Small banks switching regulators to avoid new rules; new outfit helps them compete for big loans

A growing number of U.S. community banks are changing regulators because owners say they want regulators who understand them, Jessica Silver-Greenburg of The New York Times reports. The Dodd-Frank financial reform law closed their old regulator, the Office of Thrift Supervision, and moved them to a new one: the Comptroller of the Currency, which many community bankers say only knows how to deal with "behemoth banks."

Some banks want to become credit unions. Nationally, 35 have applied to switch from national to state charters since July 2011. Some experts, though, say the banks are "regulator shopping." Former regulator James Gilkerson told the Times that the Office of Thrift Supervision was "a notoriously easy supervisor," and that switching to state and credit union regulators is "the next best thing." He said community banks are following a pattern: after financial crisis, lawmakers close a weak regulator and consolidate under a stronger one, then many banks try to find lenient alternatives.

Jennifer Kelly of the Office of the Comptroller of the Currency told the newspaper the agency is "dealing with a false perception that the OCC doesn’t understand community banks." She said the agency is committed to local regulation. Community bankers denied they are "regulator shopping." They say they want regulators that are "more in touch with the issues faced by the nation’s smaller banks, which are different from the ones faced by their larger national counterparts," the Times reports.

In an effort to help community banks, a former top adviser to Treasury Secretary Timothy Geithner, Lee Sachs, established BancAlliance last year. The firm helps small, community banks compete for large, high-quality loans outside real estate. Deborah Solomon of The Wall Street Journal reported last January that bank lending fell during the financial crisis, and the problem was particularly bad for small banks, which relied on real estate lending to make money. BancAlliance's goal is to "help firms with assets between $200 million and $10 billion move beyond real estate by pooling the resources of about 100 banks so they can compete for larger loans traditionally financed by big banks," including Citigroup and J.P. Morgan Chase. (Read more)