Opening Statement at Banking Committee Hearing Examining the Financial Crisis' Effect on Community Banks
Washington, D.C. - U.S. Senator Mike Crapo (R-ID), Ranking Member of the Senate Banking, Housing and Urban Affairs Committee, today delivered the following remarks during a Banking Committee hearing entitled "Lessons Learned from the Financial Crisis Regarding Community Banks":
Thank you, Mr. Chairman.
Today, the Committee will hear about lessons learned from the financial crisis regarding community banks.
Thank you to the Federal Deposit Insurance Corporation (FDIC) and the U.S. Government Accountability Office (GAO) for coming to testify pursuant to a statutory requirement to brief us on bank failures and their causes.
This is a critical issue since small banks represent the lifeblood of many communities across America, and especially rural communities in Idaho and elsewhere.
In fact, the FDIC Community Banking Study, commissioned by Chairman Marty Gruenberg, shows that community banks hold the majority of banking deposits in rural counties, with one in five U.S. counties having no other banking presence.
Banking used to be a community-based enterprise, relying on local knowledge and expertise to extend credit based on creditworthiness of banks' depositors.
Many community banks continue to operate that way even today.
Despite the many benefits of such relationship-based banking, the industry has become increasingly concentrated since the 1980s.
The number of banking organizations has shrunk by nearly one-third from 1990 to 2006.
Most of this contraction has involved small community banks, whose numbers have fallen by more than 3,000 during that time.
The financial crisis of 2008 only exacerbated the consolidation trend.
Between January 2008 and December 2011, 414 insured U.S. banks failed, according to the GAO.
Of those, 85 percent, or 353 banks, had less than $1 billion in assets.
These banks often specialized in small business lending, so their failure has had a disproportionately large impact on small business lending and local employment.
We must carefully examine what led to such a large number of small banks closing, and the residual effect on local communities.
We also need to be able to put this most recent crisis in perspective and examine how it compares to past community bank crises.
While this hearing is focused on lessons learned from the most recent financial crisis, much can be learned from the post-crisis response as well.
The regulatory framework that emerged out of Dodd-Frank has made it increasingly difficult for community banks to operate and maintain business presence in many communities.
Community banks are disproportionately affected by increased regulation because they are less able to absorb additional costs.
The majority of community banks today have $250 million or less in assets, according to the GAO-which often translates into a one- or two-person compliance department.
Small institutions simply do not have the resources necessary to review and parse through thousands of pages of new rules.
As a result, many community and small banks have identified Dodd-Frank as imposing overwhelming regulatory burden on them, or serving as barriers to entry.
As Federal Reserve Governor Duke outlined in a November 2012 speech:
"If the effect of a regulation is to make a traditional banking service so complicated or expensive that significant numbers of community banks believe they can no longer offer that service, it should raise red flags and spur policymakers to reassess whether the potential benefits of the regulation outweigh the potential loss of community banks' participation in that part of the market."
I believe we have reached that point.
Thank you, Mr. Chairman.