This may have gotten by you, but April was Community Banking Month. Kicking off their month with April Fools' Day pointed in the right general direction.
It's a good time to remember that for many decades, some states had nothing but community banks — because branching and acquisitions were subject to onerous, anticompetitive state restrictions. In certain states the unit bank, even the one-office bank, was the only permitted model.
This was thanks to the political influence of these banks. They persuaded legislators that if unrestricted branching and bank acquisitions were permitted, then community banks would be wiped out and we'd soon have a banking system like that of the U.K. or France: just a few large banks would control most of everything.
When the restrictions were removed, this didn't happen. We still have 7,000 community banks. Although most of the banks that failed in the recent crisis were small banks, according to the Independent Community Bankers of America community banks still constitute 97% of all banks. Why?
It can't be merely because the community banker is prepared to preside over the Rotary Club and provide uniforms for the softball team. The big banks provide a "CEO" for cities, and they vary their pricing and products by ZIP code. They're more than capable of making the necessary local charitable contributions.
The main thing the big banks have not been able to do is to lower their costs and increase their efficiency. Their total compensation expense continues to increase much faster than wage inflation. Hence, many community banks have lower personnel costs than the biggies, plus access to highly flexible and economical outsourcing of IT and other functions. They are obviously able to compete effectively.
Compare a large bank with Walmart to check where we're headed. Walmart has driven a lot of mom-and-pop stores out of business. Yet if you walk down the street anywhere, you still see lots of mom-and-pop stores. Mom and Pop will work for very low and uncertain income, while bank employees are not willing to do so. Walmart employees, unlike bank employees, must tolerate unfavorable working conditions. So, if Walmart and the supermarkets, with their low labor and product costs, have not substantially eliminated the small local stores — then it's implausible that the big banks can ever wipe out or marginalize the community banks.
True, the community banks, unlike mom-and-pop stores, are subject to rather intensive regulation. If, per dollar of deposits or revenue, banking regulation imposed a much higher burden on community banks than on big banks, this in theory could make the position of the community banks more difficult. It's very clear, however, that this isn't happening. The recent legislative and regulatory offensive — "too big to fail," the new FDIC premium structure, derivatives, mortgage servicing — will constrain and penalize the big banks while having little or no impact on most of the small ones.
What is unique about all banks is federal deposit insurance, which is effectively mandatory. As a result of this, it requires millions of dollars in capital and it can take years to start a community bank — unlike a mom-and-pop store. The barrier to entry is high, and even in a fat year the number of new charters is in the range of 100. With inevitable attrition, primarily by merger and acquisition, we'd have to make it easier to start a community bank — if, for some reason which has never been articulated, we didn't think that 7,000 of them was enough, or more than enough.
But, where does the shoe pinch? Where is the threat to the survival of independent community banks — other than the increased opportunity to sell out at higher prices, which will continue to make many disappear? Or, are they crying wolf again?
What remedies do they seek, and why? How can they argue that measures such as the Durbin amendment that are disagreeable to all banks will be particularly harmful to small ones? It was big banks, not small ones, that started providing big incentives for checking accounts and debit cards.
The ICBA overtly lobbies for an unequal playing field tilted in favor of community banks. They find it "harmful," for instance, that community banks, like all other banks, are subject to the new insider transaction rules and that "shareholders of publicly traded community banks must be given a nonbinding vote on executive compensation." Harmful to whom? The local plutocrat, whom we are asked to salute as a model of benevolence in contrast to nasty "Wall Street"?
One big thing we can say for Vikram Pandit is that he is not the son or grandson of a CEO of Citigroup. Many community banks can't say as much. High as my hopes are for Prince William, history tells us that heredity does not breed efficiency. Family businesses are bested by investor-owned businesses.
Why should legislators and regulators favor community banks or treat them as an endangered species?
