Community banks in Louisiana and throughout the United States are rapidly disappearing, and federal laws meant to protect the country from another megabank bailout have saddled smaller financial institutions with disproportionately large costs, a new UNO study shows.
The number of community bank charters plummeted 53.3 percent from 1993 to 2014, while the number of non-community banks jumped 17.6 percent, according to National and Regional Trends in Community Banking. The study was conducted by the University of New Orleans.
The causes include consolidation in the banking industry, competition from online banking and the crushing burden of “too big to fail” federal regulations, said Kabir Hassan, lead author of the study. The regulations are not working as intended to prevent the economy from being crippled if one of these megabanks fails.
“Actually in my reading, they have institutionalized it even further,” Hassan said. “And what it means is, when the law is made for a big bank, who suffers? The small, mom-and-pop community banks.”
Fewer of these banks — defined as having less than $1 billion in total assets — means less “relationship banking” and fewer opportunities for small businesses, he said. Community banks make nearly half of small loans to farms and businesses.
Those loans make less economic sense to large banks. It costs roughly the same to make a $100,000 loan as one for $1 million, but the returns are much different. So big banks aren’t interested in making loans of less than $2 million, which leaves lots of small businesses with no place to seek financing.
Hassan spoke at a community bank meeting organized by Gulf Coast Bank & Trust Co. Sen. David Vitter, chairman of the U.S. Senate Small Business and Entrepreneurship Committee, also spoke at the meeting in Baton Rouge.
Vitter said he hopes to distribute the study’s findings as widely as possible, starting with the Senate Banking Committee.
Although the downward trend in community banking is well-known, when these complaints are brought to Washington, D.C., there are typically two responses, Vitter said. The Washington-type experts deny it is happening or say it’s an unintended consequence.
“Well, it really doesn’t matter if it’s intended or not. That doesn’t change the reality,” Vitter said.
Vitter asked attendees how much it costs the banks to comply with the too-big-to-fail regulations.
Donnie Landry, president and chief executive officer of Tri-Parish Bank in Lafayette, said his bank is spending roughly $150,000 more each year to comply with the new regulations.
Other bankers said they live in fear that they may inadvertently violate rules hidden deep within the regulations.
“We spend more time and effort trying to not get fined or sued than just helping customers,” said Ann Duplessis, vice president of Liberty Bank in New Orleans.
Landry said Louisiana lost seven community banks in 2014, the biggest decline in several years.
When those banks disappear, so do sponsorships for high school yearbooks, the athletic booster club and jobs important to a small community, he said.
Tri-Parish employs about 35 people, he said. If Tri-Parish were sold to a big bank, that company would probably replace Tri-Parish with a branch employing only 10 or 12 people. Also, the new branch management might not have the same ties and loyalty to the community.
Gulf Coast CEO Guy Williams said the decline in community banking is troubling and particularly harmful to small business.
It’s imperative that industry regulations account for the vital role community banks play in the U.S. economy, he said.
Follow Ted Griggs on Twitter, @tedgriggsbr.