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The Last Real Banker? 73
regulatory requirements. Unlike their bigger counterparts, community
banks are typically privately or closely held, so they can’t
just issue more shares on the market to raise funds. Credit unions,
on the other hand, are barred by law from raising public equity, so
they can build funds only through deposits and retained earnings.
Regulations aimed at safeguarding the fi nancial system pose
a greater burden for smaller banks, too. Community bankers worry
that the more stringent lending standards will disproportionately
hurt them. “Banks are being forced to take more of a cookie cutter
approach with both residential and small business lending. You
fi t within this mold, and that’s it,” says Donald Frain, president
and chief operating offi cer of Quontic Bank in Great Neck, Long
Island. “The element of truly knowing your customer is being
taken away from community banks—which was the one advantage
they had over big banks.”
Those concerns were echoed by Thomas Hoenig, the head of
the Kansas City Fed. After praising community banks at the August
2010 congressional hearing, he questioned their continued viability
in a Too Big to Fail age. In particular, Hoeing said, the perception
that the government will again swoop in to save the biggest
banks in the event of another crisis gives them an unfair edge.
That implicit guarantee allows the biggest banks to run their businesses
with greater leverage and a lower cost of capital and debt.
The comparatively higher cost of capital for smaller banks, along
with the increased expense of regulatory compliance, will encourage
even more consolidation, he said.
That pressures smaller banks to adopt big bank practices.
Community banks used to hold their loans on their books, for
example, giving them the accountability and “skin in the game”
that regulators so prize. But no lender wants to hold a 30-year
mortgage when they can sell it off to investors, who then package
it up with other loans into a security. Today, many smaller banks
routinely sell mortgages, auto loans, and even SBA- backed commercial
loans into the great securitization machine.
Eli Moulton, the Vermont attorney, says banking has fundamentally
changed from the days of Dudley Davis. “The whole principle
of banks was to support community local investing, right?