Ex-Trump adviser Cohn predicts bleak future for community banks

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WASHINGTON — Former Trump administration economic adviser Gary Cohn anticipates more banking industry consolidation as smaller institutions struggle to keep up with technological innovations that are altering the financial services landscape.

Cohn, who headed the National Economic Council in 2017 and 2018 after serving as chief operating officer at Goldman Sachs, said handling the evolving technological and regulatory changes requires size.

“I just don't think you can really be a one- or two- or three-branch regional bank in this world with the legal component, regulatory and digital needs that you have today,” he said in an interview with Rob Blackwell, former editor-in-chief of American Banker and now chief content officer for IntraFi Network — previously known as Promontory Interfinancial Network — as part of an American Bankers Association event.

The trend of disappearing community banks will likely only be hastened by the coronavirus pandemic, added Cohn.

“We've seen it through this epidemic,” he said. “More and more transactions have been done digitally. Less and less people actually go to branches. More and more digital payments are being used.”

“I just don't think you can really be a one- or two- or three-branch regional bank in this world with the legal component, regulatory and digital needs that you have today,” said former National Economic Council Director Gary Cohn.
“I just don't think you can really be a one- or two- or three-branch regional bank in this world with the legal component, regulatory and digital needs that you have today,” said former National Economic Council Director Gary Cohn.

To survive, community banks will need to invest in digital technology, Cohn said. But those banks will need to get bigger to cover the costs of that technology, which will lead to mergers of community banks into smaller regional banks and regional banks into “super-regional banks,” he said.

“The role of the community banker has been diminished in some ways, which in some respects is a shame,” said Cohn. “But it's just sort of the natural evolution of where banking has come."

Between 1990 and 2018, the number of banks with assets of less than $500 million declined by about 70%, or by about 7,600 institutions. Today, the U.S. has almost 5,000 community banks.

Many have expressed concern about the loss of community banks, which in some rural areas and urban banking deserts are the only way residents can readily access financial services. Federal Reserve Bank of Kansas City President Esther George said in 2019 that community banks are “both the catalyst and the backbone for sustained growth.”

But Cohn said that while the decreasing number of community banks is “probably not a good thing overall,” it could be a trend that represents a natural evolution toward a bigger role for financial technology.

“You're now starting to see more and more technological competition from an unregulated community,” he said, speaking of fintech companies. “That's forcing the banks to become more technologically savvy themselves. So even the existing banks today are spending more ... of their time and more and more of their money providing a digital product for their clients, and I think that’s going to continue to be more important.”

Cohn said he isn't expecting a wave of bank failures as a result of the COVID-19-induced recession, since U.S. banks are well-capitalized. But he said large banks have to start changing the way they do compliance.

Just last week, Wells Fargo said it had fired more than 100 employees for making false representations in applying for pandemic relief funds through the Small Business Administration’s Economic Injury Disaster Loan Program. And bank regulators on Oct. 7 levied a $400 million fine on Citigroup for failing to improve its risk management systems.

Banks "tend to look at data and look at records after the fact, either when they get client complaints or a regulator calls them, or someone says something … happened in the past,” Cohn said. “That's not the way that I think banks are going to have to look and run their compliance department in the future.”

Instead, Cohn said, banks will need to either buy, create or invest in a technology that “allows you to monitor your workforce real-time on how they’re behaving.”

After the interview with Cohn aired, the head of the Independent Community Bankers of America issued a statement taking issue with his remarks.

Rebeca Romero Rainey, the ICBA's president and CEO, noted the efforts by smaller banks to support small businesses during the pandemic.

“Contrary to Cohn’s assessment, these trying times have only elevated the value of community banking partnership to small businesses across this country," Rainey said. "Pairing increased investments in technology with hard work and long hours, community banks delivered PPP loans faster than the megabanks."

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Community banking Gary Cohn M&A Fintech Compliance Regional banks Community banks Digital banking American Bankers Association
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