#202. Less Banks??? We Need More!

Posted on | The Agurban

Less Banks??? We Need More!

The recent bailout of Wall Street has begun to trickle down to Main Street as the Fed wants to “share the wealth” of the bailout with Main Street banks.  The offer of preferred shares at a 5% dividend rate is essentially “free money” in the capital asset pricing model and which Main Street Bank wants to turn down “free money?”

Part of the Fed’s plan with this money is for larger banks to use it to buy out about 1,000 banks from the pool of 7,203 commercial banks in existence as of June 30, 2008 in the USA, down from 12,343 banks in 1990.  Many of the 1,000 banks that are to be acquired will come from rural communities, where the local bank is often the only bank in town.

This policy is misguided and will actually hurt, rather than help many areas.  For decades academics and policy makers have preached that we have too many banks in this country, pushing for more of a European model where a handful of very large, mega-banks control the entire country.  I worked for seven years under such a system in rural Brazil and found it to be much less dynamic and much more difficult to obtain loans than our U. S. model of many banks.  Out of the 20 big banks in Dourados, Brazil (none locally owned or controlled) not one of them would make a $20,000 loan to purchase farmland!  “We don’t do that here.  You’ll have to go to headquarters in Sao Paulo (600 miles away) to see them.”  The local banker in mega-bank rich Brazil couldn’t make a decision that rural bankers in the USA make every day of the week!

Rather than encouraging fewer banks, it is my contention that we should instead encourage more banks, especially in the agurbs®.  Today many of the smaller, local banks are overwhelmed by regulations and regulators like the Fed, OCC, FDIC, OTS, SEC, etc. in addition to an acronym rich collection of state agencies.  It is regulation run amuck!
I’ve seen it over and over again, that these small local banks and their bankers are the ones who not only often provide a leadership role in rural communities, but also are the ones that are making the start-up loans for new entrepreneurs.  I can easily count several dozen entrepreneurs in my own hometown of Effingham, IL who wouldn’t have ever gotten into business if it weren’t for a local banker who helped them finance their new business and continue to support those now much larger businesses today.  These dozens of entrepreneurs, by the way, have several thousand employees and are the ones adding employees even as the Fortune 500 companies are unloading them in droves.

Today, we are unleashing an incredible entrepreneurial spirit in this country and we need entrepreneurial banks to help these new companies to develop.  But we risk hindering these entrepreneurs if we don’t let new banks bloom in the country.  
My proposal is to encourage the growth of new, smaller banks by lessening regulations on small banks of up to a certain threshold in assets.  I’ll pick the number $100 million, but it could be $200 or even $300 million.  If you look at the following graphic from the FDIC, you can see that not only have those smaller banks made more money in the first half of the year, but they also have much less charge-offs than larger banks.

Why would we want to discourage smaller, safer banks in this country?