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Regulations chafe Alaska banks.

Alaska's bankers say they are shackled by the expenses and business limitations caused by increasing regulation.

For decades, Hollywood has portrayed them as fat cats whose idea of a good time is to foreclose on widows and orphans. As a result, bankers don't attract much sympathy from the public when they complain about regulations introduced in the name of consumer protection. Banks became subject to stringent rules after the Great Depression, and more recently, a rash of bank failures during the 1980s encouraged additional government oversight.

Bankers admit that some regulation is good for the industry. They add, though, that compliance with rules drives up the consumer's cost of financial services and, in some cases, limits the kinds of services banks continue to offer.

The banking industry had hoped that the Federal Deposit Insurance Corporation Improvement Act of 1991 would lighten its regulatory load and give banks new powers. But while the bill did address some concerns of the industry, overall it increased banking's regulatory requirements. Consequently, Alaska bankers consider the act one more burden to bear.

According to executives of the state's banking industry, an increasing number of mandates -- including some that affect not just banks, but all businesses -- are unfair or ineffective. Among requirements and responsibilities they cite most often as unnecessarily restrictive are those affecting appraisals, environmental liability, community reinvestment and disclosure.

Bankers are particularly incensed that many demands on banks do not apply to other vendors of financial services, thereby creating an uneven playing field; banks must bear additional costs as a result of many regulations and must follow operating practices that often restrict flexibility.

Willis Kirkpatrick, director of banking, securities and corporations for the state Division of Banking in the Alaska Department of Commerce and Economic Development, believes that banks are overregulated. He says many of the "extremely voluminous" rules have little to do with the business of commercial banking and should be eliminated.

Kirkpatrick points out that although banks are regulated as if they were monopolies, the interest rates they receive from the Federal Reserve Board are determined by competitive market forces. "The problem is that banks have become regulated to the point where they're like a public utility. But, of course, they don't have any way of setting their own rates like a utility," he explains. "There's no guarantee a privately funded and highly regulated bank can make a profit."

Robert Gray, president of Anchorage-based National Bank of Alaska, says the 1991 Federal Deposit Insurance Corporation Improvement Act created 40 to 100 new regulatory initiatives. The Federal Reserve System has created 60 task forces to write regulations to implement the act. "We now have regulations numbering from A to CC, and just one -- the truth in lending law -- is over a thousand pages long," says Gray.

Tim Rueter, compliance officer with First National Bank of Anchorage, notes that 44 major changes in banking regulations have been passed in the last five years, all of which have increased paperwork and cost to the customer. Old regulations are constantly "fine-tuned," he points out.

Lengthy and complicated rules affect not only bank officers, but all bank employees, creating stress for workers and training challenges for management. Pointing to a long list of banking regulations, Gray says, "Our teller in Barrow is supposed to understand all this. We can't have tellers with law degrees."

An unintended result of regulation is increased consolidation, contends Ralph Holliday, president of Bank of America Alaska (formerly Security Pacific). The cost of complying with these rules is a big factor in a wave of buyouts and mergers in the banking industry, he says. Because regulations and reporting are uniform for all banks, expenses are greater for small banks that have fewer branches from which to generate revenues that offset costs; larger banks can reduce administrative costs per branch.

Playing with Handicaps. Inflaming banker ire over an increasingly heavy regulatory burden is growth in other financial service industries that provide many of the same products without being required to follow all the rules. Brokerage houses, credit unions and companies selling mutual funds or insurance offer competitive services. Various deposit, saving and loan products are available from bank competitors.

Says National Bank of Alaska's Gray, "People think we're in the banking business, but actually we're in the financial services business. Virtually every service we have is offered by someone else." He notes that General Electric and General Motors Acceptance Corp. are the country's two largest lenders.

"It's not equitable when one competitor has costs imposed on it by the federal government that others do not," Gray says. "These costs can't be passed on to the consumer. It comes out of our hide. People go elsewhere."

Bankers also feel that the competition is weighted because commercial banks are not allowed to participate in certain kinds of financial business. Gray cites securities brokering and the ability to underwrite stock sales as examples. European and Canadian banks are authorized to broker securities, while Japanese banks will begin underwriting stock sales in the near future. Insurance brokerage is another area permissible for banks in Europe and pending in Canada.

Bankers also complain that they -- but not mutual funds managers -- are required to keep reserves against checking and interest-paying NOW (negotiated order of withdrawal) checking accounts. Those mandated reserves, for which the banks receive no interest from the Federal Reserve, can be as high as 10 percent for amounts of more than $40 million.

Michael Burns, president of Key Bank of Alaska, calls such reserves a hidden tax on the industry. "It would be one thing if these funds went to support the banking industry, but the money goes into general funds," he says. "The Federal Reserve could bring the reserve requirement to zero, but they won't do it because the money is used to offset the federal deficit. The money is not a big number for the deficit, but is a big number for banks."

Ripple Effect. Bankers resent not only rules that hinder them competitively, but also regulations designed as consumer protection that they feel are unnecessary and drive up costs. The customer ultimately pays, bank officials note.

A case in point is the Community Reinvestment Act, a regulation designed to make banks responsive to the credit needs of the communities they serve and ensure that residents can obtain housing and business loans. The state's Division of Banking's Kirkpatrick says CRA, first passed in 1977 and amended in 1989, is an example of a rule that developed in response to an isolated instance but affects a whole industry. The Community Reinvestment Act was passed because some banks in Chicago, Ill., were refusing to lend -- "red lining" -- in black neighborhoods.

The state's bankers feel that the act's intent is good, but contend that red lining is rare in Alaska because of different social and economic conditions. They argue that documentation requirements of the act create massive paperwork but produce little social benefit.

National Bank of Alaska's Gray says compliance with community reinvestment regulations is labor intensive. "Virtually everything we do must be documented for CRA," he says. "There is a three-page checklist of compliance categories, and we have to keep records on all of them." Categories requiring CRA documentation include not only loans granted and refused, but also marketing and advertising, employee training, business hours and participation in government programs.

Gray notes that brokerage houses, insurance companies and credit unions are not bound by the regulations. Although some credit unions do meet CRA requirements, those financial institutions are not similarly handicapped by the expenses of documentation, according to Gray.

Community reinvestment is a good idea that went totally awry, says Key Bank's Burns. He notes that although his bank just completed its first CRA review and received a good rating, the firm is following the same lending policies it always has. "But now we've got two full-time employees and we've got to pass that expense on to the customer. And not one person has asked to see our CRA rating," Burns adds.

Increasingly in recent years, environmental liability concerns are keeping bank officers up nights. Says First National Bank's Rueter, "The law is completely haywire. The rules change; Department of Environmental Conservation keeps changing its mind. Basically, whoever enters into title of a property has unlimited liability for 100 percent of their assets."

Gray says that even with an environmental assessment on a property, TABULAR DATA OMITTED which is another expense for the borrower, liability is possible. Concerns about such liability have had a chilling effect on commercial loans -- and, consequently, the viability of certain projects -- because of possible environmental trouble.

Another rule directly affecting bank customers is one that requires an appraisal, paid for by the borrower, on any property offered as collateral for a loan of $100,000 or more. Burns regards appraisal regulation as a knee-jerk reaction to the savings and loan problems. Ironically, many of the bad deals of the 1980s were well documented, he adds.

"Most of the time, it takes two to tango in a bad loan -- a bad borrower and a bad lender. But now you've increased the cost to legitimate borrowers," Burns says. "It's really burdensome here in Alaska because the appraisal depends on local conditions. How can you get an appraisal on an aircraft hangar in Dillingham?"

Rueter would add truth-in-lending and savings regulations as a cause of needless expense. The rules require that borrowers and savers be informed completely of all the provisions of each transaction. Although only one out of a hundred customers reads the information, compliance generates a lot of paper that then must be stored. Rueter says the public would be better served if the information was available to the customer on request.

Total Tally. How expensive is compliance with federal regulations? Noting that the cost of regulations is difficult to determine, because it includes legal fees to examine every new product or advertising campaign, Burns estimates that Key Bank of Alaska spends $400,000 a year to meet federal standards.

Rueter explains that First National Bank added two employees since the first of the year to specialize in community reinvestment and appraisals. Perhaps the most revealing estimate comes from First National's comptroller, Jason Roth. A survey taken by his department found that each of First National Bank's employees, from upper management to tellers, attends four meetings with staff and nine meetings with customers a week to discuss regulatory matters. He estimates this consumes about 12 percent of all employee time and costs $3 million a year.

The customer ultimately pays for such expenses through the cost of services rendered by banks. Also, some regulatory expenses are charged directly to the consumer. As an example, Rueter notes that the combined fees for an appraisal and an environmental audit of a property offered as collateral in a business loan of $100,000 can be about $4,000.

Burns says regulations force banks to spend a lot of money remedying small mistakes. He suggests that government regulators should strengthen penalties for wanton violations and worry less about harmless errors. He points out that even a mistake in the customer's favor is considered a violation of the law.

Bank of America's Holliday points out that money spent on compliance is money not spent on improving other services. "We've come from traditional banking to ATMs (automatic teller machines) and home banking. This has required substantial capital investment. If we could cut the cost of regulation, we could spend more on these kinds of investments and better serve our customers."

Says Burns, "I think Congress misses the point -- the more you protect the consumer, the more it costs. Regulations that protect the many make services unavailable."

Reg Relief? Bankers see little hope of having their regulatory load lightened anytime soon. Holliday says a complete overhaul is necessary: "We need a complete review of the regulatory side of banking to determine what protects consumers and ensures safety and soundness. Then we need to get regulations simplified and controlled to cut the cost of operating expenses. To isolate one regulation wouldn't make sense."

National Bank of Alaska's Gray says he agrees with an American Banking Association recommendation that banks be allowed to create financial services holding companies to operate various businesses, each regulated by function. He also believes that community reinvestment requirements should be applied to all providers of consumer financing and deposit services.

But Rueter points out that every attempt to reduce regulation has in fact added another layer. He says, "It used to be, our chairman, Dan Cuddy, told us not to worry about the law, for if you did what was right and honest, you wouldn't run afoul of the law. In the last 10 years, this advice has been rendered useless."
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Author:Gerhart, Clifford
Publication:Alaska Business Monthly
Article Type:Industry Overview
Date:Aug 1, 1992
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