As we all watch the political theatre play out in the race for President, many political hot topics rise and fall. With all the talk about the economy, I hear a deafening silence about one of the greatest threats to our economy — the endangerment of community banks.
Since the financial crisis in 2008, a red line has been drawn between community banks and too-big-to-fail Wall Street banks. Community banks, meaning local banks that invest in local communities and make lending decisions locally, have been burdened with many new regulations as a direct result of the misdeeds of the too-big-to-fail banks.
While lawmakers in Washington, D.C. have proposed many regulatory relief initiatives in the 114th Congress, only a handful of minor measures have been enacted. The need for community bank regulatory relief has garnered bipartisan support, but as often is the case in Washington, behind-the-scenes politics have blocked constituent and industry efforts.
It's ironic that the continuous wave of onerous new banking regulations created to address Wall Street's misdeeds, better known as Dodd-Frank, is actually helping the megabanks gain market share at the expense of the nation's community banks. Community banks are vanishing, which is exactly what the Institute for Local Self-Reliance found in a recent report. This group's research shows that one in four community banks has disappeared since 2008. The report noted that, in 1995, megabanks with assets of $100 billion or more controlled 17 percent of all banking assets. By 2005, their market share reached 41 percent and today, it is an astonishing 59 percent. This is the unintended consequence of Dodd-Frank.
Despite this crushing burden, community banks continue to provide critical local lending support that accounts for more than 60 percent of all small business loans under $1 million and more than 75 percent of all agricultural loans. Community banks strive to serve customers and do so responsibly. Take mortgage loans for example. Between 2009 and 2012, the default rate on home loans across all banks was sixteen times higher than for residential mortgages held by community banks. Why? Because community banks know their customers. They specialize in "relationship banking" as opposed to "transactional banking”. Relationship banking allows bankers to make decisions based on customer needs.
South Dakota has been very blessed with a strong economy and a strong community banking industry that continues to be the backbone of agriculture and local economies. But we have not escaped bank consolidation. Seventeen community banks have disappeared from our state in the last six years. That means many cities and towns are void of a hometown bank.
Policymakers need to pass regulatory reform now and work long-term to abandon the current one-size-fits-all approach to regulatory oversight. We need sensible regulation that protects the safety and soundness of bank depositors consistent with the bank's own risk profile. Or, simply stated, we need proportionate regulations that represent two distinct banking models — one for community banks and one for Wall Street banks.
Our nation's financial system is the best in the world, built largely by the entrepreneurial spirit of local shareholders who understood the importance of starting and preserving independent banks to sustain local economies.
Let's hope our lawmakers in D.C. can put aside the partisan bickering and remove the regulatory shackles from our community banks to allow them to help local folks and small businesses thrive and prosper once again. And that they do it before it is too late to save one of this country's most important institutions.
Hannah Merritt, Marketing & Public Relations
Please contact us on issues related to consumer and small business lending, federal regulatory issues, the economy, housing, tax policy, and other financial services topics. We will provide you with information from the community banker perspective including interviews with ICBSD board members to help you with your story.