Hartford Business Journal

8 Hartford Business Journal • February 27, 2017 www.HartfordBusiness.com FOCUS BANKING & FINANCE development — and something they'd like to see done in the next 12 to 18 months. Lindsey Pinkham, president and CEO of the Connecticut Bankers Association (CBA), said Dodd-Frank is constrict- ing community lenders' ability to conduct business. He said regulatory compli- ance costs, including the addi- tional manpower and outside advisors banks have needed to hire, have cut into profits, forcing some lenders to merge because they've had "trouble complying with all this stuff." "And this is not a new mes- sage. The industry has been saying this since 2011 but the political climate has not been conducive to change," he said. Broadly speaking, many local bankers say they want to see the federal rules adjusted based on a lender's size and scope. More specifically they'd like changes to how bank charters are written, mortgages are made and com- pliance is handled. "The regulations should be tailored to the risk and business model of the institution instead of one size fits all," said George W. Hermann, president and CEO of Windsor Federal Savings Bank and treasurer of the Amer- ican Bankers Association. "Well- intentioned legislation intended to stem systemic problems in the industry has trickled down and stifled the ability of community banks like ours to be able to meet the credit needs of our community." A U.S. Senate bill that would create a tiered regula- tory approach — called The TAILOR Act — was intro- duced last year but died in Congress, Hermann said. That legislation has been brought up again this year, in front of a Republican-led House, Senate and now execu- tive branch. The TAILOR Act would allow federal regulators like the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) to tailor regulatory action based on a bank's size and risk to the overall financial system, limiting compliance costs and liability risk to smaller institutions. "In theory, Dodd-Frank wasn't intended to affect community banks but in practice it has," adds Rheo Brouillard, president and CEO of the Willimantic-based Savings Institute Bank & Trust ($1.6 billion in assets), noting that community banks pose less risk to the coun- try's financial system than larger banks. Shrinking bank landscape Wayne Abernathy, executive vice president for finan- cial institutions policy at the Washington, D.C.-based American Bankers Association, said Dodd-Frank rules have prevented new bank formation in the United States and forced some small lenders to merge. Indeed, consolidation of U.S. banks, the vast major- ity of which are community lenders, has been dramatic since 2008, when there were 8,305 institutions in place, Abernathy said. As of the third quarter of 2016, that number dropped to 5,980, FDIC data shows. The number of banks headquartered in Connecticut has fallen 25 percent since just prior to the financial crisis. There were 56 Connecticut-based banks at the start of 2008 compared to 42 at the end of Sept. 2016, according to FDIC data. Smaller banks in particular, with less than $100 mil- lion in assets, have become a vanishing breed. There were three lenders in Connecticut in that asset-size range at the end of September, compared to 10 in 2008, FDIC data shows. "More than 60 banks are disappearing every quar- ter," Abernathy said. "The trend for the past several years has been, one bank disappears every business day and that trend hasn't let up." Of course, there are myriad reasons for the shrink- ing bank landscape, not all of which are attributable to tighter oversight. And, while regulations may be adding to costs, it didn't stop Connecticut banks from enjoying one of their most profitable years ever in 2016. Through Sept. 30, the latest data available, the state's 42 FDIC-insured banks posted a collective $562 million in profits, up 7.4 percent from the year-ago period. Meantime, there are many policymakers and others who support Dodd-Frank. Connecticut Banking Commissioner Jorge Perez said his agency is "skeptical of efforts that would roll back any consumer protections," adding that his department has been exploring the potential impact of Trump's executive order on Connecticut consumers and the financial industry. "The Department will oppose any measures that would adversely impact either Connecticut consumers or the institutions we regulate," he said. "The primary mission of the Connecticut Department of Banking is to protect Connecticut financial-service consumers from unlawful or improper practices." Changing criteria for qualified mortgages One specific reform local bankers say is needed relates to mortgages. An unintended consequence of Dodd-Frank that can hamstring community banks is the strict criteria for identifying a home loan as a quali- fied mortgage, which is a mortgage that is highly likely to be paid back. The change was made, bankers note, to help the industry avoid the risky mortgages made during the housing crisis that were sold off to other financial lend- ers (not necessarily banks) and resulted in homes being underwater and foreclosed upon. If a loan doesn't meet qualified-mortgage standards, the borrower can turn around and sue the lender for making a loan that the borrower couldn't comfortably afford, bankers say. For example, Geitz said, a first-time homebuyer who has a debt-to-income ratio above the current qualified Bankers want mortgage-rule changes from page 1 Q&A Talent recruitment key threat to CT's financial- services industry Q&A talks to James T. Brett, president & CEO of The New Eng- land Council, about the current and future state of Connecticut's financial-services sector. Q: The New England Council, a nonparti- san business advocate, recently released a report that found Connecticut's economy relies on the financial-services sector more than any other New England state. What constitutes financial services and how big of an impact does the sector have on Connecticut? A: The report focuses on three major sectors that define the financial-services industry — banking, insurance, and asset management. Col- lectively, they employ 112,000 individuals in Connecticut directly, and contribute anoth- er nearly 210,000 indi- rect or induced jobs. As such, the industry was responsible for 14.1 percent of all state employment in 2015. Additionally, the industry contributes to roughly 20 percent of the state's Gross State Product. Q: Within financial servic- es, what sector can we expect to see the most growth from in New England and Connecticut over the next five years? A: The emerging financial technology, or FinTech, space is an area ripe for growth. Through early 2016, the total investment in FinTech startups founded in New England stands at over $750 mil - lion. It is yet to be seen exactly how these technological innovations will impact jobs, but financial firms of all sizes have already recognized the key role FinTech stands to play in the industry's future. Q: There are rumors that Aetna might move to Boston. What is the biggest threat to maintaining a strong financial- services sector in Connecticut? A: The greatest threat to the region's financial-services sector is the need for an adequately sized, skilled workforce. Without bank tellers, retirement advisors, and insurance agents, the financial- services industry would collapse. It is critical that we work to main- tain an ecosystem where gradu- ates from our area's colleges and universities stay here in New Eng- land to work in their chosen fields. Q: What are some policy changes the Council would like to see in Connecticut and/ or New England to support the financial-services sector? Where does the Council stand on President Trump's vow to reduce financial regulations? A: In addition to a skilled work- force, the New England business community has long clamored for a tax reform measure, and it seems as if the possibility of undertaking such an effort is strong this year. It is no secret that the nation's tax code — which is over four times longer than the complete works of William Shakespeare — has long been in need of an overhaul. In particular, the Council would urge Congress to ensure that tax incentives for retirement savings are retained and enhanced in any reform package. The New Eng- land Council has also expressed concerns about a vari- ety of financial regulations, includ- ing the Department of Labor's fidu- ciary rule for asset managers and the complexity and scope of regu- lations facing small and mid-sized community banks. We are pleased to see that the president has placed a high priority on listening to the business community to strike a more prudent regulatory balance. Q: There is a concern about the state's aging workforce, par- ticularly in financial services. Is Connecticut prepared to fill jobs as Boomers retire? A: The entire New England region is acutely sensitive to its aging population and the impact that is having on employment. This is a common theme across indus- tries. In the financial-services sec- tor, employers are undertaking a variety of initiatives to attract the next generation workforce. For instance, the Connecticut Insur- ance and Financial Services (CT IFS) cluster offers programs like High School Inc., which is a college preparatory school in downtown Hartford for high school students considering a career in financial services. They also hold periodic boot camps and career fairs to help fill existing jobs. Ultimately, it will be industry-driven partnerships that will ensure we are prepared for the changing workforce. n JAMES T. BRETT President & CEO of The New England Council Continued on page 10 Shrinking Bank Footprints Community bankers say higher costs and other difficulties related to complying with Dodd-Frank financial reforms have contributed to a consolidation wave in recent years, as smaller lenders find it difficult to keep up with the rules. Indeed, there are significantly fewer lenders today then there were prior to the financial crisis. 2008 2016 % Change Number of CT-based banks 56 42 -25% Number of banks nationwide 8,534 5,980 -30% CT banks w/less than $100M in assets 10 3 -70% U.S. banks w/less than $100M in assets 3,440 1,589 -54% S O U R C E : F E D E R A L D E P O S I T I N S U R A N C E C O R P. Rheo Brouillard, president and CEO, Savings Institute

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