A few weeks ago, a Post Independent reader wrote an astute, well-reasoned letter opining that there should be a segment of the banking industry dedicated to small towns, small businesses, and borrowers that aren't rich.
He was right on, although there is such a segment today; it's just not operative.
It's the category of financial institutions called "community banks," a broad descriptive term that generally refers to banks under $1 billion in size. Most of these, however, are half a billion in size, and on down, with many being between a $100 million and $300 million in assets.
These are the lenders that would take on local borrowers, with decisions based on local conditions. They often made loans to borrowers that the mega banks wouldn't take, many times making decisions based on character as much as net worth.
Unfortunately for all concerned, a lot of these borrowers were the most vulnerable when the recession hit, and the little banks, too small to have multiple profit centers or hefty reserves, suffered greatly, with scores going out of business.
Problems for banks, large and small, during the Great Meltdown were based on just one issue: loans that went sour. So the legislation written in the wake of the recession, such as the Dodd-Frank Act, focused on that element and mandated the same regulations for banks of all sizes, from $10 million to a $100 billion.
Unfortunately, without the resources of the money center institutions such as Chase and Well-Fargo, these rules are unsustainable for little lenders. The big guys are making big money, despite losing billions on bad mortgages and paying hundreds of millions in fines to the federal government. The little guys, generally, aren't making much, a lot are losing a little, and a few are going broke, just waiting for an FDIC takeover.
And now there's one more nail in the coffin, or, for small banks, more like a stake through the heart. It's called BASEL III, and it's a complete restructuring of the capital criteria of banks worldwide. It was crafted by banking regulators on both sides of the Atlantic and, as you'd expect, it's beautifully complex.
Without going into the details of the structure (which I don't understand well enough to explain anyway) what might this mean to us folks here in the Roaring Fork Valley? Well, for one thing, it means that that Bubba's Second National Bank in River City, which his great-great-grandaddy started way back when, has to toe the same mark as a bank in Switzerland.
It also means, for example, banks must have significantly greater reserves for many classes of mortgage loans.
Small institutions don't have the capital to put into these reserves, so they won't be making these loans. This could have the unintended consequence of denying financing to small businesses, contractors, and local investors, formerly the bread and butter of a community bank's business.
Community banks and their customers are simply being trampled by a herd of panicked regulators, politicians and money center bankers from around the world, as they struggle to right the multi-national financial ship.
The Post Independent's letter writer was right. A populist financial network is sorely needed. The question is, how do we make it happen? So far, no one's figured that out.
- Pat Dalrymple is a valley native. He's been in the mortgage and banking business since 1961. He'll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.