TBA Law Blog

Posted by: Kathryn Edge on Aug 1, 2016

Journal Issue Date: Aug 2016

Journal Name: August 2016 - Vol. 52, No. 8

With the disclaimer that I am not an economist or financial analyst but merely a bank lawyer, I am frequently asked what I think are the biggest risks to the U.S. banking system as we move toward 2017. My opinions are based on what I learn from real bankers, their industry associations, their regulators and an occasional perusal of the Federal Reserve’s webpage. In no particular order of importance (because each of my sources of information tends to have its own ideas about that), here are the risks and issues that should concern banks, their lawyers and consumers of banking products and services:

Regulation Risk

Without exception, the bankers I know cite ever-expanding regulation, particularly consumer protection regulations promulgated by the Consumer Financial Protection Bureau (CFPB), as their chief concern. They lament the cost of compliance and how those costs compress margins. They worry about finding the internal and external expertise necessary to wade through the mounting volume of confusing requirements. In addition to hiring outsourced advisors, even small community banks are forced to employ full-time compliance officers to help meet the growing demands of the voracious watchdog. I tell law students that if they want to ensure employment, they should think of becoming an expert in consumer compliance law and regulation. It is fully as exciting as ERISA.

Macroeconomic Risk

Presidential election years are fraught with anxiety for the financial markets. Upheaval in the Eurozone threatens international economies in ways that remind us of Lorenz’s butterfly effect . Even though many state and local economies have emerged from the doldrums of the Great Recession, bankers continue to worry about uncertainties in the macroeconomic environment. I have only to look out my window in the Pinnacle building in downtown Nashville to see the next bubble that may burst. The local joke is that we should replace the mockingbird as the state bird in favor of the Crane. We live in a society that suffers from serial forgetfulness and are unable to learn much from the past that informs our present and future. Developers, anxious to recoup the losses they took during the recession, are fueled by banks eager to augment interest income. As my former boss and mentor, the late Commissioner Talmadge B. Gilley, used to say, “Bankers are stupid in cycles.”

Accounting for Reserves Risk

The Financial Accounting Standards Board (FASB) recently issued a new accounting standard that introduces the “current expected credit losses” methodology — CECL — for estimating allowances for credit losses. The new accounting standard allows a financial institution to leverage its current internal credit risk systems as a framework for estimating expected credit losses. CECL applies to all banks, savings institutions, credit unions and financial institution holding companies regardless of asset size. While most lawyers will never be involved with a client bank’s CECL calculations, it is important to know that CECL will require financial institutions to change the way they calculate required reserves against losses by replacing an incurred loss methodology with a lifetime expected loss estimate. For the industry, this will have a significant impact on operations, reporting and disclosures which will be more complex than ever. Large banks with resources for analytical staff will likely take this new requirement in stride, but for community banks that cannot afford an army of internal experts, the burden will be significant. It is too soon to determine how CECL will impact balance sheets, but the new methodology is a sea change for bankers. FASB and the federal financial institutions regulatory agencies are requiring crystal balls as essential equipment for financial institutions.

Political Risk

Annually, the Government Relations Committee of the Tennessee Bankers Association makes its sojourn to Washington, D.C. for the opportunity to meet with the Tennessee delegation and federal banking regulators. It is always an anxiety-producing effort, despite therapeutic stops at local restaurants and watering holes for respite.

Bankers continue to urge congressional restraint, continue to insist that credit unions that behave like banks be taxed, and continue to worry that they have little control over their own futures. If anything is a truism in politics, it’s that there are always unintended consequences for every action, even well-intentioned actions. Congress reacted to the Great Recession by establishing the CFPB, which flexes its unrestrained and unregulated muscles by adopting regulations only Senator Elizabeth Warren could love and understand. The Bank’s prudential regulators enforce the regulations designed to protect consumers while banks argue that they cannot afford to offer certain products because it is simply too expensive to comply with the CFPB rules. Lorenz’s butterfly flaps its lovely but potentially dangerous wings.

Cybercrime Risk

Cybercrime is a top concern for bankers. Even with employing the best firewalls and protections, we all understand that hackers are better at their avocation than we are at stopping them. Organized crime is capable of penetrating vulnerable industry data systems that banks employ to move the world’s money around. The cost of protecting the banking system, when coupled with the cost of compliance and CECL, makes margins so tight that many community bankers wonder if they can afford to stay in business. While some politicians rave about building walls to keep immigrants out, some of us want to know what governments can do to stop the cyber mafia’s theft of identities and financial resources.


We will continue to see merger and acquisition activity, particularly among banks that are less than $1 billion in assets. Ironically, Congress’s efforts to assure that no bank was too big to fail have resulted in the need for community banks to enter into combinations to increase their sizes. The costs of compliance and regulation, the cost of protecting data systems, and shrinking margins are factors in a board’s decision to entertain opportunities to merge with another banking company. We continue to see some board members content to stick their heads in the sand in an attempt to hide from the lions, but more and more companies are listening to their advisors’ recommendations about finding a partner who likes the same music they do. We think that this trend will continue into 2017.

Investment tip: put your money in the bank sign business.


Hot markets like the Nashville-Davidson-Murfreesboro-Franklin MSA are becoming over-banked. At this writing, there were approximately 64 separate banks operating from almost 600 branches in this MSA. In Nashville alone, more than 36 banks vie for the opportunity to lend to anyone who owns a crane. Large, out-of-state banking companies are seeking banks to buy but bridge the gap between entry into the Nashville market and an acquisition by opening loan production offices and branches. For both retail and commercial consumers, this competition looks promising; for banks, margin compression continues.

Competition from large credit unions continues to plague bankers who operate in markets where these untaxed financial institutions can offer lower rates on loans and higher rates on deposits. It’s doubtful that this situation will change — at least until Congress gives up its credit union.

So saith the Bank Lady.

Katie Edge KATHRYN REED EDGE is a member in the Nashville office of Butler Snow LLP with offices in Tennessee, Mississippi, Alabama, Colorado, Pennsylvania, Georgia, Louisiana, New York, New Mexico, Texas, Hong Kong, Singapore and London, England. She is a member of the firm’s Regulatory and Government Relations Group and concentrates her practice in representing regulated financial services companies. She is a past president of the Tennessee Bar Association and a former member of the editorial board for the Tennessee Bar Journal.