FDIC Asks the Wrong Questions About Community Banks

In October of last year the acting chairman of the FDIC said at the annual ABA meeting, "the FDIC is going to undertake a number in initiatives to further our understanding of the challenges and opportunities for community banks."

In this speech he noted that community banks made 40% of the loans to small businesses and those credits are crucial to job creation. He went on to applaud the community banks for the unique role they play in the U.S. financial system.

In February of this year these initiatives began with the Future of Community Banking Conference in Arlington, Virginia. At this event select panels discussed the role and expectations of community banks in our economy.

The expressed concern is about the smallest banks that hold only 11% of total banking assets yet account for over 90% of all banking operations. The number of banks in this group has declined to 40% of the total in existence in 1985. Many banks have merged to solve issues of scale, but the need for the smallest community banks is essential to the economic viabilities of lesser towns and communities. Notably, the number of banks under $100 million in assets has declined to 19.2% of the earlier level, falling from 13,631 in 1985 to 2,625 in 2010.

With those startling statistics, a floundering economy and a historically weak job market banking regulators suddenly started to worry about the economic impact of the declining number of smaller banks. It seems contradictory that while expressing concern, the FDIC has maintained a general moratorium on new charters for the past three years and for the past 25 years has watched the decline.

Typically the FDIC has served as the primary care physician to the community banks. It is the primary regulator to almost all state charter institutions. It should already know more about these banks and their challenges than any of the other myriad of regulatory bodies or congressional committees.

Notwithstanding this apparent knowledge the FDIC has concluded it needs additional study in order to really get its arms around the barriers and opportunities facing the small banking community. This is somewhat akin to the doctor ordering a full body scan to diagnose a broken arm. Community banks don't need brain surgery, they need a helping hand in restoring their presence to serve the small cities and towns while providing a fair return to investors. Many changes in customer demands, regulation and competition have made the future more difficult for these banks.

What is most alarming in this new study is the sophomoric nature of the questions posed. The research questions seem to suggest an analysis without a purpose beyond confirming what most bankers already know — or perhaps an underlying lack of conviction to improve the community banking environment. The following are examples of the fourteen questions it will study.

0. What is a community bank?  
0. How has the number of community banks changed over time?
0. Where are community banks located and why?
0. Do community banks serve different customers than larger bank?
0. Do local communities benefit from a strong community bank presence?

Anyone who has been around community banking for a few weeks could answer all fourteen in less than five minutes. The answers don't address the real issues and opportunities confronting community banks.
Most important are the questions they are not asking. The following are the types of questions it should address if it is committed to help continue supporting the viability of community banking.

0. What is the cost to community banks of administering the plethora of current and new regulations?
0. Why can't regulatory capital and other oversight requirement be structured to fit the quality, needs and relevance of individual community banks?
0. What can be done to isolate the community banks from the negative public apathy of the recent financial crisis?
0. When will the FDIC once again approve requests for new banking charters?
0. What economic impact would continuation of the disturbing trends for community banks have on the small communities?

The FDIC is 100% right in its apparent concern, but it is exploring areas and questions that are irrelevant to any solution. We need to address and treat the most obvious issues. The current FDIC program offers continuing contemplation, while the patient gradually dies.
Robert H. Smith, the former chairman and chief executive of Security Pacific Corp., is a founder and director of Commerce National Bank in Newport Beach, Calif.

Watch a related American Banker video: "The FDIC Redefines the Meaning of 'Community Bank'"