While community bankers accept that the Federal Reserve Board's indirect rescue of Bear Stearns Cos. was necessary to calm financial markets, some are worried about broader implications.
For one, they are concerned that upcoming examinations could be even harsher than usual, further discouraging lending.
Bankers like Nino Moscardi, the chief operating officer at the $375 million-asset Newport Bancorp Inc. in Rhode Island, said they are worried about the impact the Bear Stearns fire sale will have on the psyche of customers and, in turn, local economies.
"In the midst of the mortgage meltdown and the very unfavorable news about the economy, both nationally and in many local markets, a situation like this contributes to the negative feeling among customers," Mr. Moscardi said Monday. "It will definitely cause people to pull in their horns and not take risks and probably curtail a lot of spending. That affects all of us as community bankers."
Finally, bankers suggested that the "bailout" of Bear Stearns will only increase pressure on lawmakers and regulators to impose more regulations on all financial institutions, including thousands of community banks that never made or invested in subprime mortgages.
Still, for the most part, bankers said they understood the Fed's decision to provide as much as $30 billion of financing to facilitate JPMorgan Chase & Co.'s purchase of Bear Stearns.
Many bankers said that they are not bothered by the Fed's decision to come to a nondepository financial institution's aid if it means preventing panic.
"I think it is important for the Fed to show they are going to back financial institutions such as Bear Stearns, because, quite honestly, if they didn't, there would have been a worldwide reaction that would have sent us down a very slippery slope," said Robert C. Ahrens, the president and chief executive officer at the $423 million-asset Gateway Financial Corp. in Sewell, N.J.
H. McCall Wilson, the president and CEO at the $215 million-asset Bank of Fayette County in Moscow, Tenn., said that, "whether you agree with it or not, much of the financial system now takes place outside of traditional banking," and that the Fed has an important role in "keeping the system from imploding."
To some bankers, the bigger news the Fed made over the weekend was its decision to cut its discount window rate by 25 basis points, to 3.25%, and to triple the maximum borrowing term, to 90 days.
Mr. Ahrens said that Gateway "is a liability-sensitive institution." The rate reduction "will allow us to lower our deposit rates and allows us to show more of a profit."
Christopher Wells, the president and CEO of the $459 million-asset Martha's Vineyard Savings Bank in Edgartown, Mass., said that even with deposit costs going down, loan yields are likely to remain stable, improving community banks' spread.
"I feel like" the Fed is "somewhat indirectly subsidizing banks with the rate reduction," Mr. Wells said.
That is not to say that all community bankers are pleased with the Fed's most recent actions.
Camden Fine, the president and CEO at the Independent Community Bankers of America, said that even though he understands why the Fed intervened in the Bear Stearns case, some of his members are worried that the attention could spur more regulation.
"Out of this mess will come a plethora of new regulations that will inevitably come down on community banks," he said.
J. Pat Hickman, the CEO at the $650 million-asset Happy Bancshares Inc. in Texas, said he has the same concerns. As he sees it, regulators should be devoting more of their resources to the most complex financial institutions.
"I have branches in Happy and Sunray, Texas, which both have populations of less than 1,000 people, and I'm the only bank in those two towns," Mr. Hickman said. "Why do they examine me for … [the Community Reinvestment Act] when I am the only bank in town? Why waste time doing that with me when they have this kind of stuff going on with the gigantic guys?"
Mr. Fine said he is also concerned about what he called a regulatory "double-standard."
If a small bank is on the verge of collapse, he said, regulators might just let it fail or, at the very least, impose severe restrictions and force out the top managers.
"It's not so much the bailout as the perception that there seems to be one standard for community banks and another for Wall Street banks," he said.
William Michael Cunningham, the president of Creative Investment Research Inc. in Washington, put it this way: "The government should not be in the business of picking winners."
Joshua Rosner, a managing director at Graham, Fisher & Co., agreed that a community bank "would be in receivership and winddown right now" if it had made bad subprime bets and were in the same situation as Bear Stearns.
"That's where the moral hazard really begins," he said. "We have to question whether there is a such thing as 'too big to fail,' or if there are creative ways of unwinding. And I'm not sure that's what is happening when the Fed is giving a $20 billion or $30 billion nonrecourse loan."
Still, Jim Barresi, a partner and the head of the financial services practice at Squire, Sanders & Dempsey LLP in Cincinnati, said it is not in community banks' best interest for the government to let a big investment house go bankrupt.
"Most community banks appreciate that runs on investment banks could eventually lead to runs on commercial banks," he said.
One of the biggest challenges for community banks in the face of the barrage of bad economic news is assuring customers that their money is safe.
Leton L. Harding, the executive vice president at the $937 million-asset First Bancorp Inc. in Lebanon, Va., said that many customers do not understand the distinction between a commercial bank and an investment bank, and that he has spent a lot of time lately explaining the difference.
The turmoil, though, has an upside for community banks. Mr. Harding said deposits have increased lately as consumers have pulled money out of brokerage accounts and parked it in savings accounts or certificates of deposit.
Bank of Fayette County's Mr. Wilson said that when news of Bear Stearns' troubles surfaced last week, one elderly woman in his community was so spooked that she pulled all her money out of her brokerage account and invested in a Bank of Fayette County CD.
"And I expect to get more calls today," Mr. Wilson said Monday.
