Community banks need their own regulatory category
A reader of this column once suggested that a separate banking category be established by the regulators to accommodate the unique needs of customers of small banks, so-called “community banks.”
I cherish and listen to all of the commentary by my readers. (There aren’t that many of them.) This, however, was a particularly trenchant observation, the validity of which is being demonstrated daily.
Almost all of the laws and regulations governing banks are the same for all banks, large and small. With the exception of a few regs designed strictly for the big guys, relating mostly to capital ratios and reporting, the $50 billion bank is treated the same as the $100 million operation.
This is like comparing Pop Warner football to the NFL. That may sound like an exaggeration, but it isn’t. The weight differential between, say, an offensive tackle in the former and one playing for the Packers is about 270 pounds. Maybe one bench presses 40 pounds, the other 400. We can comprehend those numbers, but the gulf between 50 billion and 100 million is incomprehensible and astronomical.
The only similarity between two such financial institutions is that they both seek to make a profit on the movement of an artificial commodity: money. And, of course, the deposits in both are insured by the FDIC, meaning, ultimately, the taxpayers of the USA.
So, the same encyclopedic body of FDIC regulations apply to both. Loan criteria are the same for Chase as for the Second National Bank of River City. The community bank has to follow the same consumer compliance rules as a multi-national behemoth on Wall Street.
The system works for big banks, although they squeal all the way to the trough. We hear a lot about “too big to fail,” but don’t understand that, for the very top tier of international banks, this phrase really means “too big to be unprofitable.” That’s because, if you stand at the crossroads of commerce, and the world’s money supply moves in one door and out the other, it’s impossible not to make an enormous profit on the movement of the commodity. We hear of a big bank that loses a couple of billion or so in it’s stock trading division, through the actions of a rogue trader, and then gets fined another billion by the U.S. government for a basket full of violations and misdeeds, but still books a billion or two in net profit.
Indeed, Bank of America took over Countrywide, the corporate poster child of the mortgage mess, as well as Merrill Lynch, and merely dropped from obscene profits to profitability without a superlative adjective.
Still, the institution on Main Street has to toe the same line as the one on Wall Street when it comes to making a loan. Which means that a lot of loans aren’t made in River City that should be, and that a lot of deserving borrowers have to turn to the so-called “Shadow Banking System,” nonbank corporations that lend at rates double or triple those prevailing at banks.
Businesses don’t thrive, jobs don’t get created, and the economy languishes.
One thing the banking industry could do is form a private loan insurance company, similar to MGIC and other mortgage insurance operations. It could initially be funded by some of the net profit from, say, the country’s four biggest banks. The corporation would insure the kind of borrowers and loans that are unique to the community bank business model. Premiums would be paid by the borrowers, just as they are with government- or privately insured mortgages. This would increase the cost of borrowing, but well below the often double digit whack in the private lending sector.
In a few years, shares in the company would be available to the public, and especially the nation’s smaller banks, which would have a stake in its success.
If the concept should prove viable, everybody and everything benefits: the initial investors, the mega-banks (which could enjoy just one more profit center), the subsequent investors, the small banks with new, profitable loans to enhance their asset base, certainly borrowers of every ilk and, finally, the economy.
To make the idea work, bank regulators would have to analyze and grade these insured loans with a less jaundiced eye than is currently the practice. This would be a tough sell, given today’s regulatory and political environment.
But it could be done, and maybe should be done.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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After the planning and zoning commission unanimously denied ANB Bank’s proposal to construct a new facility in the city’s 900 block, the Glenwood Springs City Council will hear the banks appeal case Thursday at its regularly scheduled meeting.