Many of the forces that affected banks in 2017 — from rising interest rates and a good economy, to balancing digital technology investments with cybersecurity — remain the top issues bankers must manage in the year ahead.
Bankers also may see a further easing of federal regulatory burdens in the coming year. The Trump Administration in its first year has taken a more lenient approach administratively to enforcing federal banking regulations.
Attorney Michael Moore, a principal in the banking practice at Miller, Canfield, Paddock and Stone PLC’s Grand Rapids office, expects that administrative approach to continue into the new year. There may be some attempts legislatively, although it will not occur quickly, he added.
“I believe there’s going to be some loosening of the financial regulation with this current administration. How much is a question in the future. I don’t think it comes easily. Once you have these regulations, it’s not like you just flip a switch and the regulations are gone. It takes time,” Moore said.
Community bankers especially have long advocated for changes to the federal Dodd-Frank Wall Street Reform and Consumer Protection Act that Congress enacted in 2010 following the late-2008 financial crisis. They’ve long complained that the law doesn’t differentiate between smaller community banks and large banks.
The law and the higher regulatory burdens that came with it have been a key factor in many bank mergers in recent years, as banks aim to better absorb regulatory compliance costs by becoming larger.
Since President Trump came into office in January, Brad Kessel, president and CEO of Grand Rapids-based Independent Bank Corp., has noticed a different approach taken by federal regulators, as bills are pending in both the U.S. House and Senate to lighten or improve Dodd-Frank.
“Those people are getting the message that, ‘Hey, we need to lighten up. We need to make it easier. We need to protect the consumer and safeguard the system, but we need to do it intelligently,’” Kessel said. “We think that tone we can see in our regulators (is) just a little bit gentler.”
Moore adds that based on conversations with his bank clients, Dodd-Frank “is not being enforced as heavily as it was in the past.”
Even so, federal regulatory compliance and enforcement represent a major question mark for banks going into 2018, said Robert Kaminski, president and CEO of Grand Rapids-based Mercantile Bank Corp.
“The thing we’re all wondering about is how will the changes in the regulatory environment affect us,” Kaminski said. “We seem to get caught up in the regulation that’s been required by the state and federal government because of some of the things that big banks have done. We get caught in that from time to time. It seems to be more of a burden for us, and we haven’t necessarily been the problem compared to some of the much bigger organizations.”
A recent 2018 outlook for the banking industry by Deloitte noted the changing tone in how federal bank regulations are enforced and that “new rulemaking appears to have abated.” However, expectations “of a broad regulatory pullback could be misplaced,” according to the report.
Higher capital and liquidity requirements, stress testing, and recovery planning will “likely remain intact,” and expectations for compliance “are expected to stay elevated,” according to Deloitte.
The regulatory environment was among the top issues Deloitte identified for banks in 2018, along with managing cyber risks and technology as consumers increasingly move to digital banking.
Banks will continue to need to balance digital banking investments with cyber risks that are getting more complex.
“With these digital advancements comes risk and how do you deal with that,” Moore said. “More and more people have now moved somewhat from the brick-and-mortar requirement to going to the bank to everything’s being done electronically. There are more and more advancements that are going to be taking place in 2018 — at least I don’t see a reason why it wouldn’t. That brings challenges to the financial institutions in how to make these changes with the concerns from the external threats that we’re also seeing in the world.”
Looking ahead to next year, banks will face a good economy that drove solid loan growth at many institutions in 2017.
Yet as Kaminski notes, bankers know it’s only a matter of time before the next economic downturn will occur.
While he does not expect a dip to occur in 2018, Kaminski said the bank next year will keep in mind the potential for an eventual soft economy. It operates today “with a little bit of caution just to make sure that we’re in a good position to withstand a downturn when it eventually will come.”
“The longer we get in distance from the last recession, it becomes more and more likely that it’s going to rear its head again, but we’re all hoping that’s well in the future. We prepare for it by being prepared and working with our clients in making sure they’re prepared (so) they have the levers to pull to make sure their overhead hasn’t grown too much during the good times,” Kaminski said. “We’re always hopeful that will pay off in the long term and that when there is a downturn, they’ll be positioned well to handle the downturn that may come our way.”