In case you missed the news, President Trump chose the portrait of Andrew Jackson to hang in the Oval Office.
Today’s bankers may not know Jackson was the anti-bank president from 1828-1836. Fervently opposed to the 2nd Bank of the United States – a precursor to the Federal Reserve – Jackson entered office determined to abolish Alexander Hamilton’s creation.
And he succeeded. After winning 219 of the 268 electoral votes, Jackson slammed shut the government bank’s doors when its charter expired four years later.
Jackson’s abhorrence of a big, powerful federal bank was recounted in Jon Meacham’s 2008 biography of the seventh president, “American Lion.” Jackson saw his mission as “to save the country, and it will be lost if we permit the bank to exist,” Meacham wrote.
But Jackson was more supportive of a network of community banks; he transferred the public funds from the Bank of the U.S. to "state banks" scattered around the country. None were too big to threaten the national economy or too powerful to challenge the will of the people.
Imagine the irony when Congress in 1928 chose to put Jackson’s visage on the $20 bill, a national currency issued by a central bank he loathed. Jackson must have rolled over in his grave.
Bill Clinton was the last president to display the Jackson portrait in the Oval Office. In further irony, no president in history did more to help big banks get bigger and small banks shrink.
Clinton signed the Financial Services Modernization Act of 1999 – better known as the Gramm-Leach-Bliley Act. However, an argument can be made that an earlier, lesser-known bill signed by Clinton, the Riegle-Neal Interstate Banking and Efficiency Act of 1994, altered the banking landscape even more than GLB.
Riegle-Neal gave ambitious bankers a green light to buy banks across the country. Over the next decade small banks disappeared and big banks became megabanks.
But there’s even more to this story. Clinton is credited with giving teeth to the Community Reinvestment Act of 1977. In return for the broad expansionary powers enabled by Riegle-Neal, Clinton got the big banks to agree to onerous CRA burdens. Some must rue that trade.
While Jackson was a populist, he opposed laws expanding the power and influence of the federal government. He arguably would have opposed not only Riegle-Neal and Gramm-Leach-Bliley, but also CRA.
President Trump’s connection to Andrew Jackson foreshadows profound change for the banking industry ahead. Although his master plan is unclear, there are clues.
Steven Mnuchin, the Treasury secretary-designate, recently made reference to his support for a 21st-century form of Glass-Steagall. While the details of that policy are unclear, it suggests restraints on megabanks. Andrew Jackson would like this.
Trump’s challenge to the power of the Federal Reserve is also Jacksonian. A battle could be on the horizon. Jackson’s portrait may be inspiration for the fight.
The Fed and megabanks may soon find themselves in the cross hairs of the new administration. But what about the community banks serving forgotten small towns and impoverished urban neighborhoods?
Just as megabanks need to be brought into the 21st century, so too do smaller banks. If Trump seeks thriving smaller banks, community banking in America may be on the brink of renaissance. He would be following Jackson’s legacy.
When it comes to regulatory policy for community banks, my advice to President Trump is to start from scratch. Design a community banking system with the expressed purpose of revitalizing the nation’s declining smaller towns and decaying urban communities.
These geographies hold back an economy that must grow at least 3% a year if we are to meet the promises made to an aging American populace.
The current system — supervisory construct as well as regulatory burden — is stuck in the 20th century, if not the 19th. There is no better example than the 40-year-old CRA law. What has it really accomplished? Develop 21st-century carrots — not sticks — that reward banks for growing alongside their communities.
Here’s a carrot: Give community banks doing business in small towns and low-income urban neighborhoods the ability to book certain loans tax-free. There’s even precedent for this practice. Congress long ago deemed farm lending so vital to the nation’s well-being that it gave the Farm Credit System the right to earn tax-free income from real estate-secured farm loans. Why not take the same approach for revitalizing communities in need of precious capital for reinvestment?
But that’s not enough. It’s time for Washington to streamline community bank supervision and ensure unquestioned accountability for supervisors. Bring community banks into the 21st century. Release them from low-and-no-return regulatory burdens overseen by a maze of turf-fighting regulators. Use small banks to turn declining small towns and urban neighborhoods into potential growth engines.
What’s there to lose?
According to FDIC data from the third quarter of last year, community banks have significantly higher efficiency ratios than big banks. That’s terrible, and motivation for their owners to sell. No surprise then that community banks hold only 12.8% of the industry’s assets. That ratio is lower than ever and on track to fall below 10% possibly during the Trump years in the White House.
Why not break the mold for how the government controls these smaller banks and give them the chance to infuse capital into the lowest-growth segments of the U.S. economy?
If Trump and Congress succeed in unleashing the 21st-century regenerative power of smaller towns and broken-down cities across America, do not be surprised if a new president 100 years from now chooses to hang Trump’s portrait in the Oval Office. Right next to Andrew Jackson’s.