Starting with the forced merger of Bear Stearns into JPMorgan Chase in 2008 and the failure of Lehman Brothers in the same year, Congress, regulators and the public at large have been questioning our banking policy of “Too Big to Fail.”
The passage of the Troubled Asset Relief Program (TARP) at the end of the George W. Bush Administration has been widely criticized as corporate welfare and a “bailout” for rich, selfserving bankers.
What we in Hilton Head Island and Bluffton should be concerned with is, do we have the national will to let our community banks thrive? Money center banking (a large bank in a major financial center which borrows from and lends to governments, corporations and other banks) is important to the world economy and local banking is critical to small businesses in our market.
In an attempt to assume that a financial crisis like the one of 2008 would “never happen again,” our brilliant elected representatives pushed through the now famous 2,300-page bill known as Dodd-Frank.
The legislation was designed to reinvent and reorganize our financial system so the excesses of the 2000s, and asset bubbles in particular, would “never happen again.” In the wise words of my sage mother-in-law, “never say never” business cycles and greed are far more dominant than any act of Congress.
With all of the bitterness and name-calling now behind us, I wanted to examine the impact of our TARP Program and the Dodd-Frank legislation on the banking system and how some unintended consequences may impact small communities and small business across the country. Let me be so bold as to kick this off with the blanket statement that TARP worked and all Americans should thank then-Secretary of the Treasury Henry Paulson and then- Federal Reserve Chairman Ben Bernanke for putting a lid on the potential meltdown of our financial system in October 2008.
The United States banking system was in freefall and that would have led to a worldwide depression as opposed to the Great Recession that we experienced. Remember that the original TARP program authorized $700 billion in expenditures and that was later reduced to $475 billion through Dodd-Frank. Ultimately, $431 billion was disbursed and as of March 31 and more than $443 billionhas been repaid.
While the majority of the TARP funds went to the nation’s largest financial institutions, as well as General Motors, Chrysler and AIG, more than 450 small banks also participated in the program.
As a result of the TARP investment in smaller community banks like some on Hilton Head Island and in Bluffton, local consumers and small business continued to enjoy access to loans.
In a recent study conducted by the FDIC, it was noted that: “The value of community banks has always been associated with a combination of services they provide and the manner in which they do business. ... As of 2011, they (community banks) held 14 percent of banking industry assets, but 46 percent of the industry’s small loans to farms and businesses.”
Over the past five years, our community has lost five community banks to FDIC-assisted mergers or consolidation, and as such, access to possible sources of lending.
Now with impending full implementation of the 280- plus new rules required under Dodd-Frank, remaining community banks are being pressed into devoting more money and human assets to compliance and regulatory matters.
These new costs associated with just following the new rules have now given rise to the question which is “Too Small to Survive?”
States like South Carolina, counties like Beaufort and towns like Hilton Head Island and Bluffton, need strong community banking organizations to provide local credit to local consumers and small businesses. Furthermore, our local real estate markets need local lenders who understand the uniqueness of our community both in terms of location and borrowers.
It is important that the United States financial system be both large enough to serve our largest global corporations and small enough to serve the very special needs of small businesses, retirees and second homeowners.
It is critical that local businesses are supported with local customers and local capital; local community banks are the perfect conduit to make that happen.
I encourage everyone to explore the world that community bankers have to offer in terms of products and services and to think about keeping deposits local to support our neighbors as they build businesses that improve our collective quality of life.
Elihu Spencer is a local amateur economist with a long business history in global finance. His life’s work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.