I never knew that the US Federal Reserve had someone on their Board of Governors who specialised in community banking but they do, and the Bank of International Settlements has published a recent speech by the holder, Michelle Bowman. She fills the “role designated for someone with community banking experience on the Federal Reserve Board, a position that was created by statute in 2015.”
Like many of you, I witnessed firsthand how community banks were significantly affected by the Global Financial Crisis, a crisis they did not cause. In my work as state bank commissioner, I learned how bank failures affected cities and towns across the country, and in my home state of Kansas I saw the profound effects a single failure can have on a community. To ensure that community banks can continue to meet the credit needs of their communities, the Federal Reserve and other banking agencies strive to achieve a fair balance between safety and soundness and reducing unnecessary regulatory burden. Given the straightforward nature of community banking, regulators have an obligation to develop and refine approaches to supervision that fit the smaller size and less-complex risk profiles of these banks. If we keep our focus on appropriately tailoring regulatory requirements for community banks so they may continue to prudently thrive, then community bankers should be able to devote more resources and time to serving their customers and communities.
In the United States, small local banks (community banks), three out of four community banks hold assets of less than $500 million, “account for just 17 percent of financial industry assets [but] are responsible for some 53 percent of bank lending to small businesses”:
With respect to supervision, the Federal Reserve continues to tailor and reduce burden.
What makes this important is that the European Central Bank (ECB) and the Bank of England seem much less inclined to this view of reducing the (regulatory) burden for smaller ‘community banks’. The Bank of England has already presided over the closure of Airdrie Savings Bank, the last Savings Bank in the UK and a closure predominantly brought about by that burden of complex regulation – regulation which is affordable if you are HSBC but not when you have two or three branches. Admittedly Community Banking is back up and, with great effort, nearly running in the UK with the help of former Airdrie personnel and an off the shelf banking system from Tata Steel.
The ECB is, meanwhile putting lots of regulatory and interest rate pressure on the German Volksbank and Sparkassen (local, usually co-operative savings banks) as Richard Werner points out:
… the ECB has been waging war on the ‘good’ banks in the eurozone, the several thousand small community banks, mainly in Germany, which are operated not for profit, but for co-operative members or the public good (such as the Sparkassen public savings banks or the Volksbank people’s banks). The ECB and the EU have significantly increased regulatory reporting burdens, thus personnel costs, so that many community banks are forced to merge, while having to close down many branches.
What I find very surprising is that the Fed tries to facilitate local community banks whereas the ECB and the Bank of England seem only to put obstacles in their way. When in both Germany and the US they lend so much to the all-important small business sector this seems pretty irresponsible. Indeed I’d suggest that flourishing local communities depend on local banking, which is why it is important (even more so post Brexit) that the UK gets its own.
Are the ECB and the Bank of England in the pockets of the large banks?
Is this, I wonder, where corporate America could, unusually, actually teach Europe something rather progressive?