Last week was a good week to be a community banker. But it could have been much better.
In passing a mortgage relief bill, the U.S. Congress also upped the Federal Deposit Insurance Corp.’s borrowing limit. That will take some pressure off the FDIC to replenish its coffers through increased premiums on banks. In fact, it will mean that a proposed 20 basis point fee hike will be halved, to about 10 basis points. For many community banks in Massachusetts, that will save upwards of $1 million a year.
Also in the past week, changes have been made to the federal Troubled Asset Loan Fund. TALF is meant to open up the secondary markets for mortgages, but it had been primarily designed to do so for pools of residential mortgages. A rule change in the TALF program, though, means it will now also be able to realistically recreate a market for commercial mortgage backed securities.
What’s becoming increasingly obvious is that community banks like those in Massachusetts have been titans of financial prudence compared with their supposedly sophisticated big bank brethren. The Bay State’s community banks were not instigators of the great subprime residential mortgage fiasco. But they have been victims of the fallout.
They first took it on the chin when their stock holdings in Fannie Mae and Freddie Mac were wiped out. They’ve been looking ahead, aghast, at what might be coming their way in terms of a new breakdown in commercial real estate loans – a crash brought about because of the inability for lenders to sell such mortgages on the secondary market.
The TALF change will open a highway for commercial real estate lenders. The going may still be slow and painful, but it should not be the complete standstill that local bankers were anticipating.
The TALF change will be good for big banks and small banks alike (or at least those who sell their loans). But the FDIC change, although welcome, does not go far enough to support the nation’s community banking system.
Fed Reserve Chairman Ben Bernanke has already said that community banks should be the model for how the banking system should be run going forward. He doesn’t say that lightly.
Our entire economy seems to be caught in a black hole of big bank failure, as the dark matter gravity of these collapsing institutions is sucking in everything around them. But that’s what happens: things that once were looked at as bright shining suns lighting the way for everything around eventually implode and threaten the rest of the universe.
Last week, FDIC Chairwoman Sheila Bair argued against allowing such financial stars to grow so large again. She told Congress that restrictions ought to be placed on banks as they grow larger. She called for stricter capital rules for bigger banks, and lower thresholds for regulatory corrective action.
But Bair could have gone further. The FDIC is a self-funding organization. Its money comes from assessments on banks, not from taxpayer dollars. But the stress being put on the FDIC is primarily coming from the nation’s large banks – although it is the smaller community banks who are being asked to replenish the fund.
No one is disputing that what we are facing is a big bank problem. Maybe the answer is to have the big banks pay for the solution. When the FDIC imposes its new fee, it shouldn’t impose a dime of additional costs on community bankers.
The nation’s large banks supposedly understand risk – at least they understand the concept of it, since they’re not actually paying for any of their miscalculations. Here’s a chance to send the bill where it really belongs, and to find a way to reward community bankers for knowing how to steer clear of black holes.
