Bank Watch

Does North Carolina need more banks?

Ray Grace, North Carolina banking commissioner, says he has lingering concerns about the industry, including the ongoing consolidations of banks and the negative impact that could have on the state’s rural communities.
Ray Grace, North Carolina banking commissioner, says he has lingering concerns about the industry, including the ongoing consolidations of banks and the negative impact that could have on the state’s rural communities. None

Ray Grace has been North Carolina’s commissioner of banks for the past four years, stepping into the role as the industry was still recovering from the financial crisis.

Although he might not be a household name, he has an important job as the top regulator for state-chartered banks. It’s a list that includes mostly small community banks, but also Winston-Salem giant BB&T. Mortgage lenders, check cashers and consumer finance companies operating in the state are among other groups under Grace’s supervision.

Last week, Grace, 68, won confirmation from the General Assembly for a reappointment to another term by Gov. Pat McCrory. Grace, a state employee whose salary is $125,676, is now positioned to remain commissioner until March 2019.

The Observer caught up with Grace this week to discuss a range of issues, including why new banks aren’t forming in the state, his criticisms of the 2010 Dodd-Frank Act, his office’s challenges in finding a new generation of bank examiners and the health of the state’s banks.

“Clearly we’ve been through a long and difficult period in banking in North Carolina and throughout the country,” Grace said. “And it’s clear that our banks now are much healthier than they were just two or three years ago. Almost all of them are again profitable.”

But Grace said he has lingering concerns about the industry, including the ongoing consolidations of banks and the negative impact that could have on North Carolina’s rural communities.

Shrinking numbers

Grace is presiding over the commissioner’s office in a period when North Carolina continues to see its number of state-chartered banks shrink, partly because of failures but also mergers. Since 2006, he said, the figure has been sliced almost in half – falling from about 116 to just more than 50 today.

Banks cite a variety of factors for the mergers, including the benefit of spreading rising regulatory costs across a larger institution.

But Grace said the combinations pose a threat to the health of rural communities. That’s because when banks grow through mergers and acquisitions, they tend to focus their lending more in bigger, more lucrative markets, he said.

For example, in the 1980s and ’90s, large banks such as NationsBank and First Union left small towns in Eastern North Carolina as they increasingly targeted larger cities, he said.

As a result, more consolidations could hinder the economic recovery of the state’s rural areas, which haven’t bounced back from the recession as Charlotte and some other big markets have, Grace said.

“We’ve had a famously tepid economic recovery,” he said, “and that recovery such as it is has been very uneven.”

No charters since 2009

A key part of Grace’s job is issuing charters for new banks forming in North Carolina. His office hasn’t done that since 2009, when it granted a charter to Coastal Bank & Trust, a community bank headquartered on the state’s coast.

A still-recovering economy and costly post-financial crisis regulations are among deterrents to the formation of new banks, Grace said. Low interest rates that are constraining banks’ profitability are another factor, he said.

Grace said he “passionately” wants to see new banks formed in North Carolina. More banks could help counteract the impact of mergers by increasing lending in those areas, he said.

It’s unclear when a new bank will be chartered in the state, although interest appears be picking up, he said.

“I think probably within a month or two I’ll be talking to some people about specific proposals,” Grace said. “I’m hopeful we’ll get an application in 2017, but no guarantees.”

Mixed on Dodd-Frank

At a time when some Republicans in Congress are pushing to dismantle the Dodd-Frank financial overhaul law, Grace says he too dislikes some portions of the act.

In particular, he says the Consumer Financial Protection Bureau, an agency created through the law, wields a lot of power but operates with too little accountability. It’s a widely held complaint about the bureau also voiced by the banking industry. Grace also notes, though, that he supports the overall notion of consumer protection.

“There are good things in Dodd-Frank. There are bad things in Dodd-Frank,” said Grace, whose office proposes state regulations and also comments on proposed federal regulations.

“In some ways, I think it’s gone too far, so I think it needs to be reined in,” he said. “But I think, generally, it was well-intended.”

Grace, a former Marine who served in Vietnam, describes himself as “firm but fair” on the banks he regulates.

Wanted: Writing skills

Now that the worst of the financial crisis has passed, Grace is facing new challenges. One he cites is hiring qualified examiners, key members of his office who determine whether financial institutions are operating safely.

An important component of an examiner’s job is writing reports for banks on the examiner’s findings at those institutions. But Grace said it’s been hard to find applicants, even those fresh out of college, who can pass a writing test that’s part of the hiring process.

“About 80 percent of the people that get to that written exercise can’t pass. If you can’t express yourself clearly in writing, we can’t teach you when you’re 22 years old,” said Grace, who began his career at the commissioner’s office as a 26-year-old examiner trainee.

Although it’s becoming harder to find good hires, Grace said the office is maintaining high standards. Years ago, if a batch of candidates was just OK, the office would hire the best among those.

“We won’t do that anymore,” he said.

Deon Roberts: 704-358-5248, @DeonERoberts