Those who encourage consolidation in the banking industry fail to recognize that the potential profits for some investors come at a significant societal cost — a loss of access to financial services for many local communities. Rather than accepting that exorbitant compliance costs naturally decrease the number of community banks, we should instead look for ways to target banking regulations to avoid needlessly exacerbating consolidation.
Community banks are not only more highly capitalized than larger institutions and therefore better equipped for economic downturns, but their local focus and accountability make them distinctly pro-consumer. These local institutions operate a relationship-based business model that incentivizes customer service and stewardship, not the transaction-based model that has left customers high and dry at Wells Fargo, Bank of America and other mega-institutions. And community banks reinvest their proceeds into the communities in which they operate, promoting economic growth that begins at the local level.
Further, community banks operate in areas many large banks won’t touch, serving as the only physical banking presence in nearly one in five U.S. counties. More than 16 million people in roughly one in three counties would have limited or no physical access to mainstream banking services without the presence of community banks. Rising concentration puts these communities at risk of losing access to needed financial services.
Community banks also remain an essential component of more densely populated areas. Many institutions, such as the now-famous Abacus Federal Savings Bank, were formed by urban communities left behind by large banks that would accept deposits but uniformly reject loan applications. Community bank lending is essential to towns and cities of all sizes. In addition to providing more than 80% of U.S. agricultural loans, community banks fund more than 60% of small-business loans — while holding just 20% of the nation’s banking assets.
We should not be encouraging mergers that shrink the size of the industry, but new entrants that will expand it. The financial crisis contributed to a virtual standstill in de novo bank formation, with applications plummeting from more than 100 per year before the crisis to a handful since 2009. Compliance costs have played an important role in the decline, with regulations proving particularly burdensome for new banks.
While there has been a latent breakthrough in applications in San Diego, New York, Las Vegas and elsewhere, reforming our regulatory system is the key to addressing the dearth of applications and the broader consolidation of the banking industry. A recent survey from the Federal Reserve and Conference of State Bank Supervisors found that community bank compliance costs have increased by nearly $1 billion in the previous two years to roughly $5.4 billion, or 24% of community bank net income. Of the respondents who said they considered an acquisition offer in the past year, virtually all (96.7%) said regulatory costs were a very important, important or moderately important reason.
Washington must make meaningful reforms to banking regulations that too often fail to distinguish between large and community-based institutions. Tailoring rules to the size and risk profile of regulated institutions will ease the burden on local institutions and reduce the pressure to consolidate. The bipartisan regulatory relief package awaiting a Senate vote is a great place to start, with reforms to rules on regulatory capital, mortgage lending, data reporting and more. Passing reforms focused on relieving Main Street institutions from Wall Street regulations will go a long way toward preserving our diverse and decentralized banking system.
Cheerleading mergers and acquisitions is no “survival strategy” for community banks. Just 0.2% of U.S. banks hold more than two-thirds of the industry’s assets. We’ve consolidated enough. Instead, tailoring our regulatory system and easing the compliance burden will help promote access to financial services that puts customers and local communities first.