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The Bermuda Triangle for Community Banks

By    |   Thursday, 11 October 2012 10:01 AM

We’re all familiar with the eerie reports about ships and planes mysteriously disappearing in the Bermuda Triangle. Now there is even a more sinister Bermuda Triangle being created in small towns throughout the United States: small community banks are disappearing.

Robert Barone, founder and economist of Universal Value Advisors in Reno, Nev., wrote in a blog last year that from 1983 to 1989, the number of new community bank charters averaged 297 a year. In the 1990s and throughout much of the last decade, the average was about 130 a year.

“But since the financial meltdown, new charters have all but disappeared. There were 29 in 2009 and only one [in 2010],” he wrote. “Meanwhile, community banks have been disappearing over the past 25 years through consolidation, driven partly by over-regulation, and, lately, by outright failures. In 1984, there were 14,507 commercial banks, and nearly all were community banks. At the end of 2009, that number had fallen to 6,840.”

According to the Costar Group, bank branch closings have outpaced openings by an average of 48 percent in every quarter since the first quarter of 2011, including the quarter to date. Banks have closed 3,839 branches in that time and opened 2,595, for a net loss of 1,244 branches. At an average range of 2,000 to 4,000 square feet of space per bank branch, that represents a loss of 2.5 million to 5 million square feet of retail absorption.

In my home state of Florida, there are estimates that the number of community banks in Florida will fall from the 300 that operated just a few years ago, to as little as 150 in five years.

Why should we care about this? Because as Barone points out, “Part of the jobs issue is right in front of our noses. Simply put, the rapid changes in U.S. financial institutions over the past 25 years have been detrimental to job creation in the U.S., because capital is no longer readily available to the entrepreneurial small business sector.”

Entrepreneurs and small businesses have essentially been cut off from loans by larger banks, and now community banks, their traditional source of capital, are closing down. That means local businesses cannot hire, cannot grow and cannot contribute to the vitality of their community.

Community banks lend out roughly 66 percent of their assets to small businesses, easily more than double the amount of the average big bank.

What is the culprit in this mess? It’s the nemesis of small businesses everywhere: onerous federal regulations. New financial regulations that were aimed primarily at stopping big banks from gobbling up even more market share are instead crippling community banks that lack the economies of scale to absorb the increased regulatory costs.

The poster child for ill-advised regulations is the 2,300-page Dodd-Frank Wall Street Reform and Consumer Protection Act. It was passed by Congress to reassure us that the big banks wouldn’t again become too big to fail.

Instead, it has consolidated power in the very banks it was trying to regulate. Former Federal Deposit Insurance Corp. Chairman Bill Isaac is quoted as saying: “I think that Dodd-Frank is a terrible piece of financial legislation. It didn’t address any of the causes of the crisis that we just went through. It won’t prevent the next crisis. It’s heaped volumes and volumes of regulations.”

Commenting on the House Financial Services Committee’s hearings about the effects of implementing the Dodd-Frank financial oversight law, Rep. Randy Neugebauer, R-Texas, wrote: “Private companies will have to spend more than 24 million work hours every year to comply with just the first 224 new rules resulting from the passage of Dodd-Frank. Its red tape reaches deep into the wallets and pocketbooks of millions of Americans and small businesses that had nothing to do with the financial crisis.”

Dodd-Frank has become another rallying cry for fiscal conservatives, and for good reason. It’s another attempt by the Obama administration to grab power and put it in the hands of unelected regulators.

But people are fighting back. A Texas bank is filing a challenge against Dodd-Frank, arguing that certain aspects of the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, which were both established by the Dodd-Frank bill, violate the U.S. Constitution’s separation of powers.

Let’s hope they are successful. When community banks disappear, so do small businesses and the jobs they create. Our entrepreneurs and small businesses are losing access to the lenders that know them best.

Solving the mystery of the new Bermuda Triangle starts with restoring community banks to the communities that so desperately need them.

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We’re all familiar with the eerie reports about ships and planes mysteriously disappearing in the Bermuda Triangle. Now there is even a more sinister Bermuda Triangle being created in small towns throughout the United States: small community banks are disappearing.
Thursday, 11 October 2012 10:01 AM
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