Harold Black's First Law Lives

All my students know Harold Black's First Law: "Any law worth being circumvented will be". Evidence confirming the law abound. Indeed, it is harder to find disconfirming evidence. Consider the impact that regulators have had on community banks. Everyone knows that regulators always over-react. Rightly or wrongly the regulators were castigated for their perceived lack of regulatory oversight prior to the great recession. As a consequence, they have over compensated. The community banks are now faced with the regulators looking over their shoulders and micro managing. Since hardly any regulator has any experience actually running a financial institution, it is not surprising that they are mucking things up and actually working counter to any economic recovery. When lending should be encouraged it is being discouraged. Recently Main Street Bank of Kingwood, Texas has announced that it is giving up its charter and reorganizing as a pure small business lender. Community bankers tell me that every loan is closely scrutinized - so those loans that the banker would normally make based on experience, will not be made because the regulator does not understand the customer. Regulators are also telling bankers to raise capital even in cases in which loan losses are low. Regulators are demanding changes in portfolio balance based on what might happen rather than what is likely to happen. So many bankers are saying "take this bank and shove it". However, they have to get permission to quit with regulatory approval. The bankers who are quitting are not really giving up banking. Rather they are giving up being a bank. There are other institutions that perform banking functions without having to get a bank charter and have no banking regulator oversight (finance company, REITs and a mortgage banking company are examples). These institutions can't take deposits. Rather they borrow the money to fund their portfolios. So Main Street's bankers who got tired of trying to bank under the thumb of the regulators can quit and organize a bank-like firm and do what they do best - banking.