Straight Talk: Disturbing Trend

As much work as bankers do to influence the performance of their individual institutions, the fact is government controls the big levers which ultimately dictate the performance of the industry: capital requirements, interest rates, loan loss reserve methodology, taxation, and regulations governing interaction with consumers and safety/soundness. While the largest players in almost all industries have long benefitted from cozy relationships with government, it's the small and medium-size players that feel the tugs and pulls like a marionette..Sky-high capital requirements, rock-bottom interest rates, pressure to over-reserve for loan losses, rising taxes and ever-changing regulations have created a very difficult environment for smaller banks. I am very concerned that some people in position to change the situation don't even see the problem..In a recent publication, the Federal Deposit Insurance Corporation notes that the number of banks with assets between $100 million and $1 billion has grown in the last three decades. The number of larger banks also has increased. Even though the FDIC reports that the number of banks with less than $100 million in assets declined by 85 percent between 1985 and 2013 (to about 6,000 from 18,000), FDIC Chairman Martin Gruenberg said: "The FDIC study clearly demonstrates the strength and resilience of the community bank sector…".The massive reduction in the number of small banks, the virtual cessation of new bank formation activity (13 de novos in the last four years) and the steady pace of consolidation (200 to 250 M&A transactions per year), makes me nervous – certainly about the future of the industry but also about the future of our economy. There are a lot of customers who want to do business with small institutions. Small banks are willing to serve many customers for whom larger banks don't have time. Fewer options for obtaining credit do not better serve the public. The decline in the number of small banks is a disturbing trend that inhibits innovation, limits options, and ultimately squashes dreams for millions of Americans..The sad thing is that if elected officials and regulators wanted to work together to correct the situation they could. In order to preserve smaller institutions, they know what to do: Back off on the capital requirements, allow for more flexibility in the loan loss reserve, scrap the consumer and safety/soundness regs that only make sense at large institutions, and make it easier for small banks – especially sub S banks – to declare dividends..They know what to do, the questions is why don't they do it?