community banks, some small banks may either have to merge with other small banks or sell to larger institutions simply because they will not be able to manage the cost infrastructure to facilitate the escalating requirements.
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