That figure, he notes, comes after more than 225 of the weakest players in the banking system have been washed out since the start of 2008—more than 140 last year alone. But with more than 7,000 banks still operating, not counting non-bank financial institutions, it may be too early to declare a banking Armageddon, Hays said.
“Look at it this way: If you look at most banking systems around the world, most of those countries have only a handful of dominant institutions,” Hays said. “We’re very different in that we have some large, complex financial institutions, but we also have all those community banks. We’ve got lots of institutions. If we lose some percentage of that, it may not really show up all that much.”
One short-term question, he said was whether the demise of some community banks would lead to larger banks’ becoming larger, or increase the median size of remaining community banks.
“There is some evidence of that if you look at the Kansas City market,” Hays said. “In the midst of all this, Bank of America lost market share in Kansas City. Some institutions gained deposits that came away from others that appeared to have a financial problem.” Longer-term, he said, the concept of regional market share in credit availability was itself becoming antiquated.
“I think there will be credit available,” Hays said. “The market is not a Kansas City market. If you’re looking for development loans, it is now possible to go outside the market because you’re not geographically bound in ways we once thought we were. Look at the impact of the Internet on consumer business; you get online and in a few minutes, you can find the best deposit rates in the country. Developers, too, can act on that and take advantage of that.”
Broader Impact
Of course, community banks aren’t being singled out with this legislation. After all, it was conceived as a way to impose controls on large banks and Wall Street firms whose shenanigans contributed to the 2008 crisis.
Like the community banks, even the largest regional banks anticipate some headaches they’d prefer not to have.
Commerce Bank, with nearly $18 billion in assets and UMB Bank, at nearly $12 billion, fall well shy of the threshold that made the nation’s biggest banks the primary focus of the reform package. Officials with both say that the reforms likely will mean higher fees, reduced perks—free checking, for example, may be on the way out—and new challenges securing credit.
“We’re not sure how all of this will end up, but it seems to be penalizing institutions that were sticking to their knitting and being good, responsible providers of financial services,” said Commerce Bank’s president, Kevin Barth.
The bad news with Dodd-Frank, as the reform measure has become known, is that it failed to address longstanding problems the two large quasi-governmental agencies most often associated with the housing meltdown’s origins, Fannie Mae and Freddie Mac. The good news? What emerged in those 2,000 pages of legislation could have been a whole lot worse, they said.
A Swing and a Miss
The disappointing part of the regulatory reform movement, bankers say, is that even though some elements of the legislation are meant to address significant flaws in financial markets, much of the remedy is excessive, misguided and over-reaching. A glaring example of that would be the new Consumer Financial Protection Bureau.
“I honestly think this whole new layer of regulation with the CFPB is really, in the end, not going to make a whole lot of difference to most consumers,” said the KBA’s Stones.
In that sense, are community banks just collateral damage in the reform movement?
“Absolutely,” said Stones.
“This was a financial crisis with a multi-headed monster, and none of those heads were community banks,” he said. “There were non-bank mortgage lenders making loans to people who could never pay them back. Wall Street firms and banks that had risky investments based on those mortgages. Hedge funds and derivatives that all put a tremendous amount of stress on the system, causing property values to drop.
“So community banks that weren’t responsible were greatly affected by those lower values and the impact on their loan portfolios, especially in commercial real estate,” Stones said. “And this new round of regulation, aimed at preventing the next crisis, didn’t even start with the Number One cause of it all—Fannie Mae and Freddie Mac.”
That, said MBA’s Cook, has been the true irony of the Dodd-Frank measure. When community banks inevitably close, he said, “it will force those assets into bigger places, many of which are where the problem started.”
That disproportionate impact on smaller banks in rural areas will likewise be felt by consumers, Stones said.
“Even before this, there was a whole news series of regulations on mortgage lending that really affected banks in rural areas,” Stones said. “In the Kansas City area, the standard home loan is a 30-year fixed; that’s not the case in rural areas.”
Those areas, where a 5-year balloon note is more common, could see that lending activity vanish, he said.
“We’ve got banks in rural area that say ‘We can’t comply with these any more, so we’re just not going to make mortgage loans’. If a bank consolidates or gets out of the mortgage business in those areas, who goes in to make those loans? The answer is: Nobody.”
Unlike the smaller banks, Commerce has sufficient critical mass, staffing and experience to deal with a bevy of new regulations. But that doesn’t mean the bank is happy about having to do so. “We’re going to play the hand we’re dealt,” Barth said. “It’s like anything else; once something blows up, there’s an urge to come in and regulate.
“But we’ll deal with it and continue to be very good providers of financial services to our customers,” he said.
Rays of Hope
While significant challenges remain for the economy in general and banks in particular, Barth said, recent activity suggests that this region’s entrepreneurial zeal remained intact.
“If you look around Kansas City, you will find people innovating, starting new businesses, and with some success,” he said. He recounted a recent discussion with a business owner who said his biggest concern for 2010 was finding nine additional members of the sales staff who would be willing to learn new skills and travel.
A focus on growth, persistence and innovation, Barth said, would be the key to getting not just this region, but the country, out of its doldrums.
“The entrepreneurial spirit,” Barth said, “the creativity of the American entrepreneur and business owner, that is what will ultimately help our country—and help us—come out of the recession.” 