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Fictional Banker, Real Tragedy

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One day Ed, CEO of the local community bank, was in his office waiting for the start of the most dispirited board meeting in his bank’s 100-plus year history. As he waited, Ed began reminiscing about his first day at the bank, when he began working as an office boy at age twelve.

Over the years Ed worked in virtually every area of the bank, rising through the ranks to eventually become CEO, always remembering and adhering to those lessons and examples of high integrity and morals taught to him by his father and predecessors at the bank.

Don't try to figure out which bank is Ed's. He is fictional. But having been a state regulator for over three decades, let me just say his story is very real.

Ed glanced at the walls of his office which were adorned with memorabilia of the bank’s history. There was the framed 1929 newspaper article describing how the bank became the first bank in the region to establish bank branches. There was also the 1933 article that chronicled how the bank became embroiled in the nation’s banking crisis, but quickly reopened after President Roosevelt’s nationwide “bank holiday”, and had remained open ever since, successfully weathering business cycle after cycle. There was the 1958 article describing how the bank building had been demolished in the great hurricane, but the bank opened the very next day with only a kitchen table, a legal pad for recording, and a bagful of money to lend. And there was the 1994 article that said interstate bank branching would be the end, beyond question, of community banks, a widely held view of the time.

Scattered about Ed’s office were numerous citations, commendations, and thank-you notes from customers and local residents sharing their personal stories of gratitude for the bank’s dedication and service, often in times of great despair. Ed bemused about how he promised himself time and again that he would organize these mementos but never found the time, now there would be no time or use for that now. Ed often heard people remark about how much the bank had contributed to the community, but Ed was always quick to respond that it was the community that had actually contributed more to the bank. Ed knew it was the community’s support, in large part, which enabled the bank to survive many an obstacle during its long history, obstacles that even larger banks could not and did not survive. However, this bank could survive no longer.

The financial crisis of 2008 and aftermath had unfortunately created, among other things, an environment in which it was no longer cost effective to operate a profitable community bank. Regulatory compliance costs had become overwhelming, and compliance costs were expected to only further increase with the new reforms and regulations to be written in the coming months and years. Direct and indirect regulatory impediments were stifling lending activities and access to capital. Washington officials were encouraging community banks to lend, saying regulators should help, not hinder lending; but the message was getting lost somewhere up and down the line.

Ed heard the board members assembling in the board room next to his office. It was time for the board to convene and vote to sell the bank. Ed wondered how this could have happened; he never thought it would end like this. His bank had not made risky mortgage loans, and did not invest in risky securities. The bank had always received good regulatory evaluations. There was no arrogance or greed about this town or the bank, unlike in other places and institutions. The bank had stayed the course that had worked for over 100 years, but the burdens and costs were too great now. As Ed entered the board room, he felt like he was dying a little inside.

In the years after, the community died more than a little. The acquiring bank closed many of the local branches in the community, small business lending became tighter and local economic and job growth remained slow. The community was never the same again.

E. J. Face Jr. is Virginia’s Commissioner of Financial Institutions.

 

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Comments (5)
Learn to lend money again! When I started in banking we made lots of personal, auto and secured loans, on a JUDGEMENTAL basis. Many were 8% to 14%. Push the darn models and "scores" aside, learn to ask questions, and take measured risk. Lets get going and stop whining!
Posted by Old School Banker | Friday, December 16 2011 at 10:39AM ET
One would think that because regulations increase costs, they are bad for business. Not so. Regulations are necessary because administrators are not the kind of human beings that do only what's appropriate. It used to be that in a regulated environment (read 1960s), banks made lots of money and communities were well serviced by their financial institutions. It was the time of the real American Dream. Now, its the fast buck, M&A, Funds, Trading and all that is nothing but an electronic environment of money freeways. No emphasis on small business and people. Rude, impersonal, arrogant, greedy and heartless are the characteristics of XXI century bankers. Those people should definitely be controlled through very strict regulations because they are out to grab every penny we have..
Posted by mauriciott | Friday, December 16 2011 at 11:08AM ET
Mauricio has a point. I wonder how many S&L execs of a certain age would go back to the days of 5-4-3 banking. For those too young to remember those were the days when deposit and loan rates were regulated when you would lend at 5% pay depositors 4% and be on the golf course by 3!
Posted by ricpfi | Friday, December 16 2011 at 11:34AM ET
Well, here is the issue..All of the financial services regulatory agencies have figured out that regulaton is a business. The most egregious of these are FINRA, who is dismantling the whole system of intermediation that has made our country great since the late 1780's. Unfortunately, it is easier to inspect a large financial institution and more lucrative to fine that institution who views the fines as a cost of doing business. There are many facits to an answer to this issue, but until the regulators buy in to the notion that it is better to find some sins that are small and hurtful but not damaging to the nation versus having a large sin become so pervasive and damaging that it takes down our country, we will continue to close small financial institutions. The heathy ones will merge and the sicker ones will just close. I pray that I am incorrect, but the vector created by charting the damage to the national and world economies by Long Term Capital in 1998, the first sub-prime mortgage explosion in 1999, the Tech Bomb in 2002 and the destruction of some of the nation's and the world's largest financial institutions in 2007-2008 points to a place that no one wants to go.
Posted by mitch f | Friday, December 16 2011 at 3:31PM ET
I must react to the very good point made by Mitch and I must say, in a most appropriate way. True, regulatory controls have become an everyday cost, payed in the end by the suckers, all of us, using the services provided by those so called bankers that resemble nineteenth century road bandits out to get up to the last penny in our pockets. If there is no criminal responsibility tied to regulatory enforcement, if we keep judging corporation behavior instead of corporate exec decisions, nothing is going to change in the financial market. Lets move in that direction and we'll see a totally different environment, much healthier for the economy and the solidity of social/class structure. Even wealth distribution would go back to what made America the greatest country on earth, a very strong middle class.
Posted by mauriciott | Saturday, December 17 2011 at 10:12AM ET
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