American banking has its own Tea Party

By Rob Cox
November 25, 2014

By Rob Cox

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Like the anti-establishment wing of the Republican Party, the American banking business has its own version of a Tea Party: the Independent Community Bankers of America. In just the past week, the trade group has vociferously opposed the nomination of a Wall Street banker to the Treasury and hailed a bill that would increase congressional oversight of the New York Federal Reserve Bank. These are the plaintive cries of a dying breed of banker.

ICBA, whose trademarked motto is “the nation’s voice for community banks,” claims 5,000 member firms representing some 24,000 branches and 300,000 employees. These banks hold $1.2 trillion in assets and $750 billion of loans. The association has been around for years, but since the global financial crisis ICBA has aggressively bared its fangs against the established order of Wall Street and money-center banks.

That’s understandable. Unlike mega-rivals Bank of America and Citigroup, community banks didn’t receive bailouts from the federal government, though they felt the sting of the downturn. Since 2008, more than 500 mostly small banks failed, according to the Federal Deposit Insurance Corp. So politicians on both sides of the aisle have become sympathetic to their cause.

The market, however, has not been particularly kind to community banks. Recent research from Celent, a consulting firm focused on financial services, lays bare the existential challenge they face. Since 1992, 6,522 banks with assets below $100 million have disappeared, to the benefit of the biggest banks, a trend the consultancy expects to continue. It predicts a 3.1 percent compound annual decline in the small-bank population through 2019.

There are many reasons for this. The economies of scale at institutions like Bank of America and Wells Fargo allow them to invest heavily in technology, offering digital banking services and massive ATM networks that may offer greater convenience to customers. After the financial crisis, the big banks have also enjoyed a funding advantage relative to their smaller brethren.

The nation’s 109 banks with $10 billion or more of assets have a quarterly cost of funding earning assets of 33 basis points, according to FDIC data. Banks with balance sheets under $1 billion pay around 50 basis points. The implication is that depositors believe their money is safer in the vaults of the biggest banks – so safe they’ll accept less compensation than if they left their cash with smaller banks. That implies a belief that the biggest banks won’t be allowed to fail.

It wasn’t always like this. Right up until the crisis, large and small banks were more or less on an even footing. And 20 years ago, the small guys, of which there were more than 12,300 – double today’s count – paid a full percentage point less than their larger rivals. As small banks face dwindling numbers and higher funding costs, ICBA has become increasingly shrill.

Last Thursday the organization came out in favor of a bill authored by Rhode Island Democratic Senator Jack Reed that would require the New York Fed’s boss to be nominated by the president and confirmed by the U.S. Senate. The Fed’s Manhattan outpost has traditionally been its most important, in terms of both regulating banks and operating in financial markets.

Indeed, the New York Fed chief is the only regional reserve bank president who is a permanent voting member of the Federal Open Market Committee, which sets official interest rates. Forcing Congress to weigh in on its management, as it does the Fed chairman, would be a major constriction of its independence.

In supporting Reed’s bill, ICBA said it “remains deeply disturbed and frustrated by recent reports that exposed the New York Federal Reserve’s culture of deference to megabanks and the largest Wall Street firms.” It was referring to whistleblower Carmen Segarra’s accusations that the regulator was too timid in overseeing banks like Goldman Sachs.

Similarly, ICBA mounted a campaign to block the nomination of Antonio Weiss, Lazard’s top M&A banker, as undersecretary for domestic finance. In letters sent to the heads of the Senate banking and finance committees, Camden Fine, the president and chief executive of the lobbying group, argued, “the narrow focus of Mr. Weiss’s professional experience is a serious concern for ICBA and community banks nationwide.”

Fine called for the Treasury to create an assistant secretary for community banking “to ensure that industry’s perspective…is appropriately represented in the policy-making process.” He suggested until that happens, any candidate for the undersecretary position possess a thorough understanding, if not experience, of community banking.

The community banker occupies a special place in America’s image of itself – think George Bailey from “It’s a Wonderful Life.” But Bailey’s kin today represent a rounding error in the nation’s finances, holding less than 9 percent of all deposits. As that number shrinks, expect its mouthpiece to rage a little more loudly against the Wall Street machine.


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How about an experienced federal prosecutor with a track record of jailing white collar criminals for head of the New York fed? It might send a message.

Posted by QuietThinker | Report as abusive

Readers of this commentary need to ignore Mr. Cox’s obvious community bank animosity and focus on the facts. Mr. Cox admits that “community banks didn’t receive bailouts from the federal government” and that the big banks’ lower cost of funds “implies a belief that the biggest banks won’t be allowed to fail.” So, Mr. Cox admits that the market is rigged in favor of big banks, yet apparently community bankers are bad sports for lobbying for an even playing field. One of the reasons that economies of scale matter so much these days is that community banks have been subjected to ever more restrictive regulations that were passed in response to big bank abuses, such as redlining, abuse of the payment system, and loan production offices rewarded for volume and not prudence. The fact that big banks control a larger DOLLAR share of the loan and deposit markets is irrelevant. One would expect banks in major financial markets to serve their customers, such as the Fortune Five Hundred companies. But these banks have no interest, nor should they necessarily, in serving the thousands of small communities where tens of millions of Americans live and work. What’s surprising or antiquated about this market phenomenon? Nothing. To scoff at the thousands of responsible banks and hundreds of thousands of responsible people who do serve this market displays real urban provincialism that one would not expect from such a sophisticated news source.

Posted by PatrickBarron | Report as abusive