A recent study released by the University of New Orleans backs up what many have been contending: “Community banks in Louisiana and throughout the United States are rapidly disappearing, and federal laws meant to protect the country from another megabank bailout have saddled smaller financial institutions with disproportionately large costs.”
The number of community bank charters plummeted 53.3 percent from 1993 to 2014, while the number of non-community banks jumped 17.6 percent, according to National and Regional Trends in Community Banking. The study was conducted by the University of New Orleans.
The causes include consolidation in the banking industry, competition from online banking, and the crushing burden of “too big to fail” federal regulations, said Kabir Hassan, lead author of the study. The regulations are not working as intended to prevent the economy from being crippled if one of these megabanks fails.
“Actually in my reading, they have institutionalized it even further,” Hassan said. “And what it means is, when the law is made for a big bank, who suffers? The small, mom-and-pop community banks.”
Hassan spoke at a community bank meeting organized by Gulf Coast Bank & Trust Co. Sen. David Vitter, chairman of the U.S. Senate Small Business and Entrepreneurship Committee, also spoke at the meeting in Baton Rouge.
Vitter said he hopes to distribute the study’s findings as widely as possible, starting with the Senate Banking Committee.
Although the downward trend in community banking is well-known when these complaints are brought to Washington, D.C., there are typically two responses, Vitter said. The Washington-type experts deny it is happening or says it’s an unintended consequence.
“Well, it really doesn’t matter if it’s intended or not. That doesn’t change the reality,” Vitter said.
Obviously, Vitter is an ally of community banks in their quest for “regulatory relief.” It will be interesting to see how his fellow members of the Senate Banking Committee, including everyone’s favorite populist, Lizzie Warren, react to the study. With a yawn and a shrug, is my guess.
As the linked article points out, the loss of community banks has potentially serious consequences for small business lending. Traditionally, community banks have been the primary source of small business loans. While some commentators believe that alternative non-bank sources (including peer-to-peer lending) will eventually substantially supplant community banks, even if true (which I doubt), that’s not going to happen overnight. I recall reading in the late 1990s prognostications that the internet would make soon branch banking obsolete. Several years later, the federal banking regulators were telling consultants and bank lawyers that they’d better not bring any more “internet-centric” bank charter applications for approval because the bloom was off that rose. While the internet and mobile, banking channels may one day replace brick-and-mortar branches, change happens more solely than many “true believers” expect, and severe dislocations for customers can result while the paradigm is shifting.
I think regulatory relief for community banks ought to be getting more “play” in Congress than we’ve seen thus far. More statistical support like the UNO study may help it gain traction. Let’s hope so.