Congress Weakens the Banks that Keep Us Afloat

DAVID MORRIS

August 14, 1991|By DAVID MORRIS

ST. PAUL, MINNESOTA — St. Paul, Minnesota-- When Jesse James robbed a bank he 7/8

walked up to the tellers, pointed a gun in their faces and demanded the money.

Today, our elected officials in Washington are about to pull off a heist on a scale unimaginable to James. But as befits a more civilized era, their weapon of choice is not a gun, but a piece of legislation preposterously named the Financial Institutions Safety and Consumer Choice Act of 1991.

Don't let the name fool you. As financial analyst Henry Kaufman warned the Senate Banking Committee this spring, this measure ''ultimately puts in jeopardy the fundamental economic democracy of this country.''

One of the bill's objectives is to dismantle this country's unique network of community-based banks. Almost 12,000 independent banks serve virtually every city and town. To the Treasury Department, such a multitude of small institutions, and the resulting fragmentation of assets, undermines our ability to compete in a globalized economy.

The proposed law would help centralize financial control in a few dozen national banks.

Those in favor of doing so argue that big banks are more efficient. They reduce costs by eliminating the expense of maintaining individual boards of directors and by requiring only a small central staff to fill out the complicated regulatory paperwork. The backers of big banks also argue that they are more secure. By geographically diversifying their lending portfolios, they insulate themselves from the impact of an economic recession in any one region.

Unfortunately for big-bank enthusiasts, the evidence contradicts this sanguine analysis. A recent study by the Durham, N.C.-based Southern Finance Project compared banks that focused on their surrounding community to those lending all over the country.

Banks that restricted lending to local borrowers were more than twice as profitable as those whose loans were geographically dispersed. Those which stayed close to home actually reduced overhead costs and suffered significantly fewer bad loans.

The Southern Finance Project's survey was buttressed by a recent examination undertaken by Federal Reserve economists Stephen Rhoades and Donald Savage, which concluded, ''Small banks generally perform as well, or better, than large banks.''

Community banks serve their communities better. According to the Federal Reserve, 90 percent of all loans to small businesses are made by community banks. When the National Federation of Independent Business surveyed its members, it found that ''firms located in unit branching states (with few branches) rated their bank's performance significantly better than firms in statewide branching states.''

The bottom line is that separating banks from their communities may be a costly proposition. In an interview with Business Week last year, Charles T. Doyle, mayor of Texas City, Texas, and chief executive officer of five very profitable community banks in Galveston County, offered one reason that community banks do well:

Sixty percent of Mr. Doyle's banks' assets are in personal loans, averaging $7,000 apiece, items such as vacations, medical bills and automobile purchases. The rest help finance Mom-and-Pop businesses.

''These are high-risk loans,'' Mr. Doyle says, ''unless you know your customer. You can call it old-fashioned banking, but it works.''

One should not romanticize community banks. At times, they can be as aloof and unresponsive to their neighbors as their national brethren. But on the whole, they are solid citizens, a fact that has not escaped the notice of their customers. Almost 7 out of 10 respondents to American Banker's 1990 Consumer Survey preferred community-oriented banks; only 23 percent preferred banking with big institutions.

To sum up: There is no evidence that independent, locally oriented banks burden the national economy. A great deal of evidence exists that they strengthen local economies. They are very popular among the general public and the small-business community. So why is the Congress willfully trying to destroy them?

A decade ago, the Congress rushed to sever the link between money and community in the savings and loan industry. We will be paying the price for that error in judgment for the rest of our lives. Haven't we learned our lesson?

''Money should never be separated from mission,'' Harvard Business Review Editor Rosabeth Moss Kanter has wisely observed. ''It is an instrument, not an end.'' The U.S. tradition of community banking has been based on that attitude.

Community banks may be popular, but in Washington money talks -- and big money screams. Barring an anguished outcry from the public, the Congress and the White House are planning to speed the demise of an institution that has served the nation well for many years.

David Morris, an author, lecturer and consultant, is a columnist for the Saint Paul (Minn.) Pioneer Press.

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