Inside Financial Services

Matt Yglesias Is Totally Wrong About Community Banks

In fact, he seems to not know much about banking generally

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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!

14 Responses to “Matt Yglesias Is Totally Wrong About Community Banks”

  1. Mark Alarik at Salesoverlays.com

    The community banks — just like the American Middle Class citizens and small business owners provide most of the tax base and jobs in the U.S. More competition means more jobs, and leverage for the employee to make a better income. Local businesses can offer local customization, also a benefit to the citizens. The community banks depend on the good will and trust of their customers, who are also their neighbors. Mr. Yglesias also doesn’t know anything about what makes a strong American economy.

  2. Doug Hajek

    I’m inclined to agree with Ron Shevlin. But if I thought Matt Y was serious, I would be convinced of one thing: Matt hasn’t the faintest idea what he is talking about.

  3. rivvir

    “Matt Yglesias simply doesn’t know what he’s talking about.” Yup. Does he actually get paid for this? Wait a moment. Slate? The liberal site? D. Hajek’s remark, “But if I thought Matt Y was serious” sure seems to come into play here, as does R. Shevlin’s. What liberals do you know who want the big banks ruling our lives? Take a look at their site. I just did. Article titles such as “Hooray for unpaid internships, they’re cheaper than college,” and “Why women and other female primates are promiscuous.” Maybe you should take another look at what you’re railing against. It might be your conservative self in this case.

  4. Mark Alarik at Salesoverlays.com

    The community banks — just like the American Middle Class citizens and small business owners provide most of the tax base and jobs in the U.S. More competition means more jobs, and leverage for the employee to make a better income. Local businesses can offer local customization, also a benefit to the citizens. The community banks depend on the good will and trust of their customers, who are also their neighbors. Mr. Yglesias also doesn’t know anything about what makes a strong American economy.

  5. Bill H.

    I don’t think they guy gets the magnifier effect that a large, diverse banking sector creates in terms of access to capital. What he seems to complain about is what my grad advisor called “the Q-tip” banking system–some really big banks, lots of really small ones, and not a whole lot in between. My local bank offers a 2 -year TD that pays more than the dividend yield of JPM. And this local bank is thriving in the same strip mall where the local grocery store has a Chase branch. Not to say that community bankers sometimes have a little too much whine with their cheese, but swallow up community banks…c’mon, man!

  6. O'Kane

    Am I tilted here or, does it smell the cologne Yglesias is wearing is cloned from Essence d’Obama.

  7. Mark Alarik at Salesoverlays.com

    The community banks — just like the American Middle Class citizens and small business owners provide most of the tax base and jobs in the U.S. More competition means more jobs, and leverage for the employee to make a better income. Local businesses can offer local customization, also a benefit to the citizens. The community banks depend on the good will and trust of their customers, who are also their neighbors. Mr. Yglesias also doesn’t know anything about what makes a strong American economy.

  8. rivvir

    Well Tom, looks like a lot of people here, besides yourself, didn’t get it. Doesn’t it? Particularly o’kane, who certainly got tilted by essence of brown.

  9. Bill

    You know full well that Slate is run by big government liberals. We should not be surprised by their hatred of any bank.

  10. JRW

    The artcile you should be commenting on was in this Tuesday’s front page WSJ regarding the decline in the number of US banks. The article was not positive on smaller community banks primarily due to limited growth opportunity and an inability to compete with larger banks. Before the crash community banks had focused on low end CRE. That market has diminished and the regulators are significantly restricting this activity. There may be some good performers out there but in my market the community bankers are having a tough time and are not optimistic. You can blame it on regulation but the real problem is an inability to generate earning assets.

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