The number of banks has already been cut in half to roughly 7,000 with more on the way. Does it matter to policymakers? What should officials be doing today to prevent that from happening tomorrow? The biggest roadblock for community banks is regulation. There is too much of it and it’s being applied too harshly to small banks. For both bankers and their examiners, judgment is being trumped by box-checking. The solution is to overhaul the way community banks are supervised. One option would be moving away from a “rules-based” to a “principles-based” approach to supervising banks with assets of less than, say, $1 billion. Rather than policing compliance with detailed rules, examiners could simply assess the bank’s operations. Does senior management have a firm handle on the risks the bank is taking? Is it operating safely? Is it meeting the community’s needs?
Some bankers suggested creating an agency that does nothing but oversee community banks. That specialized agency of examiners could visit once a year and look at everything instead of coming back repeatedly for multiple, separate looks at consumer compliance, money laundering, information systems, etc. Exam reports would be delivered quickly and consistency would be the norm. If the facts behind a loan didn’t change, then neither would its rating.
Capital is another point with a lot of community bankers. They say examiners are looking for a minimum of 9% capital, up from 7%. Raising that extra capital is, if not impossible, exhausting.
The trend toward non-specialized banking products also has community bankers on edge. Community banks have the ability to give customers products and services tailored to their specific needs. Community bank advocates also want policymakers to address the other end of the size spectrum. Some have suggested that the existing cap barring any bank from expanding through acquisition once it controls 10% of the nation’s deposits be whittled to 5%.
Finally, community bankers want to be able to compete equally with other providers of financial services, and many hope the new Consumer Financial Protection Bureau will manage to level the field. Community banks also want credit unions, at least the large ones, to pay taxes.
Community banks are disappearing for a lot of reasons, including rural depopulation, technological advances and a slow economy. Regulatory mandates are also driving consolidation, and community bankers are arguing for streamlined oversight, steady capital levels, the ability to customize products, a curb on industry concentration and equal treatment for all providers.
Without such changes, the industry’s community banking segment could shrivel. And while customers will still have plenty of access to financial services, communities will suffer and people with quirky credit needs, including lots of small businesses, will have a harder time getting financing. Click here to read more on saving our community banks.