Where Have You Gone, George Bailey?
How the federal government is killing small banks on Main Street and helping big ones on Wall Street

Jimmy Stewart as George Bailey n It's a Wonderful Life


He is America’s most iconic banker. Okay. He isn’t a real banker, but we all know and love him; he’s George Bailey from the quintessential Christmas movie It’s a Wonderful Life. Bailey, the local banker from Bedford Falls, N.Y., confronts slumlord and all-around bad guy Henry Potter for control of his father’s bank, Bailey Building and Loan. Potter tries to bribe Bailey, then tries to steal the bank from the young idealist and businessman. It was a movie, and it was the 1940s, so the good guy won. George Bailey got the bank and the girl, and the bad guy lost, humiliated and shamed by a public that hated him.

Today, thousands of George Baileys around the country — men and women who run community banks — are battling a new and more insipid villain: their own government. And they are losing.

Small banks, saddled with the extra costs of legal compliance from Dodd-Frank and other new regulations designed to protect us from another banking crisis, are disappearing. According to the Federal Deposit Insurance Corp., there were 6,812 banks in America at the end of 2012, down from 8,534 at the end of 2007.

Take Wesley Sturges, chief executive officer at Bank of Commerce, a Charlotte, N.C., bank with $129 million in assets. Regulatory costs drove him to sell a much larger North Carolina bank with $1.6 billion in assets.

Though his bank generated just $441,000 in net income last year, he was compelled to increase spending on internal staff and outside consultants — lawyers and auditors, mostly — to deal with all of the added regulatory burdens stemming from the financial crisis. Those burdens were heaped on top of the mountain of regulations that already existed for small banks, ranging from credit reporting to anti-bribery laws. “It’s across the board,” Sturges told the Wall Street Journal in early April. “When you only have 20 employees, any increase is a lot,” he said.

Take Robert Rupel, CEO of Team Capital Bank of Bethlehem, Pa., whose bank recently agreed to be acquired by a larger New Jersey bank. He told the Wall Street Journal earlier this month that his key people are spending more time trying to comply with regulatory burdens than they are making loans.

Take Dan Baird, CEO of Capital Funding Group Inc., which sold its CFG Community Bank in Maryland to MVB Financial Corp. His bank had $481 million in assets. “When they created ‘too big to fail,’ they also created ‘too small to succeed,’” Baird said.

These are not isolated stories. The chief economist of the trade group that represents small banks, Paul Merski, has been hearing the same story from the George Baileys of America. “The No. 1 complaint that we hear from community bankers is that they feel that regulators have gone one step too far and are choking off lending,” Merski said.

The Mercatus Center, a market-oriented think tank, released a study last year of 200 small banks that serve rural and small metropolitan markets in 41 states. The numbers were grim. More than 80 percent of the banks saw their compliance costs increase by more than 5 percent since Dodd-Frank; the median number of compliance officers doubled; and over 60 percent said that changes to mortgage regulations will have a “significant negative impact” on their earnings.

And the worst bit of news from the study was this: Over a quarter of small banks anticipate that they will merge within the next five years. Twenty-five percent!

Smaller banks, thanks to Dodd-Frank and its progeny, are increasingly becoming fish food for bigger banks. If current trends continue, community banks may just qualify for protection under the Endangered Species Act. One thing is certain: The Dodd-Frank Act has been great for big Wall Street banks and for lawyers. It has been a disaster for small community banks and their customers on Main Street.

Indeed, the new rules and regulations have redefined what a small bank actually is. Many bankers, the Wall Street Journal reported, think smaller banks now must have at least $1 billion in assets to cope with the increased regulatory burden. If that isn’t bad news for the George Baileys of the world, what is?

Things have gotten so bad that even Congress has taken note, according to the Wall Street Journal. “If compliance costs increase past the point of economic sustainability, many smaller institutions may merge with larger entities,” reported staff members of the House Financial Services Committee in a memo prepared for a hearing last year on community-bank regulatory burdens.

To add insult to injury, it wasn’t small banks and community banks that got America into the financial crisis in 2007; it was the big banks that were “too big to fail.” And yet it is these big banks that are advantaged by Dodd-Frank, while the small banks are being harmed the most, as are the people those banks serve in small towns and rural areas across America.

In a column last year, Senator Jerry Moran (R., Kan.) addressed this problem:

As community banks abandon their traditional business models and redirect resources to comply with Dodd-Frank, millions of Americans will have a tougher time accessing financial services and credit. In Kansas, that means fewer loans to small businesses that want to expand and fewer loans to farmers and ranchers who need to fund operations through harvest.

If community banks continue to go out of business or are forced to consolidate, we can expect to see even greater concentration of assets among the “too big to fail” institutions — and a greater number of Americans without a local bank.