Regulatory burden restrains credit unions
Sunday, June 5, 2016
Minneapolis Star Tribune (June 5, 2016) - Minneapolis Federal Reserve President Neel Kashkari has been making a lot of waves lately about banks that are "Too Big To Fail" and could require another bailout during an economic downturn. When speaking recently at the Economic Club of Minnesota, he suggested that there is too much focus on interest rates, and that there are more things that should be focused on in monetary and financial regulations.
One of Kashkari's less covered ideas is to relieve the regulatory burden on credit unions and smaller banks.
Recently in the Wall Street Journal, he was quoted as saying that breaking up the big banks could be beneficial to smaller banks, some of which argue that regulation instituted since the crisis is overly burdensome and unfairly targets them. "If we can truly address the risks posed by large banks, perhaps we can relax the burdens small banks are facing," Kashkari said.
While Minnesotans have joined credit unions at a record pace over the past decade, the regulations that Congress imposed during the financial crisis have had an unintended impact on the financial cooperatives that don't raise capital from Wall Street, but rather are locally managed and owned by their members.
A recent study by the Credit Union National Association found that Minnesota credit unions have incurred $102 million in costs directly related to the increased regulations, and $18 million in lost income to credit union members. These impacts are considerable in terms of the scale of a credit union's operation, and include costs of staffing, third-party expenses, capital expenses and reduced revenue opportunities.
Since the financial crisis, credit unions and banks have been subjected to more than 200 regulatory changes. The study found that the regulatory costs for credit unions were 15 basis points higher than they would have been without the changes. In fact, one in every four employees' time is now spent on "regulatory compliance."
Credit union CEOs noted that the strategic impact of these cost increases directly affects member benefits — noting that these funds would have been used for better member pricing, better service delivery and institutional strengthening.
U.S. Rep. Tom Emmer of Minnesota also has championed the idea of less regulation for community financial institutions. In a news release regarding the Home Mortgage Disclosure Adjustment Act, he is quoted as saying, "These unnecessary regulatory hurdles will make consumer credit — like mortgages, car and small business loans — more expensive thus harming those with modest means the most."
Emmer is one of seven members of the Minnesota delegation supporting the regulatory changes. The bipartisan effort includes 329 members of Congress who signed a letter to the Consumer Financial Protection Bureau (CFPB) urging it to use the authority Congress granted it to protect credit unions from regulation meant for the big banks that caused the financial crisis. This letter cites a section in the Dodd-Frank Act in which the CFPB has "the authority to adapt regulations by allowing it to exempt 'any class' of entity from its rule making." The letter adds, "with major rules already being implemented and new regulations on the horizon, our letter reminds the CFPB that Congress intentionally provided for regulatory flexibility to mitigate collateral damage on smaller financial institutions." We are pleased seven of Minnesota's eight members of the House signed the letter, and encourage Congress to fix the problem and tell regulators to ease the excessive burden that is being placed on credit unions and their members.
Minnesota's credit unions have been growing despite the regulatory burden because consumers and small business have come to trust local, not-for-profit credit unions after the financial chaos of a few years ago.
Credit unions recognize that they operate in a regulated industry and must bear reasonable costs of regulation. However, the "one size fits all" approach to regulation is ineffective.
Credit unions and small banks have disproportionately paid the price for the bad acts of big banks. During the financial crisis, these big banks had to be bailed out by taxpayers, while financially sound credit unions were there to help members weather the storm. Despite not causing the problem, credit unions face the same expensive regulatory burdens and this hurts consumers and small businesses.
While Kashkari's statements continue to make headlines, it's the details of his plan that will create jobs and help grow our economy further.
Mark Cummins is CEO of the Minnesota Credit Union Network.