Williston: Save the Community Bank

by Chris Williston

The New Year is quickly approaching. Being a presidential election year, 2016 promises to bring much talk about many political hot topics, but not near enough talk about one of the greatest threats to our economy—the endangerment of community banks.

Since the advent of the financial crisis in 2008, a bright line of distinction has been created between community banks and too-big-to-fail banks. Community banks—meaning local banks that invest in local communities—are saddled with many new regulations as a result of the misdeeds of the too-big-to-fail banks. While lawmakers in Washington, D.C. have proposed many regulatory relief initiatives in the 114^th Congress, only a handful of minor measures have been enacted. The need for community bank regulatory relief has garnered bipartisan support, but as often is the case in Washington, behind-the-scenes politics have stymied constituent and industry efforts.

It’s ironic that the continuous wave of onerous new banking regulations created to address Wall Street’s misdeeds—better known as the Dodd-Frank Wall Street Reform Act—is actually helping the megabanks gain market share at the expense of the nation’s nearly 6,000 community banks. Community banks are vanishing—which is exactly what the Institute for Local Self-Reliance found in a recent report. This group’s research shows that one in four community banks has disappeared since 2008. The report noted that in 1995, megabanks with assets of $100 billion or more controlled 17 percent of all banking assets. By 2005, their market share reached 41 percent and today, it is an astonishing 59 percent.

Despite this onslaught, community banks continue to provide critical local lending support that accounts for more than 60 percent of all small business loans under $1 million and more than 75 percent of all agricultural loans. Community banks strive to serve customers and do so responsibly. Take mortgage loans for example. Between 2009 and 2012, the default rate on home loans across all banks was sixteen times higher than for residential mortgages held by community banks. Why? Because community banks know their customers. They specialize in “relationship banking” as opposed to “transactional banking,” which the large banks have mastered through economies of scale. Relationship banking allows bankers to make decisions based on customer needs.

Here in Texas, we have been blessed with a strong community banking industry that is the backbone of local economies. But we have not escaped bank consolidation. Almost 150 community banks have disappeared from the Texas landscape in the past five years. That means many cities and towns are void of a hometown bank.

So what’s the solution? Policymakers need to pass regulatory reform now and work long term to abandon the current one-size-fits-all approach to regulatory oversight. We need sensible regulation that protects the safety and soundness of bank depositors consistent with the bank’s own risk profile. Or, simply stated, we need proportionate regulations that represent two distinct banking models—one for community banks and one for the Wall Street banks.

Our nation’s financial system is arguably the best in the world, built largely by the entrepreneurial spirit of local shareholders who understood the importance of starting and preserving independent banks to sustain local economies.

Let’s hope our lawmakers in D.C. can put aside the partisan bickering, and remove the regulatory shackles from our community banks to allow them to help local folks and small businesses thrive and prosper once again. And do it before it is too late to save one of this country’s most important institutions.

Chris Williston is the president and chief executive officer of the Independent Bankers Association of Texas, the largest state community banking association in the nation.