There's a lot of talk these days about big banks. Getting lost in the discussion is what needs to be done to ensure smaller community banks will continue to have a vital role in supporting the U.S. economy and our way of life.
To some, this might seem an odd priority for me to discuss as CEO of a large U.S. bank. But I grew up on a family farm in a small town in central Minnesota. I learned early in life how essential community banks are to the people they serve. They cashed our checks, kept our deposits safe, made loans that kept local commerce flowing and kept our community together. My family is still in the farming business where I grew up, and on the luckiest day of my life, I married my high school sweetheart, the local banker's daughter.
We need well-managed, well-regulated banks of all sizes—large and small—to meet our nation's diverse financial needs, and we need public policies that don't unintentionally damage the very financial ecosystem they should keep healthy. Personally, I'm concerned we're reaching that tipping point, especially when it comes to community banks. I shared some of those concerns with leaders of the American Bankers Association when they met in San Francisco a few weeks ago.
Almost 95% of all U.S. banks are community banks. They provide nearly half of all small loans to U.S. businesses and farms. In one out of five U.S. counties, community banks are the only banking option for local residents and businesses. Many small towns, like the one I grew up in, would have little access to banks, and the services they provide, without our system of community banks.
Unfortunately, many community banks are struggling to keep their doors open. Some community bank closures have been due to the economic conditions affecting banks of all sizes—legacy loan problems, tepid economic growth, soft loan demand, and historically low interest rates that have crimped profit margins.
Compounding these challenges are the burdens of changing public policies and regulations that for a smaller community bank can literally mean life or death.
We all can agree there is no such thing as free regulation even if it's done well and poorly thought-out regulation has a direct cost to banks, customers and the economy overall. To comply with regulations, banks of all sizes have to build compliance costs into their operations. The multiple provisions of recent banking regulations—along with the new international capital requirements known as Basel III—have dramatically increased those costs and make credit less available at higher prices to fewer people. These costs are burdensome even for large banks like Wells Fargo that have scope and scale—but are particularly punitive for small community banks.
And, it's not just the "headline issues" like increased capital requirements that are increasingly onerous and often not germane to their business model. The accumulated costs of complying with specific regulations can also mount in a hurry. For example, community banks must now report information on every new small-business loan application and are required to mail customers annual notices about bank privacy policies, even when they haven't made any changes to those policies. For a small bank that may have only a few dozen full-time employees, those requirements are costly and divert resources away from serving customers.
I have a profound respect for our elected officials and regulators. We share a desire for a stronger economy, and a financial system that operates on a fair, level playing field, where consumers and taxpayers are well protected. My concern is that well-intended regulations, written immediately following the worst financial crisis in recent history, could have the unintended consequence of leading to more failures of smaller financial institutions. The impacts could be particularly severe for community banks that serve local communities across the country, particularly in small towns like my hometown of Pierz, Minn.
A common-sense approach for policymakers would be to review the impact of the Dodd-Frank Act on our nation's smaller banks and assess the benefits of a scaled-down Basel III framework that better fits their operational realities. At the same time, a review should take place to simplify and rationalize the pending regulations on large banks to make sure unnecessary costs and needless complexity are not being introduced into the system that would slow down economic recovery in unexpected ways.
The strength of America's financial system is a result of the diversity of its players. As an industry, we need to pull together and support a common cause. We need banks of all sizes, but that diversity won't survive if our nation continues down the path of a one-size-fits-all philosophy of regulatory reform.
John Stumpf is chairman and chief executive of Wells Fargo.