A Generation Later Rapidly Approaches

My last post, on small banks and credit unions doing "good works" for the communities they serve, prompted this email from the CEO of a community bank in the Midwest:

I recently read a quote from Margaret Thatcher where she said that if all the Good Samaritan had was good intentions he would not be remembered. He also had money. When privately owned banks go away, taking prosperous small businesses with them, who will remember a generation later? Very sad.

That post also prompted a credit union executive to unsubscribe from the blog, on the basis, I presume, that I ended mu post with "Merry Christmas" as opposed to "Happy Festivus."

While I didn't intend to anger or depress anyone, my community banking correspondent is correct to be pessimistic. The number of banks is decreasing rapidly, and the evidence is coming from all quarters.

Minnesota Business Magazine asks if the regulatory burden is "killing small banks" and answers itself in the affirmative.

In banking, numbers tell the story. If so, these numbers have the making of a tragedy: In 2000 there were 513 community banks in Minnesota. Now we have 332, a drop of 35% in just 15 years. What’s going on?  There are two factors at play according to Joe Witt, president of the Minnesota Bankers Association. One is increased competition from large players like Wal-Mart entering the financial services industry and from tax-exempt organizations like credit unions. “Right off the top they’ve got a 30% or 40% operating cost advantage,” says Witt.

But the dominant factor that is causing small banks to sell out or close shop is what Witt calls the “cumulative effect” of government regulations.

[...]

The problem with adding regulation isn’t that small banks can’t adhere to the standards, it’s that they simply can’t keep up.

“We are getting paddled and beaten in terms of additional compliance responsibilities,” says Bill Patient, vice president of compliance at BankCherokee in St. Paul. “Everyone is in the same playing field and working with the same regulations.”

Patient says that beyond just the sheer pages of new documents, the hardest part for small banks is spending time to understand new rules and regulations. Compliance officers must sort through the new laws to figure out what they mean, how the rules work with current regulations and which rules apply to their institution. Many small banks have no compliance officers on staff, and the increased workload can be devastating for small institutions.

The article also notes other factors, like the difficulty of making a buck in banking with narrow interest rate margins and the Fed's artificially low rates, as well as the dearth of new charters since 2008 to replace banks failing or merging. Nevertheless, bankers believe its the regulatory burden that is the major factor driving the trend, a trend that has seen the annual rate of decrease in the number of banks in Minnesota double post-Dodd-Frank from 2% to 4%.

Several years ago Witt sent a letter outlining his concerns to the Federal Deposit Insurance Corporation. In the letter he quoted a banker who said, ”We used to do banking in compliance with the laws and regulations. Now we do compliance and hope that it allows us to do some banking.”

The magazine echoes my correspondent in its view of the collateral damage from this incredibly shrinking universe of community banking.

Losing community banks isn’t simply about less choice for consumers. In rural communities, the local bank can be the lifeblood of the town, and being a small town bank might not be worthwhile anymore, says David Reiling, president of Sunrise Banks in Minneapolis. “There’s a lot more risk and the return may be uncertain at best.”