America’s banking system is unique in the world. When reckless mega-banks crashed the economy with the 2008 financial crisis, community banks across Connecticut like Simsbury Bank continued to make loans to families and businesses. In fact, even though community banks account for less than 20 percent of our nation’s banking assets, they make more than half of all small business loans.
By contrast, Europe’s banking system is much more concentrated and has fewer smaller banks. As Europe struggles though its financial crisis, with mega-banks hobbled by their sovereign debt holdings, they don’t have smaller banks to support the economy as the mega-banks recover.
You would think that American banking policy makers would be delighted that our many banks of all shapes and sizes don’t move in lock step. This creates a much more resilient banking system.
So, why, if federal banking regulators know this key American banking system advantage, would they propose complicated and excessive capital regulations that have the potential to put thousands of smaller banks out of business?
Federal banking regulators recently proposed sweeping changes to bank capital requirements designed principally to control complex mega-banks (banks with commercial banking, investment banking and brokerage, and in many cases, insurance activities under one roof). Basel III, the most prominent of three proposed capital regulations, would subject local banks like Simsbury Bank to the same complex rules as mega-banks like JPMorgan Chase. Named for the Swiss city in which international bankers and regulators gathered to design it, Basel III sets worldwide bank capital requirements. This one-size-fits-all approach is wrong for America’s diverse banking system, and is especially wrong for thousands of community banks.
Have regulators forgotten that community banks’ simple banking model consists of taking deposits from local families and businesses and redeploying those deposits as loans to families and businesses to grow the local economy? Few community banks trade in risky financial instruments like credit default swaps, which serve as profit centers for mega-banks and played a large role in the 2008 financial crisis. Unlike what we lived through with the 2008 crisis, when a community bank fails, the entire banking system does not have a heart attack.
The Basel III proposal, with its complex approach to capital, further tilts America’s banking playing field in favor of the Wall Street mega-banks. In his 1961 farewell address, President Eisenhower warned the country to “guard against the acquisition of unwarranted influence, whether sought or unsought, by the Military-Industrial Complex.” Eisenhower was concerned that in the name of national security, defense industry contractors, the Pentagon, and Congress would accumulate such power over American life that the country’s national interest would be threatened.
Today, we face a similar threat to the national interest by a Wall Street-Washington Complex. As this Complex accumulates power, there is a steady transfer of Americans’ financial freedom to the shared interests of Wall Street mega-banks, Congress, and the federal bank regulatory establishment. America’s Wall Street mega-banks are not only too big to fail, they are too big to regulate. They have an outsized influence on our economy, our lawmakers, and our banking regulators. The overreaching legislative agenda of the Dodd Frank Act and regulatory incursion of Basel III are a combined assault on America’s historically resilient banking system. Through their complexity, they are accelerating the consolidation of the banking system, making Americans ever more dependent on a handful of too big to fail mega-banks.
There is a different way to control the Wall Street-Washington Complex and address the failures leading to 2008. We should break up the mega-banks and, as was the case from 1934 to 1999, again prohibit commercial banking, investment banking, and insurance activities under one roof. Breaking up mega-banks allows Congress and banking regulators to reduce the complexity of the Dodd Frank / Basel III approaches to bank regulation and instead develop a more targeted regulatory approach that would preserve one of America’s unique strengths: many banks of different sizes, competing in different ways, and none systemically risky and too big to fail.
Unlike Basel III’s world-wide one-size-fits-all approach, we must establish American bank capital requirements that are aligned with institutional and systemic risk. Even if JPMorgan Chase divests its investment banking activities, it would still be vastly more complex than Simsbury Bank. Capital requirements for small bank should be much lower than for mega-banks.
We are at a seminal moment in American history. In the late 19th century, a handful of industrial trusts like Standard Oil had accumulated such power over the entire US economy that they threatened the American dream. President Theodore Roosevelt busted the trusts of that age. America’s diverse banking system is one of its great economic advantages. Let’s not allow the Wall Street-Washington Complex to destroy it.
Martin J. Geitz is president and CEO of Simsbury Bank and president of the Connecticut Bankers Association.
