Skip to comments.Treat Community Banks Differently: Dodd-Frank is harming an essential American institution
Posted on 05/14/2013 7:02:14 AM PDT by SeekAndFind
In the 1946 classic Its a Wonderful Life, James Stewart stars as George Bailey, the director of the Bailey Building and Loan Association in the fictional community of Bedford Falls, N.Y. Bailey faces numerous challenges to keep the Building and Loan afloat in order to continue supporting the people and businesses of his hometown. His chief challenge is Mr. Potter, the wealthy slumlord who repeatedly schemes to force Bailey out of business.
Although Its a Wonderful Life is fictional, the Building and Loan is a prototype of a real, modern institution, the community bank. And in 2013, community banks are finding themselves under significant threats to their existence. Instead of being Pottered, theyre being Franked. Real towns, like the fictional Bedford Falls, will suffer if a miraculous change in policy doesnt occur quickly.
The Dodd-Frank Act was intended to fix the perceived inefficiencies and failures in the American banking system that supposedly led to the financial crisis. However, my new research with the American Enterprise Institute suggests that its having at least one detrimental effect: The act is placing unwarranted and unsustainable pressure on community banks.
Community banks did not cause the financial crisis. They did not engage in predatory lending; their business model depends on gaining and maintaining the trust of the community. They did not originate subprime loans or securitize them; they issue and hold mortgages on homes and businesses owned by their long-term customers. They did not engage in complicated derivatives trading; like the Building and Loan, they largely stick to traditional banking activities such as taking deposits and making loans. A community bank with $100 million in assets serving families, farmers, and small businesses in a rural area bears little resemblance to a $2.1 trillion global behemoth such as JPMorgan Chase. But rather than creating two or more distinct tiers of regulation, appropriately tied to the size, complexity, and risk posed by these two very different kinds of institution, Dodd-Frank builds on the existing systems one-size-fits-all approach to regulation.
The Dodd-Frank Act was intended, in part, to eliminate too big to fail. Ironically, it may have an almost opposite effect, by making community banks too small to succeed. Almost 2,000 small banks vanished in the past decade, due mostly to mergers with larger banks. The number of banks with assets of less than $100 million decreased by more than 80 percent from 1985 to 2010, while the number of banks with assets greater than $10 billion nearly tripled. With an increased regulatory burden, over the next few years it seems likely that many small community banks will continue to merge into larger banks, or simply go out of business. Like Bedford Falls under the thumb of Mr. Potter, many communities will be the worse for it.
The FDIC has determined that approximately 1 in 12 American households dont have a checking or savings account, and an additional 20 percent are underbanked that is, despite having an account, they also rely on expensive alternative financial products such as payday loans and check-cashing services. Lower-income, rural, and minority Americans are much more likely to be unbanked or underbanked. These problems will only increase if community banks merge or disappear entirely.
The relationship-banking model used by community banks puts them in a position to offer financial services to families and small businesses that dont neatly fit into the profiles used by large financial institutions. Although community banks cumulatively hold only 14.2 percent of total bank assets, they are responsible for nearly half of small-business loans, more than 40 percent of farmland and farming loans, and over one third of commercial-real-estate loans. In rural areas, community banks hold 70 percent of all deposits.
Dodd-Frank was intended to protect consumers and ensure the stability of the financial system, but if more community banks are forced to merge or go out of business, too-big-to-fail banks will get even bigger. And the small businesses and individuals that dont fit neatly into standardized financial modeling, or are located outside metropolitan areas served by big banks, will find good loans and basic financial services harder to come by.
Before we lose more community banks, Congress must act.
Meaningful reform that distinguishes small, traditional community banks from sophisticated financial institutions requires a two-tiered regulatory framework. By more precisely addressing the risks posed by both types of institution, Congress could actually reduce systemic risk and protect consumers. Rather than devoting time and resources to addressing regulations that have little to do with their operations, community banks would be freed to serve their customers and invest in their communities. In contrast, the largest financial institutions would be subject to regulations and examinations properly tailored to their size, complexity, and role in the American economy and global financial system.
Its a Wonderful Life may be an idealistic work, but its portrayal of the importance of the Bailey Building and Loan to Bedford Falls is spot on. Farmers, families, and small businesses, particularly in the most challenged parts of this country, depend on their community banks.
Clarence, George Baileys guardian angel, gave us a peek at Mr. Potters Bedford Falls, and it wasnt pretty. With proper reform of Dodd-Frank, we can avoid that fate for America.
Tanya Marsh is an assistant professor at Wake Forest Universitys School of Law, where she teaches real-estate law, property law, and a seminar on the financial crisis, and an adjunct scholar at AEI.
Dodd-Frank mandates that the big banks will get bigger, which ensures more “too big to fail” guarantees of government bailouts in the future. This is what happens when Big Government runs the economy.
Ms. Marsh has also evidently never heard of a credit union.
On one saturday we went to the local tavern on the way home from the grocery store, which my dad did with us every saturday. We walked back then, so it was our job as kids to help carry the groceries in our wagons.
My dad had a brief conversation with the bartender who was the owner's son. The son opened up the cash register and handed my dad a fist full of money. I sat quiet and drank my rootbeer while the guy pulled out a book and jotted something down. The next saturday we sat up to the bar and my dad gave him an envelope. The same on a few more saturdays, on the last one with envelopes we were treated to free cokes and a sandwich.
Years later the owner of the bar was arrested. I asked my dad why? He didn't want to discuss it. It was later in the local paper that he was illegally loaning money. $5.00 per week per thousand dollars. They had him in his book doing so for over 30 years.
The one local bank in town was behind it. The owner had to sell the bar to pay his legal costs and to stay out of jail, as he was in his 70's and not in good health.
Sharing a beer every week while making your loan payments and treating your kids to a rootbeer sure beats being judged by some &rick in a suit and mailed a coupon book to tear off and mail in.
What has happened to America is tragic.
I told my wife years ago that the Government allowing the mergers of small banks into big ones would one day ruin America.
My bank got eaten up years ago, then that bank disappeared into another one and another. I got a lona from a local bank for my mortgage, so that is I had a problem I could go to the bank and discuss it. They sold my mortgage to a big bank and then it was sold again . I was never so happy as the day I paid off that mortgage.
Obongo Care and DODD-Frank need to be REPEALED!!!!!!!!!!!!
Amen to that, brotha! Two laws designed to add to the bloated bureaucrazy (misspelling intended) at the expense of the private sector. What's next from nObama, a 5-year plan?
I wonder how my credit union fits into this. I would go back to cash and the mattress before I would change to one of the Banks in town.
The government would prefer that small business would all go away. It is much easier for the government to deal with a few huge entities that with all the small businesses that litter a free economy. More profitable at election time, too.
Probably!I’m not sure inasmuch as I haven’t read”Rules For Radicals”!!!!!!!!!!!!!!!!!!!!!