Why are more than 34 million Americans underbanked or lack any bank accounts whatsoever, conducting some or all of their financial transactions outside of the mainstream banking system?

Bank regulations, Texas banking commissioner Charles Cooper writes in an article for American Banker.

The very rules meant to protect consumers may actually be excluding people from basic, affordable banking services.

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A third of bank executives surveyed by the FDIC said regulations are a major obstacle to serving the unbanked and underbanked. Indeed, regulations are now more pervasive and comprehensive, including know-your-customer rules, Bank Secrecy Act/anti-money laundering requirements, fair lending and compliance rules and third-party relationship risk.

As regulations become more “numerous and complicated,” banks, especially small banks, are giving up on offering and developing products designed for the underbanked, says Cooper, treasurer of the Conference of State Bank Supervisors.

That’s a pity because basic banking services enable people to build a financial foundation by helping them save, borrow and invest. Banks must balance their willingness to help the underbanked against perceived regulatory risk. Plus, interpreting regulations can be challenging.

The Federal Financial Institutions Examination Council recently issues 15 laws and regulations covering social media.

“How can we honestly expect small banks to offer innovative products to meet the needs of the underserved population,” Cooper asks, “if they are required to wade through 15 laws and regulations just to tweet?”

Policymakers must drop their one-size-fits-all approach and give special treatment to community banks, Cooper argues. Federal Reserve Governor Elizabeth Duke has said she supports a “two-tiered approach” to mortgage lending rules, and the Consumer Financial Protection Bureau has proposed a rule easing some mortgage lending requirements for small banks.

“It is clear that more needs to be done to reduce the compliance burden of community banks to allow them to fully serve their communities,” Cooper writes.

“After all the changes to consumer protection laws in recent years, it seems unfortunate that the very rules meant to protect consumers may actually serve to exclude the most vulnerable individuals from affordable banking services.”

Small banks have supporters in Congress, The Hill notes. More than a few Congressmen are telling regulators to steer clear of community banks when writing new regulations. For instance, Sen. James Inhofe, R-Okla., introduced a bill amendment that would to except community banks from new requirements.

“My amendment aims to protect small banks from being further subjected to the onerous regulations written for larger institutions,” Inhofe said, according to The Hill.

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