Save The Small Banks

The Federal Financial Rescue Has Ignored Institutions That Drive Much Of The Economy

The financial crisis of 2007-2009, has tilted the playing field against community banks and has raised a general danger for all banks that they will face steeper regulatory burdens than other kinds of financial firms. This is not only bad for the banking industry but for the American economy. Regulatory anomalies create economic inefficiencies that translate into less safe and sound financial institutions and less sound credit being made available to the marketplace.

Once the financial crisis was at a full boil, the Treasury, Federal Reserve and financial regulatory agencies rightly, through a variety of mechanisms, kept many larger institutions from failing. In addition, the regulators adopted a more understanding and flexible regulatory climate. To have done otherwise would have risked a meltdown of our financial system with Depression-era consequences.

However, the flexibility the regulatory community has shown for the "too-big-to-fail" banks has not been in evidence with the community banking sector. This is unwise. Our community banking sector fulfills and important role in communities all over America, particularly for small and medium-sized businesses. These institutions did not cause the current financial crisis; their woes are the product of failures, triggered by the activities of unregulated and under-regulated entities and those with more leverage and capital markets expertise.

Bank regulatory agencies did a much better job than they are being given credit for in regulating banks. During the past decade, regulators have faced a tough environment; markets were too liquid, under-regulated competition too prevalent and interest rates too low. But now is not the time to let the regulatory pendulum swing from harsh to harsher.

Regulators must look for ways to help these institutions rather than find reasons to close them. Why not, for example, inject community banks with regulatory "rescue capital," the same strategy that is helping revive much larger financial institutions? Why not ease onerous accounting rules that force banks to write investments down to fair value when there is a strong possibility they will recover in an improving economy? What is the harm in establishing a separate regulatory unit that works with them? Why not take a longer-term view since many of these well-managed community banks have weathered two and three tough cycles and need only one thing to survive - time?