Has your hometown community bank disappeared, absorbed by one of the mega banks?
Looks like a cornerstone of our communities is fast disappearing. Since 1980 there has been a steady decline in their numbers, from approximately 18,000 in the late 1980’s to a little over 6,400 today (according to the Federal Deposit Insurance Company, FDIC). The rate of consolidation has been a gradual one, averaging about 3.5% a year. Credit union declines have pretty much kept pace with that of banks.
While smaller banks still make up the vast majority of our financial institutions, with 98% having fewer than $10 billion of assets and 89% with fewer than $1 billion of assets, it is the smaller ones that are hardest hit. From 1985 to 2013, institutions with less than $100 million declined by 85%.
There are a number of factors and many legal changes in the industry that have contributed to this, including a weaker economy, more stringent loan requirements, and the mortgage industry fiasco. The “mortgage meltdown” resulted in tightened credit and higher requirements from the FDIC for approving new banks so fewer bank charters are obtained and fewer small banks can open their doors. Last year, a Federal Reserve study claimed that at least three quarters of the decline in new charters is the result of the weak economy and low interest rates which results in fewer investors.
Still, regulations and the costs of keeping up with compliance have been huge factors. Jill Castilla, President and CEO of Citizen’s Bank of Edmond (Ok), says, “There is a lot of regulatory fatigue. I think there’s maybe a greater temptation to merge because of compliance costs and the economies of scale you’re able to gain when you combine.”
But what’s causing regulatory fatigue? Why is the cost of compliance escalating? More than a few experts point an accusing finger at Dodd-Frank. A Harvard University working paper released in early 2015, argues Dodd-Frank is the culprit contributing to fewer community banks. Marshall Lux, a senior fellow at Harvard’s’ Kennedy School and one of the paper’s authors says, “This is a piece of legislation that needs to be fixed.” And, it appears that calling for even more bank reform that supposedly helps smaller banks wins relief for the larger banks as well.
Lux believes, “consolidation is not inherently a bad trend, but policy makers should be concerned that a critical component of the U.S. banking sector may be withering for the wrong reasons – inappropriately designed regulation and inadequate regulatory coordination.”
There is reason for concern. The Harvard paper found that the share of assets controlled by banks with less than $10 billion in asset size has shrunk twice as fast since Dodd-Frank was put into place. Yet, contradictions are rampant. The FDIC claims that when a community bank fails or voluntarily closes its doors it is taken over by another community bank about two-thirds of the time.
Others argue that small banks just don’t have the economies of scale to compete in today’s market. The big banks can offer more for less. And, an elephant in the room is that perhaps the “too big to fail” banks have “unfair advantages that slants the playing field in their favor.”
There is no argument. Larger banks are more profitable and more efficient than their smaller “competitors.” Today, banks with upwards of $10 billion in asset size generally have a higher return on their assets and equity. And compliance costs hit smaller banks hardest. As Ms. Castilla tells us, Citizens Bank, with $253 million in asset size had no choice but to increase its compliance spending from 3% of its budget in 2008 to today’s cost of nearly 15% of its budget.
Frank Keating, President and CEO of the American Bankers Association, recently warned, “Since the fall of ’08 we have lost one community bank a day, seven days a week… as a result, quite truthfully, of, obviously competition from nonbanks, but most particularly by a huge regulatory burden, some 12,000 pages of proposed and final rules in Dodd- Frank.”
I don’t believe in conspiracy theories. But, it appears to me that the rules that govern capitalism and encourage entrepreneurial growth and small business are being trashed – skewed in favor of the mega companies. Government rules and regulation are driving the small business out of business. Community banks, the pillars of our communities, are going the way of the dinosaur and giving way to the giants in the financial service industry that don’t care about the average customer.
And Dodd-Frank is driving the wedge even wider.
[tweetthis url=”http://buff.ly/1hIwxbl”]Has your hometown community bank disappeared, absorbed by one of the mega banks? ~@RichardMBowen #tbtf #banking[/tweetthis]
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
