Matt Yglesias’ denunciation of community banks yesterday on Slate.com isn’t so much wrong as it is unhinged. A few points:
No, the executives who run community banks aren’t dumber than the ones who run big banks. (Boy, does this guy need an editor.) I can’t think of any data Yglesias could point to that would support such a crazy claim. Trust me, Matt, some of the dullest bankers I’ve come across are the time-servers weighing down the bureaucracies of the very institutions you seem to think are hotbeds of managerial talent. Meanwhile, some of the best-run banks I know are community banks. Case in point: $400-million Horizon Bank of Austin Texas. It earned 2.21% on its assets, last year, 1.93% the year before, and 1.86% the year before that. By comparison, the average 2012 ROA of the Big 4 banks that you seem to think are such world-beaters came to 0.74%. This notion that community banks are chronically “poorly managed” is preposterous.
No, community banks aren’t exempt from meaningful regulation. Community banks are heavily regulated.–by the FDIC, the OCC, and the Fed, among others. Yes, the banks were able to finagle some carve-outs for themselves, such as the Durbin amendment. But the entirety of the Dodd-Frank bill is a disaster for them. The incremental regulatory costs it imposes are enormous. So it’s just not true that community banks “can’t be regulated.” Oh, boy, can they ever.
Yes, community banks can compete. Matt, hello! If community banks couldn’t compete, they’d have gone out of business long ago. Community banks are a vital source of credit for the small businesses in the communities they serve. That’s often why local small-businessmen get together to form them in the first place. It’s of course the case that some community banks got too aggressive on real estate lending this past cycle. So did certain large banks. Which did more damage to the financial system?
Yglesias says that in his version of banking utopia, “we should want the US Bankcorps [sic] and PNCs and Fifth Thirds and BancWests of America to swallow up local franchises and expand their geographical footprints. The ideal would be effective competition in which dozens rather than thousands of banks exist.” It’s not clear to me how fewer players would make for greater competition in the banking industry or, for that matter, that the industry isn’t highly competitive already. (News flash: it is.) Further, his preferred banking arrangement would almost certainly mean less credit would flow to small businesses.
More to the point, if the Yglesias Banking Valhalla had been in place in the early 2000s as the housing bubble inflated, the ensuing panic would have happened just the way it happened. Here’s why: It’s not the number of institutions in a financial system that’s crucial in assuring its health; it’s the volume of bad loans in it. Come to think of it, institutions that were the very size that Yglesias believes is optimal (and I’m thinking here of Washington Mutual and Countrywide, among others) were the ones that ended up being among the biggest contributors to the problem.
Thus ends my diatribe. To sum it up, it’s hard not to come to the conclusion that, as regards the banking business, Matt Yglesias simply doesn’t know what he’s talking about.
What do you think? Let me know!