Why NC needs small banks

by John C. Hunter, former Asheville banker, published in News and Observer, March 19, 2014.

The United States is suffering from a severe over-concentration of banking assets. Currently, 50 percent of all banking assets and deposits in America are held by just 10 banks. This has made those banks “too big to fail,” and it is widely believed that the government would, in a repeat of the massive Wall Street bailouts of 2008, once again commit billions in taxpayer dollars to ensure that these few banks do not fail.

This over-concentration is more than just a threat to our nation’s economic stability. By crowding out America’s smaller community banks, it also represents a lost opportunity for widespread and stable economic growth within our economy.

North Carolina and the nation need small banks. Smaller, community-oriented banks have many economic virtues. Because they tend to know their borrowers well, they make a high ratio of good quality loans. This in-depth knowledge of their clients also allows local banks to stick with these good customers even during tough times. Conversely, the depositors in local banks also tend to be “sticky” – they are less likely to flee the bank in tough times. These are stabilizing influences within our economy.

As local banks grow, the jobs they create and the money they earn stay in the local economy – which means more money earned and spent in Hickory, High Point and Ahoskie, and fewer multimillion-dollar bonuses handed out on Wall Street. This helps our economy grow in a more balanced and sustainable fashion.

And if a community bank does fail, its stockholders and the Federal Deposit Insurance Corporation, an organization funded through an assessment on the banks themselves, take the loss, not the taxpayers. And the failure doesn’t risk causing a larger collapse within the economy. Since the onset of the current economic downturn in 2008, six community banks have failed in North Carolina. The affairs of these banks have been wound up by the North Carolina commissioner of banks and the FDIC without most North Carolinians even noticing. However, just knowing that they will be allowed to fail provides local banks with a market based incentive for prudent management – an incentive their “too big to fail” brethren often lack.

Unfortunately, despite the advantages of small banks and their importance to our economic future, the trend today is toward government action at the federal level that will ultimately inhibit the formation of such banks within our financial system. In an effort to curb the practices that led to the Wall Street bailouts, ever more costly and onerous regulations are now being placed on banking activities. Banks are also being required to raise and retain more capital. Higher capital requirements and more regulation favor the growth of larger, national banks and are barriers to the formation and growth of community size banks.

There would be less need for these regulatory actions if our nation’s banking assets were more widely distributed. True, it would require community banks to once again focus on loans to customers in whom they have confidence and to keep a higher percentage of the loans they make as assets on their own books, instead of selling them to institutional investors. But this reform would have the beneficial effect of encouraging the establishment and growth of more local banks to handle the total volume of loans, while requiring those banks to be directly accountable for the quality of the loans they make. In turn, these smaller, more responsible banks would present less of a risk of failure and require less capital as a buffer against loss. A virtuous cycle indeed.

There will always be a need for large national banks. The financial needs of many of our larger commercial concerns can be met only by such large financial institutions. But the future economic growth and stability of our state and nation argue for the continued establishment and promotion of smaller, more responsible, banks.

During the last century, North Carolina was known as the “Good Roads” state. That reputation did much to assist North Carolina’s economic development in the 20th century. We could do worse than to be known as the “Good Banks” state in the 21st century. Let’s work to make North Carolina and the nation the beneficiaries of a robust and growing network of small banks.

John C. Hunter is an attorney and former banker in Asheville. He serves as a member of the N.C. State Banking Commission. The views expressed here are his own.