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FDIC reaches out to small banks

By Claes Bell, CFA · Bankrate.com
Friday, February 17, 2012
Posted: 12 pm ET

It looks like community banks are finally starting to realize the federal government's regulatory tightening on systematically important financial institutions is actually going to help them.

If you'll recall, last year, then-FDIC chairman Sheila Bair was heckled at a gathering of mostly community bankers organized by the American Bankers Association in San Diego Washington, D.C. Bair was taken aback; she had considered herself a friend to the banks and had pushed for small-bank exemptions in Dodd-Frank and other regulatory reform efforts.

Booing Bair hasn't been the only expression of community bankers' displeasure with post-financial-crisis reforms. The Independent Community Bankers of America has released statements condemning opposing some elements of Dodd-Frank, the Fed's implementation of debit swipe-fee caps and the creation of the Consumer Financial Protection Bureau.

What's funny about that is legislators and Obama administration officials have bent over backward to signify they're not targeting community banks, writing small-bank exemptions into all sorts of things, including debit swipe-fee caps and more stringent capital requirements for the banking industry. Obama even gave a shout out to community banks in his State of the Union Address in 2010.

As a result of regulators' small-bank favoritism, some of the nation's biggest banks are being forced to boost their fees to keep their checking accounts breaking even, even as community banks and credit unions have been able to keep free checking alive. As a result, the evidence suggests we're seeing a pretty big exodus of customers to community banks and credit unions as a result.

At a love-fest for community banks put on by the FDIC, it finally seems to be dawning on community bankers that they're getting a pretty sweet deal compared to their SIFI brethren. From Joe Adler at American Banker:

Underlying a much-anticipated conference on regulatory issues facing small banks Thursday was a feeling of hope among executives that Washington may finally be starting to focus on their sector.

The meeting, hosted by the Federal Deposit Insurance Corp., is part of a new agency initiative to better understand the conditions and challenges faced by community banks, and then consider changes to how regulatory policy affects them.

Attendees were not shy about pushing for so-called two-tiered regulation, concerned the agencies were applying the same scrutiny to large and small institutions.

"We don't cause a systemic risk to the FDIC fund and shouldn't be on the same level of examinations" as larger institutions, said John Evans Jr., chief executive of the $938 million-asset D.L. Evans Bank in Burley, Idaho, in an interview.

"I hope there will be some changes happening in the regulatory process. Forty percent of the banks in Idaho are 3-, 4- or 5-rated. They're not lending, they're trying to just survive. It makes it very difficult when only 60 percent of the community banks are out there lending."

That push for two-tiered regulation is revealing, as it shows that community banks are starting to realize their interests and those of SIFIs are just not that closely aligned. I've always been a little mystified by the solidarity within the banking industry concerning regulation. It seems to me the biggest threat to community banks in recent years, aside from the consequences of some not-great lending decisions, hasn't been overregulation, but competition from large national banks pushing their way into markets across the country.

While there's little doubt that, across most sectors of the economy, increasing regulation tends to benefit the biggest companies and disadvantage small ones, it seems like so far, the post-Dodd-Frank regulatory regime is having the opposite effect on banking, and that's by design. The Obama administration seems to realize that if they want to fight the increasing concentration of American banking in the hands of a few SIFIs, they're going to have to do things to level the playing field.

What do you think? Has the Obama administration favored small banks over large ones?

Follow me on Twitter: @ClaesBell

Update: Just to clarify, the Bair heckling incident did not occur at an Independent Community Bankers Association event. While, according to the reports, the gathering was mostly community banking executives, the event in question was held by the American Bankers Association.

Update 2: An ICBA spokesperson maintains ICBA was neutral on Dodd-Frank as a whole, opposing some measures while supporting others, so I've updated the blog post to reflect that.

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