What do the infamous Watergate scandal and overwhelming regulatory burden on community banks have in common? “Follow the Money.” Many of us remember this quip from the Watergate scandal. It was another way for “Deep Throat,” the most famous source in American history, to say “connect the dots.” So let’s follow the money and see if we can find the answer to why community banks are being crushed by regulatory overkill.
Today, just five banks, less than 1 percent of total U.S. banks, hold 40 percent of the nation’s deposits. Just 10 banks hold 55 percent. And fewer than 100 banks, or 1.2 percent, hold more than 80 percent of the nation’s total banking assets. In fact, since the crisis began, the very banks that triggered a global financial meltdown have actually gotten bigger!
Over the past 30 years, as our nation’s banking system became more and more concentrated in fewer and fewer hands, the federal regulatory agencies and Congress moved to protect consumers and curtail abuses that almost naturally come with unbridled growth and sheer size. At some point an institution becomes so large that corporate objectives gain primacy over customer care. That is because at some point an institution’s sheer size or monopoly on a product makes a single individual not count for much. We have all experienced the frustration of dealing with on-line automated “help desks,” gate agents at an airport, or the local DMV. To a business that employs nearly 500,000 worldwide and serves tens of millions of customers around the globe, what is the value of a single individual relationship?
Contemporaneous with the rapid concentration of banking assets and the creation of too-big-to-fail institutions came the phenomena of the burgeoning “shadow” banking industry, which operated largely outside the reach of bank regulators and had little or no oversight or constraints on the types of products offered to customers or whether the products offered were appropriate for various customer types. Again, the major focus of these unregulated financial firms was growth and investor return. And once again, customers became just a commodity to be churned through the product mill.
When that happens, businesses get sloppy, executives begin to think they are “bulletproof” and customer abuse begins to creep into the firm’s business practices. When customer abuse becomes widespread, government invariably steps in and acts. And those actions lead to regulations that are not selectively applied just to the banks or shadow financial firms that became insensitive to or abused their customers, but more broadly to all banks—whether they engaged in reckless activities or not.
As the saying goes, “one bad apple spoils the barrel.” And voila, staggering regulatory burden on the institutions that had nothing to do with the abuses, greed or overreach that caused the problems in the first place. And that is why community banks suffer from regulatory overkill.
For nearly three decades, abuses by the few have caused regulatory pain for the many. And this is why ICBA has fought hard for a regulatory and examination system that recognizes that community banks are not the abusers and deserve a different regulatory standard—a standard that recognizes that the community bank has a fundamentally different business model than the largest banks and non-bank financial firms. Community banks make and hold loans and stay close to their customers. It is a business model based on relationship banking, not the business model preferred by the largest Wall Street banks, which use a transaction-based business model. Both models are valid and necessary; however, ICBA fundamentally believes that these two very different business models require different examination and regulation schemes.
So the next time you hear policymakers say that “the financial crisis was not the fault of the community banks down on Main Street,” let’s all hope that they put their words into actions and do NOT reject a two-tier regulatory and examination framework.