Opinion – Mark Singletary

As we try to cover banking issues, it’s important to note that Birmingham is a market served primarily by regional and community banks. There are three classifications for banks, primarily based on total assets and business activity. The largest are called money-center banks, the next level down are regional banks and the rest are considered community banks.

There are four U.S. banks designated as money center banks—JPMorgan Chase, Wells Fargo, Bank of America and Citigroup—and these, with the exception of Wells, actually have a very small presence in the Birmingham area.

Money center banks are just like other banks, except they have gigantic balance sheets. The combined assets of the four largest banks in America is just over $6.5 trillion, according to a Federal Reserve statistics report. These banks, by any measurement standard, are too big to fail.

Then there are the regional banks and community banks—and again, these are the banks most heavily represented in the Birmingham market. Of the 5,980 federally insured banks in the U.S., most are designated as community or local banks.

Community banks, regional and money-center banks, at least theoretically, all do the same thing—they take deposits and make loans. The deposits are insured and the lending activity is regulated. Some observers think the regulations have gotten too onerous. On the other hand, many investors, regulators and legislators think the restrictive regulations are just desserts for the bad behavior that led to the banking crisis of 2008, and the deep recession that followed. Our government had to invest billions of dollars to save the country’s banking systems, and as a result, adopted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, a federal law that enacted sweeping changes to banking oversight and regulatory authority.

The Dodd-Frank law forced banks to be better capitalized, have more liquid assets, write better, or at least safer, loans and report their activities to regulators. There are lots and lots of regulations associated with Dodd-Frank. The biggest banks have the most rules to follow, but even the smallest community banks must comply with most of the provisions of the federal law.

Since the implementation of the provisions of Dodd-Frank, there are 1,377 fewer banks in the country. Most of the bank closures are due to consolidations, but there are fewer banks making loans to small businesses and consumers. That is the ugly side effect of the Dodd-Frank law. As Frank Sorrentino, a community banker, wrote in an article featured in Fortune earlier this year, “We’ve seen the number of banks in the U.S. steeply decline year over year, as smaller banks fold to regulatory pressures or undergo M&A in order to absorb compliance costs.”

Among those that think the regulations associated with Dodd-Frank are too restrictive is President Donald Trump. Trump issued an executive order recently to address the over-regulation that many small banks claim are too restrictive and restraining. To be fair, Trump’s executive order just instructed the agencies responsible for oversight to review their authority and come up with better, more sensible plan for regulating the banks, but it is an important first step.

There is consensus that the provisions of Dodd-Frank unfairly burden the nation’s smaller banks. Compliance and fear results in stricter standards and fewer loans. Fewer loans mean less economic activity in the communities where these smaller banks are located.

Community bankers know their customers well. They live and work in the same neighborhoods. They go to the same churches, shop at the same stores and volunteer at the same civic clubs. The nation’s community banks have prospered because they fit into the fabric of American life.

No one with any sense wants to see the reckless behavior return that led to the banking crisis in 2008 return. But it’s fair to say that most of the reckless behavior was from larger banks. The investment bankers and traders bundled unsecured mortgage loans and other obfuscated financial packages and traded them back and forth until the securities were worthless and the economy was in shambles.

Banking regulators had to take control and restore sanity and process to the banking system. And, they did the job well.

But, now it is very important that federal banking regulations get modified to allow for the operational differences in banks, based on size, mission and location and let our regional and community banks get back to their core missions.