Stacking the Deck Against Community Banks

Is bigger really better?

Sure, it’s a loaded question and one with a variety of answers – most of which this family-oriented edition is unable to print.  However, when it comes to banking – and financial services in general — the answer sure appears to be a resounding YES.

The BrandBank has been a loyal advocate of community banking.  As a proud corporate sponsor of two state banking associations, we’ve helped many owners and presidents establish a voice and communicate their comparative advantages within their markets. We, like the thousands of owners and shareholders of smaller banks across the country, believe there are many compelling reasons why the public should consider doing business with their local community bank.

Yet, the current plight of community banking reminds me of the American League East, specifically the Baltimore Orioles. Now, I’m not a huge fan of the Orioles or the American League for that matter (blame it on the ridiculous designated hitter rule), but you have to feel for a proud franchise that no matter how hard it tries, it will almost never win a division title again. Not since 1997, when the Birds went an AL-best 98-64, have they topped their larger, richer rivals from the East.

In fact, since that fateful year, the Orioles have been dreadful. On average, they have finished 28 games behind the eventual division champion. During that 13-year span, the Yankees have won the division 10 times. The Red Sox have won the division once and the Wild Card seven of those 13 years.

While not 100% correlated to performance, team payroll plays a significant role in team performance. Enormous cable contracts and lucrative stadium and corporate deals in their respective markets allow the Yankees and Red Sox to spend at will. To relate it to banking, their cost of funds is almost nil, making it nearly impossible for their divisional rivals to field a competitive team. 

Which brings me back to community banking…If the 2008 financial crisis has taught us anything it’s that the larger financial institutions enjoy an audience, a lobbying effort and a fear factor that community banks cannot (and will never) touch.  The Too Big To Fail exercise, where the U.S. government issued the largest federal bailout in our nation’s history to the 19 biggest financial institutions, was the beginning of the end. As shocking and disappointing as the evidence is, it simply cannot be ignored any longer. (The BrandBank wrote about this topic exactly one year ago.  Read it here.)

In her final testimony before the Senate Banking Committee in June 2011, former FDIC Chairwoman Sheila Bair said it herself.  While calling the remaining 7,000 community banks “one of the strengths of our financial system,” she admitted that “the competitive position of small and mid-sized institutions has been steadily eroded over time by the government subsidy attached to the Too Big to Fail status of the nations largest banks.” She noted that in the first quarter of 2011, the cost of funding earning assets was only about half as high for banks with more that $100 billion in assets as it was for community banks with assets under $1 billion.

To her credit, she then called for “stronger and more uniform capital requirements” and a fair framework that subjects every institution – no matter its size – to the discipline of the marketplace.

But the damage is done.  Bigger banks have already received their Get-Out-of-Jail-Free Card and have made the most of it. The gap is wider than ever. A recent Celent study decried that new capital and regulatory burdens alone make the business of community banking unprofitable and basically untenable. 

Don’t get me wrong, I’m a free-market, free-entreprise, competition-is-great guy. And I’m not here to espouse uniformity or more state or federal oversight to ensure EVERY bank survives. That should not happen in any instance. But when you’re running a franchise for the federal government – and that’s essentially what banking has become – it seems wildly unfair that some banks get special treatment over others.

Until the playing field is leveled and community banks get the same consideration as larger banks, they face a very tough battle, one they are destined to lose.

By the way, after a promising start to the year, the Orioles find themselves in last place in the AL East, trailing the Yankees by a mere 30 games.

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