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Banks post record profits, but new bill may threaten community lenders

Posted: May 24, 2018 | Tags: BankTracker

The U.S. banking industry reported record profits of $56 billion in the first quarter of 2018, an increase of more than 27 percent over the same time last year, according to the Federal Deposit Insurance Corp.

This is the largest quarterly profit for banks in history, Julianne F. Breitbeil, a senior media relations specialist with the FDIC, said via email.

In a press statement, FDIC Chairman Martin J. Gruenberg attributed the record-breaking profits to “higher net operating revenue and a lower effective tax rate.”

President Donald Trump signed the Tax Cuts and Jobs Act last year, reducing the federal corporate income tax rate from 35 percent to 21 percent, a move that saved banks billions of dollars this quarter alone, according to The Washington Post.

On Thursday, Trump signed a bill intended to help community banks by rolling back requirements enacted by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under Dodd-Frank, banks with at least $50 billion in assets were subject to stringent federal regulations, including annual stress-test evaluations. The bill signed Thursday raises the threshold to $250 billion, easing reporting requirements for some regional and community banks that fall under that watermark. Critics of the measure say it could encourage a return to the reckless lending practices that led to the 2008 recession.

While the new law may ease regulations on smaller banks, it may eventually contribute to the continued demise of community lenders as regional banks have more room to expand their operations and look to acquire smaller, profitable competitors.

Compared with this time last year, community banks increased their quarterly profits by more than $900 million, a jump of just over 17 percent.

“It’s a bad thing for community banks,” said Rebel A. Cole, the Kaye Family Endowed Chair of Finance at Florida Atlantic University. “They’re going to get gobbled up by these banks that want to grow into that $50 [billion] to $250 billion range.”

There are just over 5,600 banks reporting financial information to the FDIC; more than 92 percent identify themselves as community banks.

During the first quarter, 65 banks were absorbed in mergers. There were no failures and three new charters were added.

Since the first quarter of 2013, the number of FDIC-insured institutions has declined by more than 1,400 banks. About 93 percent of those have been community banks, according to FDIC data.

“The consolidation is going to continue,” Cole said. “And I don’t think that’s a good thing.”

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