North America: Small banks feel the squeeze in the US
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North America: Small banks feel the squeeze in the US

White House report baffles community bankers; a quarter of small credit unions closed.

According to the White House’s US Council of Economic Advisers, community banks across the US are doing just fine, and Dodd-Frank regulation hasn’t harmed the sector.

“Although opponents of financial reform often claim that it has harmed community banks,” the Council wrote in a paper in August, “a closer and more comprehensive review of the economic evidence shows that community banks remain healthy.” The paper points to the annual growth rate of lending by community banks in each asset range which is in line with rates seen prior to the financial crisis. 

Bill Hampel, Credit
Union National

Nonsense, say community bankers. “While some may argue that the community banking industry appears to be doing pretty well, low interest rates and regulatory costs are certainly taking their toll,” says Terry Jorde, senior executive vice president and chief of staff at trade association, the Independent Community Bankers of America (ICBA).

There are 2,000 fewer community banks since the financial crisis. Worse still, in that time only four new banks have been formed. That is unsustainable, he says.

“Even back in the 1980s during the oil, agriculture, and savings and loans crises we were still chartering 150 new banks a year, so you can see that the industry is really facing some challenges right now or we wouldn’t have this level of consolidation.”

Rob Nichols, president and chief executive of the American Banking Association, responded to the Council’s claims in a public letter. He said he was “baffled” by the findings, writing: “The notion that the Dodd-Frank Act – and its 24,000 pages of proposed and final rules – has had no impact on community banks is simply untrue,” he said, and “a conversation with any community banker would dispel this forced conclusion”.

While the Council points out that the number of branches of community banks has not declined since 2000, it does concede that it is due to the expansion of banks with $1 billion to $10 billion in assets, not because small banks are still serving local and rural communities.

“People who relied on smaller community banks are running out of places to turn,” says one community banker.

And credit unions, especially the smaller ones that might have provided an alternative, are also suffering. Bill Hampel, chief policy officer at the Credit Union National Association, says: “The largest 1,000 or so are doing well, but the other 5,000 and indeed the smallest 3,000 have had a very difficult time in the last decade.” 

Some 25% of credit unions that had less than $25 million in assets have gone out of business in the last five years - Bill Hampel, Credit Union National Association

He says while there has been strong asset, membership and loan growth system wide, the attrition rate shows how smaller credit unions are finding it harder to survive. “You’d expect that during the financial crisis and Great Recession of 2007 to 2009 many credit unions would have closed. But actually the attrition rate has increased since then. Some 25% of credit unions that had less than $25 million in assets have gone out of business in the last five years, mostly through mergers into larger credit unions.”

Hampel says the reason is twofold, and one driver is increased regulatory costs. “Relative to assets, we have found that the cost of regulation is three times greater for a small credit union than for a large credit union,” he says.

The second reason is the cost of technology. “Twenty years ago the cost difference for a large financial institution compared to a small one was that the large bank needed 10 more tellers, at 10 times the cost. But with new financial technology, scale economies come into play. Larger institutions can spread the fixed costs of software and hardware over many more transactions. Smaller institutions need the same systems, but the costs are much greater relative to their size.”

Several credit unions are coming together in various groups to explore joint investments in fintech to share the burden. “Some are looking to create an e-wallet with fintech firms. One group is working on a distributed ledger project together,” says Hampel. “Bitcoin works with people who don’t know and trust each other, but the credit unions could use blockchain technology to work with those that do.”

Exploring technology

Community banks too are looking at how they can work with fintech firms to cut costs, in particular, exploring technology that would enable them to automate the loan process. This has not been without its challenges. BancAlliance, a consortium of about 200 community banks, formed a partnership last year with Lending Club to purchase consumer loans originated on its platform, but suspended the programme in May after Lending Club’s chief executive was ousted.

While community banks would benefit from greater partnering up, Jorde says that is not really a route that they explore unlike their counterparts in Europe or credit unions.”

The ICBA does however give its members the opportunity for group purchasing power. “We also own a company that provides credit card and payment services to our banks so they can be issue Mastercard and Visa cards under their own bank name, allowing them to compete in this space with the largest banks,” she says.

Far more needs to be done to prevent the greater loss of community banks and credit unions, but the White House may not be as unsupportive as the Council’s paper would have one believe. Appeasing Main Street seems to be on the agenda for both presidential candidates as they near the election. 

At the end of August Hillary Clinton unveiled a plan to pare back regulations for small banks which includes simplifying capital requirements. In September the Republicans are introducing an overhaul of the financial system that sources say will include most of what community bankers want.

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