A recent op-ed by Rep. Maxine Waters gives voice to the many Americans who worry that our justice system is two-tiered and broken, punishing low-level offenders with harsh sentences while refusing to hold big-bank employees accountable when they break the law. But it would be a shame if the ranking member of the House Financial Services Committee and other members of Congress allow a focus on big banks to overshadow the nation's community banks as they shrink in number.
The continued failure of the House and Senate to fix the regulations burdening community banks gives evidence that small banks are not a priority for Washington. It also raises the question whether some high-profile members of Congress are too distracted by big-bank politics to make time for community banks.
Further proof of the challenges facing small banks is offered in a recent Wall Street Journal story about the Bank of Bird-in-Hand, the first new bank formed in this country during the past five years. (Starting up new banks in this nation is now so rare that it qualifies as front-page news in the largest financial newspaper in the world.)
Two small facts buried in the story shed light on the problems faced by community banks.
First, the Journal noted that 10 different federal and state bank regulators took part in the first exam of the Bank of Bird-in-Hand. To give this number perspective, the bank has only 16 employees. This means the bank had one regulator for every 1.6 employees. If the nation's biggest bank, JPMorgan Chase, was subject to similar scrutiny, then regulators would need to muster up 150,000 examiners.
In fairness to the regulators, who can blame them for aggressive supervision in light of the not-altogether-justified pounding they received from the Financial Crisis Inquiry Commission.
The article also notes that this tiny startup bank in Pennsylvania devotes one full-time employee to the job of managing compliance. The president would like to hire another loan officer, but Bank of Bird-in-Hand is so burdened by regulatory pressures that loan growth is relegated to the back burner.
Think about what this state of affairs means for the nearly 6,000 community banks spread across the US.
Every day, community bank presidents are forced to decide whether to devote limited resources to growing the bank and thus the nation's economy or meeting the escalating regulatory and compliance demands designed and signed off by Washington lawmakers.
If you want to know how bank presidents come out on this trade-off, consider how the efficiency ratio a critical measure that marries bank expenses to revenue creation has changed since Dodd-Frank was signed into law.
According to FDIC data, the efficiency ratio for the nation's nearly 3,900 community banks with assets between $100 million and $1 billion averaged 69.5% over the past four quarters. We have to go all the way back to Congresswoman Waters' first year in Congress 1991, when 185 banks and savings and loans failed to see numbers that high. It's an even worse story for the 1,830 banks with assets less than $100 million. The most recent four-quarter average efficiency ratio of 76.7% is higher than at any time in the entire history of Congresswoman Waters' tenure in office.
In plain English, a deteriorating efficiency ratio indicates that it takes more expenses to generate a dollar of revenue over the past year than it did between 1990 and June 30, 2010. In practice, what this means is that thousands of community banks like Bank of Bird-in-Hand have loaded up on compliance officers at the expense of revenue-generating loan officers.
How is this working out for the U.S.?
Since Dodd-Frank was passed, 1,445 banks with assets of less than $1 billion have disappeared, again according to FDIC reports. That's a 20% decline in the number of banks at that asset level in just five years. And contrary to the FDIC's reassuring assertion that community bank mergers would slow as bank profitability improved, just the opposite appears to be happening.
Mergers are accelerating. During the four quarters ending March 31, 2015, the US lost 5.5% of its community banks. That's an annual pace of mergers faster than at any other time in history except the four quarters ending March 31, 1995. Unless something changes, simple trending of FDIC data suggests that 1,700 community banks will be lost to consolidation between now and the end of 2020.
If Washington lawmakers truly want to fix U.S. banking, they must recognize the unintended consequences of a regulatory pendulum that has swung so far that it threatens the very banks they profess to want to nurture and grow.
Rep. Maxine Waters is a powerful voice in Washington. This nation needs her 25 years of Washington political know-how and her leadership role on the House Financial Services Committee to escalate the issue of community bank survival to the top of the congressional bank agenda.
Richard J. Parsons is the author of Broke: America's Banking System. He is writing a new book about the future of U.S. banking.