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Why Do Community Banks Carry Water for the Megabanks?

posted by Adam Levitin

A phenomenon that has puzzled me for the last several years is why community banks consistently carry water for the megabanks on regulatory reform issues.  I'm hoping that readers might be able to shine some light on this issue.

The US has a very unusual financial landscape with 6,812 banks (plus thousands of credit unions). 41% of the assets with in the banking system are held by just four mega-banks, and the 108 biggest banks (those with over $10 billion in assets) hold 81% of the assets in the system. Yet politically, particularly in the House of Representatives, the smaller banks (most, but not all of which we can call community banks) hold an outsized amount of political power, as they are located in every district and often play an important economic and civic role, particularly in rural districts. Therefore, the political support or opposition for community banks really matters in regulatory reform debates. 

Community banks compete with big banks; they probably compete with big banks more than they compete with each other, as most community banks operate in very geographically limited areas. Yet community banks have repeatedly opposed regulatory initiatives that are restricted only to big banks and which have put us well on our way to a formal two-tier regulatory system.  For example, community banks opposed the Durbin Interchange Amendment, even though its key price cap provision applies only to the 108 banks (out of 6,812) that have over $10 billion in assets.  Similarly, community banks were opposed to the creation of the CFPB, even though supervision and enforcement of banks with less than $10 billion remained with the prudential regulators.  Community banks and credit unions opposed chapter 13 cramdown, despite an exemption in the legislation for institutions with less than $10 billion in assets.  And then this week, incredibly, the Independent Community Bankers of America came out in opposition to the Republican proposal for a special tax on banks with over $500 billion in assets (there are only 4 such banks). 

The logic of the Independent Community Bankers of America was that the mega-bank tax could be slippery slope, but that struck me as really weak logic:  when you're at the bottom of Mt. Everest, you don't have to be especially worried about some rain on the summit. The community banks seem to be more worried about regulation than about their competition. I'm really curious to hear thoughts on this. 


Maybe like academics (ha!), community bankers determine their political positions without regard to their own selfish economic interests :-)

Community banks are well aware that megabanks have the political and business clout to restrict or cut off their air supplies. Make friends, play nice, and the big boys will make sure the small fry keep their place in society.

Why would community banks bite the hand that feeds?

To, er, continue the metaphor, if you're at the bottom at Mt Everest and there's rain on top, aren't you basically the one eventually pitching water out of your basement?

I can see why any new proposal of regulation or tax or whatever would be terrifying to a small community bank, exemptions or not. Compliance is probably an especially expensive fixed cost when you're a community bank. I can't imagine there is a large pool of ably qualified people able to keep up with what happened to the last two years alone, much less what is proposed now - and yes, you'd have to figure out it said proposal hurts you or not and possible side effects of it - and if said people exist, they are most likely employed by said top 4 bank, yes?

There was a survey released recently about the effects on dodd-frank on community banks and it was an interesting look at actual impact. Some surprises on what actually impacted them, some not surprises, but interesting mixed bag: http://mercatus.org/publication/how-are-small-banks-faring-under-dodd-frank

While credit unions are different from mega or community banks, they largely also carry water for their bigger, more voracious brethren. Witness the credit union support, mobilizing and sending their tellers to lobby on Capitol Hill for BAPCPA in 2004.

Two big exceptions, both from my home state, are Self Help Credit Union, affiliated with the Center for Responsible Lending, an North Carolina State Employees' Credit Union.

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