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Small Banks Will Suffer from Big-Bank Breakups

Some people assume that when big banks lose, community banks win. I'm not convinced. In fact, I think we need to be careful what we ask for. How can you potentially rip apart institutions that hold more than 50% of the industry's assets without having a significant negative impact on banks in general and the economy as a whole? 

Consider how a government-mandated big-bank breakup would play out in the marketplace. Just one of the largest institutions could devolve into a dozen or more superregionals. Those superregionals would make a direct play for the kinds of small business, agricultural and commercial real estate loans that are the bread and butter for banks like mine. That redistribution of customers would play out all of the way from the largest to the smallest. The customer universe gets pretty small at the bottom.

The "resized" banks would still enjoy economies of scale. This disruption in the banking industry also opens up another door for tax-exempt credit unions and Farm Credit System institutions.

The government's deeper reach into private industry – even if focused on the largest banks – also could harm banks of all sizes in other ways. Investors already are wary of banks' growth prospects due to all of the new rules and regulations. Attracting capital will be that much harder once Uncle Sam has established his rights to further manage the business of banking. Investment dollars are fluid and there are a lot of options outside of our industry. Bank multiples are significantly impacted by publicly traded valuations and those multiples flow downstream to non-publicly traded community banks as well.

Policymakers clearly don't want to harm small banks, but it's difficult to see how they can insulate us from the macroeconomic effects of some of the proposals being considered. The recently-leaked Brown-Vitter approach, for instance, would require all banks to hold a minimum 10% ratio of tangible equity to total consolidated assets with an additional surcharge of 5% for banks with more than $400 billion in assets.

Getting there from here would require the industry to raise $1 trillion in new capital or offload more than $3 trillion in loans and other assets in order to right-size banks to the new capital requirements, according to an analysis by the American Bankers Association. That's the equivalent of booting a majority of banks out of the economy while they bring their ratios in line. Again, this impacts all banks, not just large banks.

Just as importantly, what does that disruption do to economic growth and all whose livelihoods are dependent on a continued recovery? The March unemployment numbers reminded us again that the recovery is still fragile. Who will take up the slack when banks are sidelined? Foreign banks? Or perhaps the less-regulated shadow banking industry, birthplace of some of the "innovations" that caused the last financial crisis?

I truly understand the anger that is fueling some of the "too big to fail" debate. And I wholeheartedly agree that TBTF is patently unfair and has to end. But a rational discussion is what's needed if we are to avoid a cure that is as bad, or even worse, than the disease. I actually think the current debate is healthy and positive. We will eventually get to solutions. But now it's time to start actually applying facts and studies to the potential solutions being bantered about.

We've already experienced the outcome and ramifications of abruptly passed legislation. For those of us in the community banking space, remember when we were told that Dodd-Frank would primarily impact large banks? Strike one. Remember when we were told that the Consumer Financial Protection Bureau would only impact those with more than $10 billion in assets? Strike two. Now there is this assumption that breaking up big banks will only impact big banks. How do you call this pitch? From my perspective it has a significant chance to be strike three for community banks, big banks and our industry as a whole.

So let's be careful what we wish for. Let's find solutions that first do no harm to the recovery and the economy in general.  Second, let's bring about positive change for community banks and the banking industry as a whole. These changes should move the entire industry forward in a safe and sound matter, truly address TBTF and support and grow our communities, our customers and our economy. We can't afford to get this one wrong.

Plagge is president and CEO of Northwest Financial Corp., a $1.5 billion community bank holding company in Arnolds Park, Iowa.



(10) Comments



Comments (10)
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Posted by youeye | Monday, July 27 2015 at 1:34AM ET
The only roles that the big banks play in the American economic system when "times are good" are the role of "arrogant leader" and the easy way for the Fed to impact the money supply. With only a half dozen banks controlling over half the deposits, controlling bonds, etc. what an easy way for the Fed to implement policy. But it is like pushing on a string. When you had three or four regional banks in a geographic area or major cities, you had 3 or 4 civic leaders with clout, ambition, and the determination to help their communities and for their bank to have respect. Most of that energy and ambition has been eliminated from the financial system with the consolidation of big banks.
Posted by FrankRauscher | Wednesday, April 17 2013 at 5:19PM ET
Let me get this straight. The TBTF banks are poor competitors in the community banking space but the smaller pieces resulting from their break-up will compete well. This implies two conclusions. One, TBTF banks are not serving the market and yet the taxpayer is on the hook if they goof up (as they obviously did a few years ago). Two, community banks can't compete in the free market but like the status quo. If one is true, it is even more imperative we break up the big banks. I completely reject two and have a stable of community bank clients who would do so as well.
Posted by mjamesson | Wednesday, April 17 2013 at 4:48PM ET
Hard to believe I just read that. I would think that the big boys could come up with a better argument than that. The small community banks are already competing against superregionals with greater economies of scale. That's not the issue. the issue is competing against banks with lower cost of funds due to their TBTF designation. And do you think 10% tangible equity will be a big detriment to Community Banks? So his final argument is this is a fragile economy....yes, you are let's consider why. That's the reason why we need to break up these entities.
Posted by littletownbanker | Wednesday, April 17 2013 at 4:43PM ET
Well, big banks play an important role in the American financial system. It's easy to notice that when everything is okay and big American banks feel good then there are no so many economic problems. And when there are tough times for banking giants then it impacts the economy and the worst, American consumers. That's why it's not that hard to understand that community banks will not really win from big-bank breakup. Despite all the drawbacks, big banks have an experience in servicing people and many customers trust them their money, these banks even offer payday advance loans and alternative financial services and their breakup will be significant for the economy.
Posted by Christina8 | Wednesday, April 17 2013 at 4:25AM ET
The discussion around TBTF ignores the fact that most recent regulations have made TSTS (Too Small to Succeed) a larger issue. As the American Banker pointed out last week, the real winners will be the regional banks who have the balance of economies of scale and a bit of 'flying under the radar' to help them.
Posted by jmarous | Tuesday, April 16 2013 at 3:54PM ET
I don't buy these arguments. Mega banks are dealing down to the individual level on a daily basis in the mortgage and credit card markets. The money in these banks won't disappear. They can work cooperatively on larger projects, as can other banks. There are better vehicles for behemoth lending such as money funds. When the government guarantees your depositors, you lose your freedom. Get used to the government telling you what to do to the micro level no matter what industry you are in these days.
Posted by John C | Tuesday, April 16 2013 at 2:38PM ET
Community banks will suffer if we break up the oligopoly?? Is there something about the term "free market" that Plagge doesn't get? Competition is good!! Everybody wins in a robust and competitive free market. Plagge's opinion piece comes right out of George Orwell's vision in "1984" - Oligopoly=Free Market; It is that kind of Orwellian thinking that got us into this mess to begin with.
Posted by commobanker | Tuesday, April 16 2013 at 12:44PM ET
Dwihas3 provides an interesting perspective. I think that I can simplify it. what makes anyone think that a $250,000/ year or less bureaucrat has the knowledge, ambition, innovation, street smarts, etc to play in a game with the people at the top of these major banks who are making $1-25 million/ year?

with regard to Mr. Plagge's comments, he is correct in stating that there needs to be a dialogue. I believe that the result of the dialogue will be that breaking up the big banks will be great for the US economy.
A few topics for discussion have to do with "Accountability" and "Competitiveness". Executives and Directors at the TBTF banks can blow off their customers, local civic leaders, shareholders without any ramifications. When banks were smaller, bank officers and directors were also accountable to their "Country Club buddies" where they could be embarrassed and kibitzed about many of their practices until they changed. Creating a lot of regional banks would have the same effect as the breakup of AT&T into the Baby Bells and that created a lot of jobs. And banks would have to try harder for new business and the stupid ones could fail. Yes, we need a conversation because there are many pros as well as the cons.
Posted by FrankRauscher | Tuesday, April 16 2013 at 12:10PM ET
Interesting. In 2006, when I was heading up the FDIC's large bank oversight program known as Large Insured Depository Institutions Program, I formally recommended that the nation's largest banks be charged for the extra time and effort in regulating large banks based on a "complexity" score. My proposal was met with ridicule by senior officials at the agency because it was believed overwhelmingly at the FDIC that the largest banks were "safer" and posed less risk than community and regional banks because the largest banks had more diversified revenue sources and better Moody's and S&P debt ratings than all other banks.

You need to understand that I also reported a number of instances of accounting and regulatory violations by large banks and these same officials winked and smiled and ignored all transgressions reported. These officials were "captured regulators" in every sense of the word.

Once I realized top officials were burying all evidence of major wrongdoing by the large banks, I decided to formally be a whistleblower. I made disclosures to the Chairman, Vice Chairman, Ombudsmen, and Inspector General. Shockingly, these top officials ignored my formal whistleblower disclosures. I then took my complaints to the Office of Special Counsel and Merit System Protection Board. Even more shocking, these judicial authorities deemed me to not be a whistleblower entitled to any protection by law.

I write about this in my book, "American Betrayal" by John Doe. I cover this in my blog as well, at
Posted by Dwihas3 | Monday, April 15 2013 at 10:19PM ET
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