The problem with regulatory bodies

For any of you that don't know... I'm a banker. I've worked at and with bank's 8 years now. I worked at a bank that was closed by the regulators. And even after all of that I'm a big fan of the FDIC and its various bodies (OTS, OCC, etc). I believe that they are the reason that we have a strong banking industry. For those of you that don't understand how this works. Essentially, banks are (generally) required to pay for insurance on their deposits. As a condition for getting the insurance the insurance company (the FDIC in this case) gets to come in and dictate terms to you. Generally, the FDIC is charged with protecting depositors. They have extended this influence into the realm of loans based on the argument that unsafe loans put the depositors at risk. Some regulators have lost sight of this primary goal but, in general, the regulatory bodies do a pretty good job.

However, they all share a common problem, they are problem identifiers, not problem solvers. Their job is to come in and point out problems but they are, generally, not able to provide much insight into how to fix the problems that they identify. Every time they identify a new problem they create an industry scramble. People frantically seek professional help to assist them in solving the current problem of the month. 6 years ago it was Y2K, then it was system security, now it's concentration of credit. For most bankers, these come as pretty big shocks. For consultants, there's a frantic scramble to determine what information is out there and try to educate themselves so that they can actually assist their clients. For regulators, there become a need to see solutions despite not knowing what the solution is supposed to look like.

My understanding is that the problem is actually generated by the large banks. Regulators have a very symbiotic relationship to larger institutions. Some accuse them of being too close. I don't think this is the case. I do, however, believe that certain mandates are originated because of the education by osmosis that occurs. For example, Regulator A gets assigned to Big Bank. After working their for a couple months he sees the very interesting reports that are generated by Big Bank's new analytical software. The reports show historical trends for every conceivable portion of the Bank's portfolio and they cross reference it to any of a number of variables. They identify problem sectors in the portfolio based on geography, product type and a host of other factors. Now, Regulator A thinks these are great. Big Bank has managed to identify and address several areas that look like they could have been serious problems. Regulator A's next job is in Small Bank. Now he applies what he's learned at Big Bank and is shocked to see that Small Bank doesn't have any kind of analysis of its portfolio. So he writes them up.

Regulators are intimately aware of the differences between large banks and small banks. However, I believe that they do not properly recognize that there are two types of small banks. There's regional banks and community banks. Regional banks tend to be statewide and sometimes multi-state. They have assets less than $10 billion and they are generally growing through acquisition. Community banks tend to be in one or two cities. They have assets less then $500 million and they are generally growing through expansion and occasionally merger.

These two entities have very, very different needs and capacities. The regional banks can diversify in ways that the community bank cannot.

That was just me venting... sorry to bore you...