Community Banks Keep It Personal

As the banking industry, with the encouragement of the federal government and Wall Street, rushes toward megabanking, a single anecdote summarizes why community banking is destined to remain a vital component of our nation's financial infrastructure.

During a stressful negotiating session in which one of my former clients was growing increasingly impatient, the other party to the negotiation asked him not to take things so personally, since the only issue at stake was money. Without pausing, my client retorted, "Nothing is more personal than my money!"

Forecasts of Demise Unfounded

This client's response clearly illustrates why community banks will continue to play a vital role in our society. Despite the views of policy makers and industry leaders, members of Middle America do not see their financial affairs as commodities.

In the midst of the euphoria over the mergers of NCNB with C&S/Sovran and BankAmerica with Security Pacific, it is tempting to forecast the demise of community banks.

It would be a serious mistake, however, to declare megabanking as the only future.

And as far as our global neighbors are concerned, the tendency of countries like Japan, France, and Germany to foster big banks is not directly applicable to the United States for the following reasons:

* The United States is more economically, culturally, and demographically diverse than any of these countries.

* Small business is a more critical component of the U.S. economy than in the other major industrial nations.

* The United States dwarfs any of these other countries in terms of land mass, a factor that contributes to the maintenance of regional diversity.

* And Americans are traditionally hostile to extreme concentrations of economic power.

The myriad financial arrangements in today's banking industry can make it difficult to identify a community bank.

What Makes a Community Bank

In general, however, four characteristics distinguish these institutions:

* A community bank has a "humanness" that can only be achieved and maintained in a smaller institution. Once banks pass a certain size -- normally, over $5 billion dollars -- they tend to lose that factor.

* A community bank operates in a relatively compact geographical area.

* A community bank typically has a decentralized decision-making process, whereby, branches have the authority to make many decisions about products, credit, and other management issues.

* Finally, the success of a community bank and its employees is largely dependent on the economic future of the community is which it is based. This is not the case with the branches of many megabanks, in which a particular branch is such a small part of the whole. And a position in a branch may be seen by an employee as merely a stepping stone to a job at headquarters.

A Critical Role

Community banks must and will be maintained because of their critical role in the financial security of the United States. They deliver service and play an important role in fostering community growth that cannot be replicated by larger banks.

The current drive to consolidate our banking industry is a response to severe industry problems, not a response to customer needs. Many bank customers desire personalized service, more than they desire better prices or technological wizardry.

Community banks have excelled in delivering financial services to small customers, at competitive prices, without losing the all-important personal touch. There are no market factors dictating that community banks cannot continue to do this profitably.

The Small-Business Market

In addition, community banks are especially well-suited to serving the small business market. The recent wave of bank consolidation has typically had an adverse effect on small businesses.

Many large banks choose not to cater to small businesses because of the expense and flexibility required to service such accounts. Yet, economists generally credit the small business sector with being the primary engine of economic growth in the United States.

The inability (or unwillingness) of megabanks to serve this market will assure a continuing role for smaller, community-based financial institutions.

Filling Other Roles

Local financial institutions perform other, more subtle, functions in our communities. Community banks are major sources of financial and human resources for civic activities.

In addition, banks that are integral to their communities support local systems of financial accountability that help counteract the lax attitudes regarding debt in our society.

Finally, community-based banks provide economic nurturing to their local areas and encourage bankers to see their success as linked to that of their locales.

The federal government and Wall Street appear to favor consolidation, with little regard to its impact on small business and on smaller communities.

Suggestions for Policymakers

While consolidation is a desirable outcome in our banking system, policymakers should take care not to create artificial incentives for bank mergers.

General public policy initiatives that would be helpful to the community banking sectors include the following:

* Allow community banks to enter into joint ventures to share back offices and technology ventures. Current regulations, while not explicitly prohibiting joint ventures of this type, do not define the circumstances under which such arrangements can be made or establish clear guidelines for this process.

* Simplify the regulatory process for multibank holding companies that choose to operate subsidiaries as community banks. Currently, these companies are faced with managing regulatory compliance at both the holding company and individual subsidiary levels and must therefore deal with multiple regulators and inconsistent policies. This is an expensive and time-consuming process.

* Implement policies that enhance the viability of the small business community.

This would include rationalizing tax policy as it applies to small business by doing such things as restoring the investment tax credit, restoring capital gain preferences, and easing the burden of estate taxes on small businesses and families.

* Eliminate the too-big-to-fail policy, so that community banks are not placed at a competitive disadvantage with megabanks.

* Refrain from implementing policies that would actively promote the consolidation of healthy community banks and eliminate existing policies that encourage this process.

Such policy changes would include avoiding capital incentives that are dependent on the size of an institution and changing aspects of the current policy that burden small institutions with disproportionately high regulatory supervision costs.

Outstandingly Profitable

Community banks have consistently provided personalized competitive services to their communities, while achieving outstanding profitability.

Despite the distress in the savings and loan industry and isolated failures of community banks, there is no systemic weakness in the community banking sector.

The industry satisfies the real needs of real people. Any policy that would seek to eliminate the community banking system would amount to a solution in search of a problem.

Banking is, in many respects, a business based on personal trust. Community bankers have long known that there is nothing more personal to a customer than his money.

Mr. Bostian is chairman and chief executive officer of Investors Savings Bank, a Richmond, Va., thrift that has fallen short of capital requirements.

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