Inside Financial Services

The Independent Community Bankers Association Has Forgotten It’s Made Up Of Bankers

A little less special pleading and a little more straight-up competition, please

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I’m outraged at the series of sanctimonious statements lately coming from the Independent Community Bankers of America over the supposed threat to the financial system posed by “too-big-to-fail” banks, and the unfair government subsidy they purportedly receive. The latest version of ICBA griping came in the form of an op-ed last week in American Banker by chairman-elect John Buhrmaster. As you can imagine, Buhrmaster just loves the Brown-Vitter bill, which would slap unreasonably high capital requirements on big banks and ease the regulatory burden on smaller ones. “Employing stricter capital guidelines on the largest and riskiest financial firms while easing the regulatory burdens they have caused for the rest of us would . . . remove excessive government distortions in our nation’s financial sector,” he thunders, barely stopping to take a breath. “Despite the inevitable kicking and screaming from Wall Street, these reforms are essential to freeing up our markets and putting the ‘capital’ back in capitalism.”

Oh, please. Buhrmaster has no interest in putting the capital back in capitalism; he’s merely engaging in special pleading. To begin with, if he really thinks big banks are inherently dangerous and much riskier than community banks are, he’s kidding himself. Say what you want about the boundlessness of Wall Street greed, large banks are more broadly diversified, both by loan and product type, than small banks are. Too many small banks are simply money spigots for local developers. That’s why the vast majority of bank failures (and FDIC losses) this past cycle were related to smaller banks. If big banks showed the same sort of loan concentrations of many community banks, regulators would force out their managements.

What’s more, notwithstanding the Simon Johnsons of the world, TBTF banks don’t enjoy any competitive advantage via a supposed special government subsidy by virtue of their size. If anything, the all-in cost of funding of big banks is slightly higher than it is for smaller banks. Nor do big banks earn higher returns. This notion that being TBTF is some sort of special advantage is a myth. If it were not, you’d see big banks and other large financial services firms clamoring to be designated as SIFIs. They are not. In the meantime, since the recession ended it’s been the big banks that have taken the lead in lending to what are supposed to be community banks’ bread-and-butter customers: small business.

Buhrmaster is simply looking for some help from the federal government, in the form of Brown-Vitter’s onerously high capital requirements, in his competition with the megabanks. I love community banks because I love free-market competition. In market after market, community banks go toe-to-toe with the big banks and win. But the ICBA, under Buhrmaster and its CEO, Cam Fine, have chosen not to champion community banks for their ability compete. Instead, they’ve resorted to whining and misleading in a shameful, unpatriotic effort to put one group of banks at a disadvantage while engaging in an unseemly attempt to secure a handout for the banks in their organization. It’s a disgrace.

What do you think? Let me know!

10 Responses to “The Independent Community Bankers Association Has Forgotten It’s Made Up Of Bankers

  1. Jim Muse

    Tom….I love ya. But you’re “outraged” that the leaders of a community bank trade group would be taking the opportunity to bash the big guys? C’mon now!
    The reason that smaller banks are unhappy with the big guys has nothing to do with TBTF. It’s two things; 1) getting our reputations lumped in with “Wall Street” banks or their equivalent through a big bank subsidiary, and 2) the rather imposing regulatory costs being heaped upon everyone – primarily due to the overreaction of Congress to perceived “greedy” activities that the larger institutions were perpetuating.
    You know that fixed costs are harder to absorb across a smaller organization than a bigger one. The FDIC is tighter in their exams, the CFPB is promulgating away, and Dodd-Frank will be unfolding for years. And MOST community institutions never made a sub-prime loan, nor ever approached the “per capita” levels of overdraft and other fee income levels of larger banks. Yet, we have many thousands of dollars less to invest in emerging customer service technology, new product development and self-service branches. Yet, we must grow, we still maintain our community service presence and we must rise to the challenge of increasing regulation. All while competing for business.
    I’m proud to be part of an organization that is managing – so far – to compete and be profitable. But I am also cognizant of why the leaders of the ICBA are using their position to move the banking dialog closer to their members favor.
    Keep up the great writing….it’s thought provoking and helpful!!

  2. PureDakota

    Tom, you should start your rant with a recognition that we wouldn’t even have DFA if big banks hadn’t thrown caution to the wind in their quest for profit. Mr. Muse said it well. I doubt Brown-Vitter is the answer; but TBTF must be dealt with. A solution has a better chance of being permanent if the banking organizations come to Congress with a solution that they can both live with. Both need to respect the fact that each has strength in Congress, and if they try to solve this by going to war with each other, it will never end.

  3. Talig

    It’s called moral hazard. In a crisis, the creditors of the big banks get bailed out by the taxpayers. The small banks do not. Creditors are lending to the big banks unconstrained by fears that the banks will go broke. Maybe you can’t see how wrong that is because you’re long the big banks.

    I favor breaking up the big banks, but since this isn’t politically feasible until (possibly) the next crisis, then the alternative is to impose higher capital requirements.

  4. Talig

    It’s called moral hazard. In a crisis, the creditors of the big banks get bailed out by the taxpayers. The small banks do not. Creditors are lending to the big banks unconstrained by fears that the banks will go broke. Maybe you can’t see how wrong that is because you’re long the big banks.

    I favor breaking up the big banks, but since this isn’t politically feasible until (possibly) the next crisis, then the alternative is to impose higher capital requirements.

  5. The Commissioner

    Mr. Brown, your opinions about capital requirements and other banking issues would have greater credibility if you disclosed the holdings of the hedge fund you manage that are relevant to the opinions you espouse. For example, you defend the too-big-to-fail banks, but you failed to mention that your hedge fund holds stock in some of the very too-big-to-fail banks you stridently defend.

    We all know how public-spirited and altruistic you hedge fund managers can be and how you would never just say something irresponsible to line your own pockets, would you?

    Oh that’s right your hedge fund does hold stock in too-big-to-fail banks, that wouldn’t have any bearing on your opinions, would it?

    Maybe before you offer any more public pronouncements on banking policy you should state your financial interests somewhere in the column.

  6. The Commissioner

    Mr. Brown, your opinions about capital requirements and other banking issues would have greater credibility if you disclosed the holdings of the hedge fund you manage that are relevant to the opinions you espouse. For example, you defend the too-big-to-fail banks, but you failed to mention that your hedge fund holds stock in some of the very too-big-to-fail banks you stridently defend.

    We all know how public-spirited and altruistic you hedge fund managers can be and how you would never just say something irresponsible to line your own pockets, would you?

    Oh that’s right your hedge fund does hold stock in too-big-to-fail banks, that wouldn’t have any bearing on your opinions, would it?

    Maybe before you offer any more public pronouncements on banking policy you should state your financial interests somewhere in the column.

  7. WVCommunityBanker

    Your alliances are obvious, and you are either completely clueless or just playing fast & loose with the facts in order to serve your masters. To conclude that community banks have more signaificant credit concentrations than TBTF banks and thus this is the (sole ?) reason that more community banks have failed than TBTF banks, is a flawed and dishonest conclusion.The only reason the big boys didn’t fail in 2008 is because the government deemed them TBTF and bailed them out. You should first & foremost, at least acknowledge that fact. These were failed instituions, period. And in regard to concentrations, what about the TBTF banks’ concentrations in subprime mortgages & the securitization and derivative businesses built around them ? THAT wasn’t a concentration ????

  8. Randall Grossman

    Wow. I come late to this discussion and I’m astonished at how many people have bought into “too big to fail.” Yes, big banks were a contributor to the financial crisis. But so were small banks. As Tom notes — and any of you can confirm from FDIC data — “the vast majority of bank failures (and FDIC losses) this past cycle were related to smaller banks.” But it is politically incorrect to impune community banks, so no one ever mentions this.
    TBTF has been used as an excuse to impose higher FDIC fees on large institutions than on small ones — even though any market based insurance system would do the reverse, given the pattern of losses. I agree with Tom: stop whining and focus on competing. The big banks are not that hard to beat if you focus on basics.

    I do agree with one thing that Jim Muse notes: some of the regulatory costs that have been imposed in response to the financial crisis are burdensome and of little value. But that’s what happens when you believe in simple solutions. And if the Law of Unintended Consequences tells us anything, it is that urging government to stack the deck in favor of smaller banks will blow back on all of us, big and small, very quickly.

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