The Consequences Of Too-Big-To-Fail On Community Banks

 

 

 

This is a great article about the importance of the Community Banks.  I am concerned with some of the recent changes and the overall impact these changes could have on our Community Banks.  We need to support the Community Banks in their future challenges to find their place in this tough environment.  We need these Lending institutions in our communities.  They embody “community”. 

Nancy Pratt

 

 

     

 

 

 

 
 
 
 
 

The Consequences Of Too-Big-To-Fail On Community Banks

in From The Orb > Word On The Street
by Thomas M. Hoenig on Friday 03 September 2010
  
comments: 1

 

WORD ON THE STREET: Over the past 20 years, as the banking industry has consolidated into fewer and larger banks, a perennial question has been, “Is the community bank model viable?” The short answer is yes.

The longer answer is yes, if they are not put at a competitive disadvantage by policies that favor and subsidize the largest financial institutions. I have worked closely with community bankers my entire career, through good and bad economic times. I know their business model works.

There are more than 6,700 banks in the country, and all but 83 would be considered community banks based on a commonly used cutoff of $10 billion in assets. In the 10th Federal Reserve District, we have about 1,100 banks, and all but three would be considered a community bank. A lower threshold of $250 million, which focuses on a far more homogeneous group, includes about 4,600 institutions, or about two-thirds of all banks.

Community banks are essential to the prosperity of the local and regional economies across the country. Community banks have the majority of offices and deposits in almost a third of all counties nationwide. However, their presence and market share are most substantial among Midwestern states, where their role is particularly crucial in rural areas and smaller cities. It is the economies in these states that would suffer most significantly without their presence. Why?

Community banks have maintained a strong presence, despite industry consolidation, because their business model focuses on strong relationships with their customers and local communities. Community banks serve all facets of their local economy, including consumers, small businesses, farmers, real estate developers and energy producers. They know their customers and local markets well, they know that their success depends on the success of these local firms and they recognize that they have to be more than a gatherer of funds if they hope to prosper.

These factors are a powerful incentive to target their underwriting to meet specific local credit needs. And it gives their customers an advantage of knowing with whom they will work in both good and difficult economic times. Larger banks are important to a firm as they grow and need more complicated financing, but in this region, most businesses are relatively small, and their needs can be met by that local bank.

It is said that a community with a local bank can better control its destiny. Local deposits provide funds for local loans. Community banks are often locally owned and managed through several generations of family ownership. This vested interest in the success of  their local communities is a powerful incentive to support local initiatives. It is the very “skin in the game” incentive that regulators are trying to reintroduce into the largest banks. It’s the small community’s version of “risking your own funds” that worked so well in the original investment banking model and kept partners from making risky mistakes that would result in personal bankruptcy back then and government intervention more recently.

There is no better test of the viability of the community bank business model than the financial crisis, recession and abnormally slow recovery that we’ve experienced over the past two-and-a-half years. The community-bank business model has held up well when compared with the megabank model that had to be propped up with taxpayer funding. Community bank earnings last year were lower than desired but on par with those of larger banks. 

However, community banks generally had higher capital ratios that put them in a better position to weather future problems and support lending. This is an important point to note, as the decline in overall bank lending, particularly to small businesses, is a major concern. Data show that community banks have done a better job serving their local loan needs over the past year.

Community banks, as a whole, increased their total loans by about 2%, as compared to a 6% decline for larger banks. In addition, community banks have had either stronger loan growth or smaller declines across major loan categories. Business lending, in particular, stands out, with community-bank loans dropping only 3%, as compared with a 21% decline for larger banks.

Of course, some community banks made poor lending and investment decisions during the housing and real estate boom of the mid-2000s. Unlike the largest banks, community banks that fail will be closed or sold. For community banks that survive, it will be a struggle to recover. Commercial real estate, particularly land development loans, will be a drag on earnings for some quarters yet. Nevertheless, for those that recover, a business model that continues to focus on customer relationships will be a source of strength for local economies.

Thus, community banks will survive the crisis and the recession and will continue to play their role as the economy recovers. The more lasting threat to their survival, however, concerns whether this model will continue to be placed at a competitive disadvantage to larger banks.

Because the market perceived the largest banks as being too big to fail, they have had the advantage of running their business with a much greater level of leverage and a consistently lower cost of capital and debt. The advantage of their too-big-to-fail status was highlighted during the crisis, when the FDIC allowed unlimited insurance on non-interest-bearing checking accounts out of a concern that businesses would move their deposits from the smaller to the largest banks.

As outrageous as it seems, in many cases, it is easier for larger banks to expand through acquisitions into smaller communities. This occurs because smaller banks tend to focus on their local markets and, therefore, often face significant antitrust restrictions to in-market mergers. This policy ignores the fact that the largest 20 banking organizations in the U.S. now control just less than 80% of the industry’s total assets.

Going forward, the community-bank model will face challenges. Factors such as higher regulatory compliance costs and changing technology will encourage community-bank consolidation. And despite the provisions of the Dodd-Frank Act to end too-big-to-fail, community banks will continue to face higher costs of capital and deposits until investors are convinced it has ended. But community banks have always faced such challenges. They have survived and prospered. If allowed to compete on a fair and level playing field, the community bank model is a winner. 

 

Nancy G. Pratt

Director of Business Development/eStrategy Manager

PropertyInfo Corporation /eMortgage Solutions

Direct         317-414-4268

email       npratt@stewart.com

 

Any change, even a change for the better, is always accompanied by drawbacks and discomforts. – Arnold Bennett

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Data show real estate closing costs on the rise across region | Washington Examiner

By: David van den Berg
Special to The Washington Examiner
September 4, 2010

Closing costs are on the rise both nationally and across the Washington metro area, according to data released this month by Bankrate.com, a financial news and data site.

In the District, assuming a $200,000 loan with a 20 percent down payment and good credit, closing costs are $3,685, according to the survey. That figure means the District has the 22nd-highest closing costs in the country. Last year, the city ranked 41st in the Bankrate.com survey, with a total closing costs figure of $2,502.

“That does not jibe with my experience,” said Adrian Hunnings, president of Palladian One Realty, a Washington real estate firm licensed for transactions in the city, Maryland and Virginia. Title insurance costs have risen in the city, he said, but they have not increased that significantly from 2009 to 2010. Most elements of a property’s closing costs are not contingent on the location of the property, but are more dependent on the value of the property, he added.

Closing costs in Virginia are slightly higher, at $3,883, according to the survey. The state’s ranking dropped from 15 to 19.

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HomeLoanApproval.com: Old vs New GFE

I couldn’t talk long enough about the constant roll out of new guidelines affecting home loans on a daily basis. Its certainly an interesting way to start a week  knowing what you know today may be little use to anyone tomorrow! The good new is that everyone is becoming more comfortable with the technicals that have become the new standards resulting from the financial reform act. Some of the better points here are old vs new. Here is one of my favorites.

Old Good Faith Estimate vs. The New Good Faith Estimate

The Old was a general list of fees that varied in style, size, shape, definition of terms, costs etc. A constantly moving target that had no responsibility other than to give you an idea of what the loan terms and costs possibly could be.  The lender was under no obligation to disclose any change in terms, costs, points or fees and buyers were often shocked at closing with little or no options but to close and bear it.

Move over Old and in with the New. The new is actually a very clear and standard form which gives the  the precise costs in one lump sum, broken down between lender charges and title/escrow charges. It must be exact and can not change in any way once disclosed or unless there is a changed circumstance affecting either the costs or the rate. These changes are very specific and the home buyer must be informed a minimum of three working days prior to closing of the loan. The catch here is that lenders can opt to disclose fees from a title/escrow company that the buyer would never use. Since the new laws require most title fees to be shown as the buyers responsibility even if the seller is paying them, the title services can be chosen by the buyer. Choosing to close some place other than the one listed on the Service Providers list on the Good Faith Estimate does not hold the lender responsible to the fees of the selected company. If choosing the title company listed on the GFE then each fee calculated in the title services total must be within a tolerance of 10%. Hallelujah! I’m a huge fan of the new process and how the consumer is given the access to his loan costs upfront. Additionally, the GFE explains important details, like Pre-Payment Penalties, escrow account, interest rate, fixed or ARM, if payment can change etc.

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