BLOG VIEW: Big Questions For Smaller Banks

The month of April means a great many things to a great many people. This 30-day stretch has been claimed as Emotional Overeating Awareness Month (put down that doughnut, ya hear?), National Kite Month, Straw Hat Month, Women's Eye Health and Safety Month (sorry, guys, you have to get your own month), Fresh Florida Tomatoes Month and (no joke) Irritable Bowel Syndrome Awareness Month. Of course, T.S. Eliot fans know April to be the cruelest month. Â Â Â Â Â Â Â

April is also Community Banking Month, or at least that's what the Independent Community Bankers Association (ICBA) has declared. Amid the mad mix of quasi-holidays that have laid claim to April, one might imagine the celebration of community banks at this time seems incongruous. But while Community Banking Month seems like a beacon of normalcy in a month of off-kilter celebrations, community banking has been a solid sector in the otherwise chaotic financial services industry.

On the whole, the community banks have retained their stability and viability in today's market. That's not to say some smaller banks haven't been damaged or worse – no one has been immune from the wreckage and ruin, and the crisis in warehouse lending is having a disproportionate effect on smaller lenders. But on the whole, they've withstood the turmoil and have not failed the communities they serve.

The success of most community banks at this time has emboldened the ICBA to openly question the policy of ‘too big to fail,’ a concept that has been at the crux of the ongoing bailout/rescue/recovery/stimulus offerings that have been put forth since last summer. In testimony last month a House Financial Services Committee hearing on regulation of systemic risk institutions, Terry Jorde, ICBA immediate past chairman and president and CEO of CountryBank USA, Cando, N.D., didn't mince words when she pointed out that bigger does not mean better.

‘The only way to maintain a vibrant banking system, where small and large institutions are able to fairly compete, is through appropriately and aggressively regulating and assessing those institutions posing a risk to our entire economy,’ she said.

Jorde added that the so-called financial supermarket strategy adopted by the too-big-to-fail failures is a key reason for the current crisis – specifically, the extra-risky adventures that were worlds away from traditional and conservative lending and investing. Hey, you cannot disagree with the facts. Â

Jorde also made it clear in her testimony that the community banks, which did not contribute to today's miasma, should not have to swallow the medicine prescribed to its ailing larger competition.

‘A monolithic federal regulator such as the United Kingdom's Financial Service Authority would be dangerous and unwise in a country with a financial services sector as diverse as the United States,’ she said. ‘Congress need not waste time rearranging the regulatory boxes to change the system of community bank regulation. That system has worked, is working and will work in the future. The failure occurred in the too-big-to-fail sector. That is the sector Congress must fix.’

In that argument, I need to part company with Jorde about the revamping of the financial services industry. We don't have an FDIC for big banks and a mini-FDIC for smaller ones – regulatory rules can and should apply to all institutions, regardless of size. If genuine reform needs to occur, it has to encompass all corners of the financial services industry. Too-big-to-fail is a bad idea, but too-small-to-be-upgraded won't cut it, either.

ICBA has also raised concerns about both the Troubled Asset Relief Program's (TARP) Capital Purchase Program (CPP) and credit card regulatory reform legislation. In both cases, ICBA states community banks will have to shoulder more regulatory burden than necessary. But, again, the idea of two-tiered regulatory oversight based on the size of a financial institution is impractical.

As the ongoing crisis continues, there will be more debate and consternation over the various proposals being put forth to solve the problems. If it is any consolation, we can recall the aforementioned rundown of quasi-holidays and discover that April is the perfect time to recognize the difficulties that everyone is going through. After all, April is Stress Awareness Month!

– Phil Hall, editor, Secondary Marketing Executive.

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