The Community of Banks (Opinion)

Sarah Wallace, board chair of a savings and loan association in Newark, Ohio, recently wrote in the Wall Street Journal that the country’s new banking regulations – which, after much arm-twisting in Congress, were signed into law by President Barack Obama on July 21 – could very well “signal the end of community banking. The new reforms will give more power to the Federal Reserve to regulate how my bank and others like it do business.

“What does all this mean for our customers?” she continued. “Less credit will be available, costs will increase, and we will be less able to make loans to regular people who were creditworthy in the past. This is the perfect storm for the small retail banking customer. We will start to see more small community bank failures and mergers because of voluminous regulation.”

Ahead of the signing, the president referred to the landmark legislation as ushering in “the strongest consumer protections in history.” The 2,300-page regulatory overhaul is meant to protect the nation from a repeat of fall 2008, when the hubris of Wall Street’s biggest firms kicked off the worst recession in memory. Washington’s official response includes the creation of a council of regulators to monitor risks throughout the banking system, creates a consumer protection bureau, and gives the federal government new abilities to deal with firms whose collapse could undermine the market.

Generally speaking, it’s a good bill, if only it were targeted at Wall Street. The United States can’t afford (literally and figuratively) to bail out Wall Street’s biggest firms every time greed gets the best of them. The financial meltdown made it patently clear that Wall Street, if left unattended, would go out of its way to worry about itself – not the country or even in some cases its own customers. Hopefully all the extra oversight this bill provides will help fix that.

Meanwhile, bankers at several Arkansas banks have expressed to us over these last months multiple trepidations regarding the changes. Like Wallace, they fear these regulations will injure bottom lines and send costs upwards. It also means that small banks unable to compete in this new era will likely be consolidated.

Hopefully those fears will prove wrong. If true, it means Washington may have more homework ahead of it. Obviously it’s beside the point that a handful of financial titans made a bad name for bankers from coast to coast – financial reform was already a long time coming.

The reality is that the country is mainly made up community banks – institutions where firms count customers as friends. Aside from being a business, they put a friendly, trustworthy face on their communities. Lose them, and it’s the public that gets hurt. To us that sounds bad for business as usual.

We hope Washington uses its new regulations wisely. We also like to think our leaders in Congress won’t hesitate to amend the legislation if community banks begin to struggle.