Tuesday, May 13, 2014

Federal Reserve Challenges Parsons' Recommendations

Community Banks are Vanishing at an Alarming Rate

It's nice to know U.S. bank regulators are reading my Op-Ed articles in the American Banker. On May 1st the AB ran my Op-Ed entitled, "Two Policy Changes That Could Help Save Community Banks" urging Congress to take immediate action to save U.S. community banks from going the way of the corner drug store. As I write in my book, "Broke: America's Banking System", more than 3,000 community banks failed in the U.S. over the past three decades. U.S. regulators have responded with whack-a-mole supervision. Now every management decision is treated as critical; but is it? And what are the unintended consequences of hyper-supervision of the nation's smallest 90% of the banks that account for less than 10% of U.S. bank assets?

Major in the Majors

Here is what I expect: Half the banks under $1 billion in size will merge between now and the end of 2020. If Congress wants to save community banks, it must drive tangible changes that improve the environment in which banks operate. What is needed, ironically, is less supervision. But here is the key: Major in the Majors. Regulators should focus community bank supervision on the critical few factors that cause banks to fail: Asset Growth Rates and Asset Concentration. Apparently the Federal Reserve Bank of Minneapolis read my Op-Ed because on May 7th the American Banker posted a Fed response titled "The Surprising Truth About Community Bank Consolidation". Here's the upshot of the Fed response: Don't worry, the cost of added regulation is not really all that much, so everyone should just relax. Apparently at least six bankers don't agree. On May 5th and 6th the American Banker reported six more bank mergers.

Richard J. Parsons is the author of "Broke: America's Banking System". He is a frequent contributor to the American Banker and a member of the Editorial Advisory Board of the RMA (Risk Management Association) Journal. Rick can be reached through RJParsonsGroup.comFacebookTwitter and LinkedIn.