The question is one we have been asking for ten years, and we are far from alone: Why are small, community banks treated the same as Too Big to Fail Mega-Banks?
Almost everyone seems to agree that a one size fits all approach is both unfair and overly taxing on smaller institutions, yet every attempt to ease their burden has failed. One reason for this is that there is no consensus on where the line should be drawn.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010, brought sweeping changes and years to implement. The industry is stronger now, but at a huge cost to small banks that played no part in the crisis. President Trump, who was never a fan, issued an executive order just weeks into his presidency aimed to start chipping away at the law.
Jeb Hensarling (R-TX), chairman of the House Committee on Financial Services was ready. It took him a little more than 2 months, but on April 24, 2017, he unveiled his Financial Choice Act (or H.R. 10), which would have undone much of the 2010 law. The House passed H.R. 10 in June along party lines. The bill was sent to the Senate last June and has sat dormant since July.
It isn’t that the Senate is uninterested, but Mike Crapo (R-ID), Chairman of the Senate Banking Committee, knew any bill would need bi-partisan support in the Senate. He got it. Co-sponsored by 13 Republicans, 12 Democrats and one Independent, the Senate voted 67 to 31 last week, in favor of the bill (S.2155).
Even with this support, however, S.2155 has a rough road ahead of it. On the one hand, some democrats (like Senator Elizabeth Warren, MA) oppose undoing any of the safeguards put into place after the housing crisis. On the other hand, Jeb Hensarling and his supporters in the House want to see more of Dodd-Frank undone.
We say they are all missing the point. For example, the banks listed on page 7 and in this week’s Supplement all cater to their local farmers. All except two of them have less than $1 billion in total assets—most have far less. The two that have more are chartered with Agriculture Specializations. They are:
5-Star John Deere Financial FSB and
5-Star United Bank of Iowa.
These banks (and countless other small banks) had nothing to do with the housing crisis, the mortgage bubble, collateralized debt obligations, or any of the other pieces that precipitated Dodd-Frank. But they are still paying a price for it.
They did get a certain amount of relief when the FDIC introduced a short quarterly call report that certain banks with assets under $1 billion may now use, but the majority of the reporting burdens still pertain to them.
S.2155 seeks to raise that asset threshold to $5 billion. It also would raise the threshold for banks subject to the Volcker Rule (which currently applies to holding companies with $1 billion in total consolidated assets) to holding companies with $10 billion in total consolidated assets or banks with trading assets and liabilities that are greater than or equal to 5% of total consolidated assets. The Volcker Rule , if you recall, prohibits banks from speculative trading with their own money. Regulators are currently working on revisions to the Volcker Rule anyway so that part may be moot.
But the fault we find in S.2155 is that it misses the point altogether. Case in point: this legislation raises the threshold for enhanced prudential standards (AKA Stress Tests) from $50 billion to $250 billion. These are NOT the small banks that are being overtaxed and over-regulated.
The banks that need regulatory relief are small, community banks—some of which are listed on page 7 and the supplement. What we need is legislation that will help small, local banks remain small and local.
At the end of 2008 there were 3,131 U.S. banks with assets less than $100 million; they accounted for 37.7% of the industry. Today that number is down to 1,407 or just 24.8% of the industry. As a whole, these banks are solid performers with capital ratios far better than the national average. But having to comply with large complex banks is forcing them to merge. In fact, a recent article in Farm Futures reports that there are 625 rural counties in the U.S. that are now without a community bank. This is what needs to be addressed.