The wave of new banking regulations that Congress created to deter and punish Wall Street’s misdeeds is landing with much greater impact on the almost 7,000 community banks than on the too-big-to-fail lenders.
Community banks didn’t cause the financial crisis; they played by the rules. Because of their time-tested business model, one based on customer relationships rather than transaction volumes, community banks aren’t a threat to the financial system. Yet they are being forced to pay a penalty in regulatory costs — to comply with rules aimed at preventing the bad behavior on Wall Street from happening again.
Community banks are also disproportionately affected by the new rules. Right now, banks with less than $10 billion in assets control only 20 percent of total U.S. banking assets. Washington lawmakers and regulators are holding back community banks from devoting their full attention and resources to making more loans and fueling a more robust economic recovery.
The effect of these regulations is that Congress has added insult to injury for community banks while rewarding the real villains. The megabanks are benefiting from what Bloomberg View calculated is an $83 billion annual taxpayer subsidy, the value of implicit guarantees by the U.S. Treasury. Bloomberg View was correct to characterize the too-big-to-fail subsidy as “a major driver of the largest banks’ profits.”
Perversely, Federal Deposit Insurance Corp. data show that large banks have both the lowest credit quality and the lowest cost of funds in the industry. Community banks rank the highest in both categories even though they have had to compete for years against the megabanks’ access to cheaper money in pricing loans. In addition, community banks must compete against the big lenders’ lower comparative costs in handling regulatory paperwork.
This is morally wrong — and bad economic policy. Community banks should be putting their capital to work in the small towns, rural communities and middle-class urban enclaves they know well. Instead, they are focusing too many of their precious human resources on onerous paperwork and time-consuming compliance measures.