Former FDIC chair shares concerns about costly new regulations

Sheila Bair explains for Fortune readers why the new federal Volcker Rule could create problems for smaller companies that lack the resources to deal with its complexities.

Regulators at last have finalized the Volcker Rule, which bars banks from speculative trading. For that, they should be commended. Unfortunately the 71-page rule, which comes with 900 pages of explanations, has renewed debate over mounting regulatory costs and whether the benefits outweigh them. J.P. Morgan Chase — whose halo in Washington has been replaced by a big bull’s-eye — estimated in 2011 that its increased costs for compliance and controls would be about $3 billion over the “next few years.” But JPM, which generated $56 billion in earnings since 2011, can handle it. And if better controls help the bank avoid litigation and incidents like the $6 billion London Whale trading loss, it will be money well spent for its shareholders.

The benefits are less clear for regional and community banks. Many of the new regulations have hefty, fixed startup costs, which disproportionately impact smaller institutions. For instance, Buffalo’s M&T Bank estimates that its annual compliance costs have nearly doubled, from $50 million in 2003 to $95 million in 2011, more than 10% of its 2011 earnings. Similarly, at a recent conference at the St. Louis Federal Reserve, one state bank survey reported that compliance costs are eating up 10% to 15% of community-bank earnings. The irony is that most small banks did not make dodgy mortgages or hold the high-risk derivatives that created losses for the big banks.

While I strongly support financial reform, I would be the first to admit that more is not always better.

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