Chef Anthony Bourdain chops slimy fish into a stew pot while explaining how big banks took unsold “fish” they bought on Friday — that would be mortgage bonds — and cooked up a brand-new dish, a fancy entrée called a collateralized debt obligation.
“So what am I going to do? Throw all this old fish in the garbage and take the loss? No way,” Bourdain says. “It’s not old fish. It’s a whole new thing.”
Wall Street banks cooked up big trouble in the years leading up to the Great Recession but across Wisconsin and the nation, community banks just did what they always had done; they served up meat-and-potato products: home loans, business loans and federally insured deposit accounts. They weren’t the ones who gagged the economy in 2008.
That’s why Main Street bankers still get a little testy when politicians rail against “the banks” without making clear which “banks” they mean. And, it’s why community bankers complain bitterly about the avalanche of new rules that came rushing downstream after passage of the 2010 Dodd-Frank Act, a well-intentioned though poorly designed law that came as fallout from the financial debacle.
“The regulations under Dodd Frank are crushing community banks,” says David Schuelke, president and chief executive at Spring Bank in Brookfield, Wisconsin’s newest bank. Spring Bank was founded in 2008, just weeks before the Wall Street time bomb otherwise known as Lehman Brothers exploded, triggering a cascading credit crisis and the worst recession since the 1930s. Spring Bank survived that, and now has total assets of $228 million, which would rank it near the median of state banks.
But Spring Bank, like others, has exited the home mortgage business, which Schuelke says has gotten expensive because of federal rule-making. An October report by the Federal Reserve Bank of St. Louis and the Conference of State Bank Supervisors found that the number of community banks “describing mortgages as a primary product line or as an offered product or service” declined last year.
According to the same report, a survey of bankers found that compliance accounted for 11% of personnel expenses, 20% of legal expenses and a whopping 48% of all consulting expenses. That sucked up 22% of net income.
“I think it’s just overkill,” Schuelke says. “I cannot connect the dots and say the consumer is better off, because I think the consumer is going to pay more.”
Spring Bank spends hundreds of thousands of dollars each year to comply with federal regulations, Schuelke estimates, about a third more than just a few years ago. Those are dollars that produce no new loans and attract no new deposits.
In a 2014 paper for the St. Louis Fed, Tanya D. Marsh, a Wake Forest University law professor, argued that community banks were under stress because of federal policies that subsidized their competitors and encouraged Americans to invest in capital markets at the expense of depository institutions. Other experts suggest small banks are holding their own but have had a harder time than their larger competitors dealing with a very long run of low interest rates, which makes it harder for bankers to make money.
The health of community banks matters because they fill an important niche. A Harvard study in 2015 found that community banks are especially important for farmers, homeowners and small business owners. In many rural communities, small banks are the main source of credit. If they struggle, the economies of those areas may struggle. The study found that since passage of Dodd-Frank, community banks’ overall market share had fallen at a significantly faster clip than before the law was passed.
Banking never has been a purely market-driven enterprise. The federal regulatory hand has long pushed back against the “invisible hand” of the marketplace, which is as it should be. What I hear community bankers asking for is fairness.
Congress and regulators need to remember: Anthony Bourdain wasn’t hacking up day-old fish in the back office of a community bank. His metaphorical doppelgänger was cooking up trouble in the financial kitchens of Wall Street.
David D. Haynes is editorial page editor for the Journal Sentinel. Email firstname.lastname@example.org Twitter: @DavidDHaynes