In the aftermath of what appears to be the biggest financial catastrophe of this century, it has become commonplace to call for more regulation, more capital, less diversity and less risk. The implications of these calls will have far reaching consequences that may not produce the results that were intended.
In trying to save the financial system, Regulators have forced the mergers and acquisitions of Too Big to Fail institutions which have actually created even larger, and more systemically important institutions. Expect that membership in the Trillion-Dollar-Plus balance sheets to rise even further, even though there is a cap on national deposits at 10%.
Regulation meant to protect consumers may actually cause higher fees, less options, and the destruction of many smaller community banks that cannot function under the cost burden of all the additional regulation.
The call for additional capital for financial institutions which may be needed for riskier companies, would also serve to reduce lending, and cause the forced mergers of many smaller banks. This mass consolidation will withdraw lending from many businesses and communities that are not attractive to the national banks, and will stifle the entrepreneurial enterprises that need a banking relationship which cannot be described on a standard loan form.
So while the big get bigger, the forces at work are conspiring to stall the formation of new community banks, and make all community banks under $1 Billion in size uneconomical to operate… This is a very serious state of affairs. Ninety two percent of the 8200 banks in the United States are under $1 billion in assets… For small businesses on Main Street’s all across this country, this situation could be disastrous.
Existing banks will need to absorb most of the products and services previously provided by the shadow banking system, and this may not occur in a smooth and stable process. It is important however to keep in perspective that we will never be able to regulate for every future problem that may arise. In some cases, the failure we are experiencing was not due to lack of regulation, as much as the lack of application of existing regulations…
There are a great number of community banks that have played by the rules, and provide a sorely needed service to our vast majority of businesses on Main Street. Let’s be careful in how we seek to rectify the problems mostly created by the non-bank banks, and not over-burden the banks that will be needed to restart our economy…