There is much to like in the recently released report of the Volcker Alliance. Unfortunately, however, there is little discussion of those banking institutions commonly referred to as community banks.
At roughly the same time last month, the Independent Community Bankers Association of America highlighted in a press release the importance of community banks in helping small businesses gain financial stability. The release said there are roughly:
6,000 community banks, including commercial banks, thrifts, stock and mutual savings institutions. Assets may range from less than $10 million to $10 billion or more. Across the nation, community banks operate 52,000 locations, employ 700,000 Americans and hold $3.6 trillion in assets, $2.9 trillion in deposits and $2.4 trillion in loans to consumers, small businesses and the agricultural community.
The relative unimportance of the community banking industry, notwithstanding employment of roughly 700,000 people, to those who prepared the Volcker Alliance report on regulatory reform suggests just how concentrated in large banking organizations the financial services industry has become following the Great Recession. The draftsmen just had bigger fish to fry.
Implementation of the Volcker Alliance report’s recommendations would benefit community banks in two main ways. First, the role of the Federal Reserve as the primary banking industry regulatory would be clarified and limited to monetary policy and the drafting of financial regulations. Second, and perhaps most significant, regulatory consolidation would result in one supervising regulatory agency referred to in the report as the PSA (Prudential Supervisory Agency). All of the supervisory functions of the FDIC, the OCC and the Federal Reserve would be combined into the PSA.
And the PSA would have a special division for the regulation of “true” community banks. The report fails however to say what it means by the term “true.” At note 16, the report correctly notes, as one example of the inconsistency of the current regulatory framework, that community banks are defined differently by Federal Reserve, the OCC and the FDIC.
Notwithstanding the foregoing, the report, which is available at www.volckeralliance.org, is worth a review if only to deepen your understanding of the current regulatory framework which the report persuasively demonstrates is in need of simplification and re-organization. It is policy research at a very high level.
Another recent study examines more thoroughly the nature of community banking within the context of the current regulatory environment: Lux and Greene, The State and Fate of Community Banking, Harvard Kennedy School, Mossavar-Rahmani Center for Business and Government (February 2015) (Associate Working Paper No. 37), available at http://www.hks.harvard.edu/centers/mrcbg/publications/awp/awp37. Among other conclusions of this study:
Our findings appear to validate concerns that an increasingly complex and uncoordinated regulatory system has created an uneven regulatory playing field that is accelerating consolidation for the wrong reasons.
Id. at 3.