Senate Banking Panel Examines Issues Facing Community Banks

New Banking Subcommittee Chairman Senator Sherrod Brown Holds First in a Series of Hearings on “Banking that Benefits Main Street”

WASHINGTON, D.C. – To kick-off Community Banking Month, U.S. Sen. Sherrod Brown (D-OH) today chaired a hearing of the U.S. Senate Banking Subcommittee on Financial Institutions and Consumer Protection entitled “The State of Community Banking: Opportunities and Challenges.”

“The success of community banks is critical to strengthening the business community and spurring job growth,” Brown said. “Community banks are enmeshed in their neighborhoods—these bankers live and work where they do business, and are trusted, long-term partners with the families they serve. I will work to help community banks overcome existing challenges so that small business owners can access the investment and capital they need to compete domestically and internationally.”

Today’s hearing was the first in a series to be held by Brown – who was recently tapped to chair the Financial Institutions and Consumer Protection Subcommittee - entitled “Banking that Benefits Main Street.” The first hearing examined issues facing the community banking industry, including implementation of the Wall Street Reform Bill, the recent increased industry consolidation, and community banks’ role in supporting small businesses and boosting job creation.    

The witnesses for the hearing included: Ms. Maryann Hunter, Deputy Director of the Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System; Ms. Sandra Thompson, Director, Division of Risk Management Supervision, Federal Deposit Insurance Corporation; Ms. Jennifer Kelly, Senior Deputy Comptroller for Midsize and Community Bank Supervision, Office of the Comptroller of the Currency; Mr. John P. Ducrest, Louisiana Commissioner of Financial Institutions and Chairman of the Conference of State Bank Supervisors; Mr. Bill Loving, President and CEO, Pendleton Community Bank, on behalf of the Independent Community Bankers of America; Mr. Paul M. Reed, President, Farmers Bank and Savings Company, on behalf of the Ohio Bankers League; and Mr. Tommy G. Whittaker, Chief Executive Officer, First Farmers Bancshares, Inc., on behalf of the American Bankers Association.

Below is Brown’s opening statement, as prepared for delivery.

Today’s hearing is the first under my Chairmanship of the Subcommittee.  I look forward to working with  Ranking Member Corker and the other members of this subcommittee who will bring their expertise to ensure both consumers and financial institutions are well-served under a new regulatory framework.

That’s why today’s hearing is so important – and why I thank all of the witnesses for being here today.

And this is an especially timely hearing since April is “Community Banking Month.”

A lot has changed in the banking industry in the last two years, including:

•    New consumer protections including credit card reforms and a Consumer Financial Protection Bureau;

•    Enhanced regulatory scrutiny and supervision;

•    Challenges related to capital reserves and funding sources;

•    And of course new proposed reforms to the interchange fee structure.

There has been a lot of disagreement about these proposals—both among members of this committee and among bankers.

One thing that bankers, regulators, and consumer advocates can all agree on is the importance of community banks.

Community banks have what Ohio Bankers League President Mike Van Buskirk has called, “high-touch responsiveness to the local area.”

Fed Chairman Ben Bernanke has said that “Community bankers live and work where they do business, and their institutions have deep roots, sometimes established over several generations.”

And Elizabeth Warren has said that “community banks work hard to be trusted, long-term partners with the families they serve.”

Banks with close relationships with their customers are better able to safely make loans to startups or expanding small businesses.

As Mr. Van Buskirk has pointed out, while a Wall Street bank’s computer algorithm might tell a banker to reject a loan, a local banker’s personal expertise might tell the same banker to approve the loan.

Community banks don’t trade in complex and opaque financial products.  They don’t speculate in markets that have been created to simply turn money into more money.

Yet, despite the importance of our nation’s community banks, because of a slumping housing market and a declining economy, we lost 157 community banks last year—the most since 1992, when our economy was in a recession following the Savings & Loan Crisis.  

In my state, community banks have weathered the financial storm better than most – we lost two community banks in Ohio in 2010. But losing even one is too many.

So we’re here today to discuss what we need to do for community banks so that they can invest more in small businesses and consumers.

As Cam Fine, the President of the Independent Community Bankers of America (ICBA), has acknowledged:

“[T]he Dodd/Frank Act does create an important precedent that recognizes two distinct sectors within the financial services spectrum—Main Street community banks and Wall Street megabanks.”

Dodd-Frank was crafted to address those institutions that are too big and interconnected to fail:

•    The Volcker Rule provision bans federally insured banks from trading for their own profit;

•    The new Financial Stability Oversight Council will oversee large banks and systemically important financial companies;

•    Enhanced capital requirements will apply to financial companies that are systemically important; and

•    There will be greater oversight and transparency of the derivatives market.

Recognizing the importance of our community institutions, there are a number of targeted benefits for community banks:

•    Those under $10 billion of assets will not be examined by the Consumer Financial Protection Bureau;

•    They have been exempted from parts of the Sarbanes-Oxley Act; and

•    Certain small banks are exempt from new regulatory capital and leverage rules.

Despite these efforts to help community banks maintain their competitiveness, challenges remain.

One of the greatest threats to community banking is unfair competition and industry consolidation—with banking now more concentrated than it was before the crisis.

In 2006, the top 10 banks made up 68 percent of total assets; at the end of 2010, they held 77 percent of total banking assets.

And there still may be more consolidation ahead.

A recent survey of corporate Merger & Acquisition advisors ranked financial services in a tie for second among industries most likely for consolidation.

Megabanks have greater options for raising capital through the debt and equity markets.

And they enjoy a lower cost of funds—in the 4th Quarter of last year a $100 billion bank enjoyed an 81 basis-point advantage over its $10 billion competitor.

The ICBA has argued for imposing severe restrictions on any further growth and consolidation within the industry.

I agree that we need to continue working to ensure that banks are more regional and more responsive to local communities.

Community banking is incredibly important to the Midwest.

Our community banks are our small business lenders, and they must play a central role in strengthening the business community and America’s economic recovery.

Our continued economic recovery requires capital that will help businesses expand their operations by hiring workers and buying equipment.

There are so many productive industries in states like Ohio that need investment and capital to help them compete domestically and internationally.

Congress and community banks are both here to support the job creator who just needs a little help from the corner bank to turn his or her dream into a profitable venture.

We should work together to achieve our common goal.

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