Committee Visits ‘City of the Big Shoulders’ to Hear Concerns About Big Government Regulations
Posted by on December 05, 2011

The Committee on Financial Services held a field hearing on “Regulatory Reform: Examining How New Regulations are Impacting Financial Institutions, Small Businesses and Consumers in Illinois” earlier today.


At this hearing, representatives from community financial institutions and small businesses explained how new financial regulations are affecting the ability of financial institutions to extend credit and stimulate job growth.  The Committee also explored the effect of stringent federal bank examinations—examinations that some financial institutions contend may be overzealous—on economic recovery.  

The Dodd-Frank Act directed federal financial agencies to promulgate more than 400 new rules.  Many financial institutions have expressed concern that the cumulative weight of these new rules— layered upon outdated, unnecessary, and duplicative regulations—will substantially raise compliance costs, thereby forcing financial institutions to curtail lending and investment activities that further economic growth. 


As evidence of increased compliance costs resulting from the Dodd-Frank Act, financial institutions point to the 2010-2011 edition of the Bureau of Labor and Statistics’ Occupational Outlook Handbook, which states that “increasing financial regulations will spur employment growth both of financial examiners and of compliance officers” by 31 percent over the years 2008-2018.  A recent PricewaterhouseCoopers survey estimated that regulatory changes will likely depress revenues, increase operating costs, and squeeze community bank profits.  In that survey, nearly 90 percent of banking industry leaders cited over-regulation as the biggest threat to business.


In light of these findings, critics have called on the Financial Stability Oversight Council (FSOC) to eliminate outdated or duplicative regulations and to perform cost-benefit analyses on new regulations before they are finalized.  In an August 2010 speech, Treasury Secretary Tim Geithner agreed that such efforts may be necessary:  “[W]e will eliminate rules that did not work.  Wherever possible, we will streamline and simplify.”  Deputy Treasury Secretary Neal Wolin echoed those sentiments before the Senate Banking Committee, testifying that “over the years, our financial system has accumulated layers upon layers of rules, which can be overwhelming.  That is why alongside our efforts to strengthen and improve protections through the system, we seek to avoid duplication and to eliminate rules that do not work.”  Despite the Administration’s stated interest in streamlining and simplifying regulations, in testimony before the Committee on October 6, 2011, Secretary Geithner conceded that the FSOC has not yet “made much progress” on this initiative.


In addition to their concern that existing and pending regulations will increase the costs of banking and credit, small business owners and bankers from across the country are also worried that federal financial examinations are inhibiting lending.  While some believe that low lending levels result from a lack of demand from creditworthy borrowers, many bankers claim that overly stringent federal examinations have stifled lending to creditworthy borrowers that would have otherwise been able to obtain loans.  In particular, bankers have said that the examiners’ application of mark-to-market accounting rules, loan classification guidelines, collateral valuation policies, and loss reserve requirements have contributed to stagnant economic growth.  Since the 110th Congress, the Financial Services Committee has held hearings to examine the “mixed messages” that federal regulators are said to be sending financial institutions:  while officials in Washington urge banks to “lend more,” field examiners are applying restrictive standards that make lending more difficult.  This hearing provided an opportunity to further explore how regulators can balance the competing goals of ensuring that the institutions they oversee are operated in a safe and sound manner while permitting them to fulfill their function as financial intermediaries between savers and borrowers.