House Subcommittee Hears Lack of Banking Competition Fueled by Overregulation

The U.S. flag is seen on a building on Wall Street in the financial district in New York on Nov. 24, 2020. Brendan McDermid/Reuters

Over the past decade, there has been less competition in the banking industry, and this is harming consumers, according to Rep. Andy Barr (R-Ky.), chairman of the House Financial Services Subcommittee on Financial Institutions and Monetary Policy.

The subcommittee hosted a hearing on Feb. 8 titled “Revamping and Revitalizing Banking in the 21st Century.”

It featured five witnesses to discuss the state of the banking system and if overregulation has been a chief cause of the considerable slowdown in the growth rate of new financial institutions.

Not only has there been a slowdown in the creation of new banks, but the growing trend of community banks merging, being acquired, or shutting their doors are “trends we need to examine,” Barr noted.

Rep. Andy Barr (R-Ky.) speaks during a hearing in Washington on March 10, 2021. Ting Shen-Pool/Getty Images

Although low-interest rates and weakening economic conditions have been notable factors for this trend, industry leaders and Republican lawmakers say the growing cost of compliance and regulatory burdens have fostered this reality.

According to a 2020 report by the Federal Deposit Insurance Corporation (FDIC), approximately 60 new banks have been chartered in the past decade.

By comparison, more than 2,000 banks were formed between 1990 and 2008.

“Congress should be encouraged and should be encouraging an economic and regulatory environment that allows community financial institutions to thrive, let alone survive,” Barr said.

But while Republican members of the subcommittee claimed that excessive regulation has impacted consumers, Rep. Bill Foster (D-Ill.) contended that the federal government’s actions over the years have protected the industry and shielded depositors from bank failures.

Stability in Banking Sector

From 1864 to the 1930s, bank failures were a common occurrence in the U.S. economy, Foster said.

It wasn’t until after President Franklin Delano Roosevelt signed the Banking Act of 1933, which established the FDIC, that there was more stability in the sector.

Then, following a period of deregulation in the 1980s, “we were rewarded by the savings and loan crisis,” as many small banks were underregulated and engaged in faulty business practices.

“Interestingly, of the top 16 largest firms by assets of failure, every one of them happened under Republican watch,” Foster said.

That said, if too many regulations establish a barrier to entry for new banks, there would be a greater risk of large bank failures, according to John Berlau, senior fellow and director of finance policy at the Competitive Enterprise Institute.

“A lack of new entrants in the banking sector increases the chances that a large bank failure could severely curtail the supply of credit and availability of financial services, and that, in turn, sets the stage for a continuing cycle of government bailout and increases a demand for a competitive market free of heavy-handed regulation enables a financial system and an economy that is simultaneously dynamic, inclusive and resilient,” Berlau told the hearing.

Phase-In Period For New Institutions

Brian Knight, senior research fellow and director of innovation and governance at the Mercatus Center at George Mason University, said excessive regulations can “unfairly penalize smaller banks.”

He told lawmakers that he doesn’t believe regulators are inherently malicious, but rather, it’s the regulatory system that incentivizes the amplification of bureaucracy.

Knight proposed several solutions that could address many of the problems facing the sector, particularly the smaller outfits, such as an oversight organization engaging with regulators, ensuring regulatory decisions can be appealed to a neutral third-party source and making sure that Congress provides more clarity on the rules and practices officials impose.

Barr has also proposed legislation permitting a three-year phase-in period for new financial institutions to comply with capital standards.

This public policy proposal would be something that would facilitate “the formation of banks that will be well equipped to serve and respond to the pressing banking and financial needs for their local communities,” according to Jim Reuter, CEO of FirstBank.

But not everyone favored rolling back the myriad of rules and regulations installed over the years.

Hard-Learned Lessons

Renita Marcellin, advocacy and legislative director at Americans for Financial Reform, argued that these efforts would weaken protections for consumers, especially in relation to the “new age of banking,” which is a reference to the era of big data and fintech.

“Last week, Twitter announced they’re working to offer payment services across the platform. What happens when Twitter combines their data on where we eat, shop, and sleep with transactional data?” she said.

“Large tech companies also have the ability to offer a full suite of banking services while avoiding the necessary banking rules by obtaining an industrial loan company charter.”

Marcellin said innovation shouldn’t be an excuse to “forget proper regulation.”

“Consumer protections, prudential regulation, and anti-monopoly laws came after hard-learned lessons in American history to create a banking system worthy of the 21st century,” she said.

“We should build upon these lessons instead of tearing them down.”

Cracking Down on ‘Junk Fees’?

In 2022, Consumer Financial Protection Bureau officials announced that they would begin probing fees that they think are “likely unfair and unlawful.”

Earlier this month, the consumer watchdog submitted a new rule restricting financial institutions from charging surprise overdraft fees on debt transactions and raising late fees.

During his State of the Union address, President Joe Biden promised that his administration would start clamping down on “junk fees” from banks, hotels, airlines, and other service providers. He argued that these fees are often hidden, unnecessary, and typically impact household budgets.

“Junk fees may not matter to the very wealthy, but they matter to most other folks in homes like the one I grew up in, like many of you did. They add up to hundreds of dollars a month,” he said.

“Americans are tired of being—we’re tired of being played for suckers.”

The president urged lawmakers to pass the Junk Fees Prevention Act. This legislative proposal would trim unexpected charges, such as airline booking fees, credit card late fees, resort fees, and service fees for concert tickets.

But Reuter, who represented the American Bankers Association at the subcommittee hearing, conceded to lawmakers and regulators that targeting junk fees can be a “confusing” prospect.

“Now, in fact, it’s quite confusing when the fees we are charging are clearly disclosed within compliance of the existing laws, that suddenly one person can interpret that a different way,” he said.