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Non-Bank Benefits?

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Posted On: 05/24/2017

Question: As a mortgage lender, I compete for business every day. So why is it fair that non-banks face less regulation and therefore fewer costs than traditional banks?

Answer: Banks and non-banks are distinctive and different financial creatures. They are “alike” in the same way that Indy racecars and family sedans both have four wheels.

We generally see “traditional” banks as established financial service providers that collect deposits, offer checking and have a number of tellers, branches and ATMs. In contrast, a non-bank is simply a lender that finances mortgages with investor capital or loans from established banks and investors worldwide. In the typical case, a non-bank has no deposits, no tellers, no branches, no ATMs and no checks.

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Within the world of traditional banks there's a huge gap between small community banks and the nation's largest financial institutions. Community banks are a disappearing species. According to the FDIC Community banking study, between 1984 and 2011, the share of U.S. banking assets held by community banks declined by more than half, from 38 percent to 14 percent.

Meanwhile, the big banks are gaining market share. Giant banks had a 17 percent market share in 1995, a figure that rose to 59 percent by 2014 according to the Institute for Local Self-Reliance.

If a community bank with $10 million in assets fails, it's not good news but it's also is not a threat to the financing system. If a major financial services company goes under the entire economy can be impacted – and not in a good way.

Banks of all sizes are not regulated the same, a bow to the reality that small banks don't require as much oversight while big banks do. The bulk of all financial regulation applies to banks with at least $10 billion in assets. When a bank or insurance company has at least $50 billion in assets, it can be defined as a systemically important financial institution (SIFI) and faces stricter requirements.

As an example of differing risk, big financial institutions do virtually all bank derivatives trading. The Office of the Comptroller of the Currency (OCC) reported that for the third quarter of 2016 the nation's banks held derivatives with a notational value of $177.5 trillion.

“The four banks with the most derivative activity hold 89.7 percent of all derivatives,” said the OCC, “while the largest 25 banks account for nearly 100 percent of all contracts.”

The threat of financial institutions that are “too big to fail” was seen in wake of the 2008 financial meltdown when the government constructed a $700 billion bailout effort. Until that threat goes away, it's likely enhanced regulation will continue for big banks while the requirements for small banks and non-banks will be less burdensome and more flexible.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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