Have you noticed how many small banks there are here?
I looked it up. Of the 67 banks in Los Angeles County, 44 have a market share of less than one half of 1 percent. In other words, community banks account for about two-thirds of all banks here.
And you can start puckering up now because we’ll be kissing a lot of them good bye.
One local banker, Robert Franko, made this prediction in an article in last week’s Business Journal: One quarter of all community banks will be merged out of existence in the next few years.
He has some firsthand knowledge. The directors of his community bank, Beach Business Bank of Manhattan Beach, recently decided to sell.
We may already be seeing the beginning of this trend. In the article, reporter Richard Clough counted eight local mergers involving community banks just since last summer.
Why the urge to merge? Well, as Clough pointed out, it continues to be a tough market for lenders. And many small banks are worn down from years of losses or subpar earnings.
But the killer is the wave of new rules and regulations, which whack small banks hard. Gee, just trying to read the 2,200 or so pages of the lethally dull Dodd-Frank Act could be the end of a lot of poor bankers. The 200 or so new rules and regs could cause heart attacks.
New regulations basically mean small banks must hire experts in regulations called compliance officers. They mean generally higher costs to do transactions with correspondent banks. And they mean banks must now jump through more hoops than a circus dog on matinee day just to get a standard loan processed.
Now those additional expenses might amount to no more than a rounding error for a big bank, but they’re more like a roundhouse punch to a small bank. That’s why so many small bankers right now are looking for roommates – other banks that can help pay some of the new overhead costs.
“Compliance costs are going up,” Franko was quoted as saying in the article. “I don’t think that smaller banks can remain competitive for the long run.”
It wasn’t in the article, but Mary Lynn Lenz, the chief executive of the Professional Business Bank in Pasadena, told Clough: “There is a big dilemma right now in community banking, and it’s based on size: You’ve heard too big to fail? (Small banks are) too small to succeed.”
Of course, the defenders of these encyclopedic regulations say most of them are aimed at big banks and won’t really affect small ones much at all.
Ummm, yeah, but do you remember when Sarbanes-Oxley was passed in 2002? Those same people told businesses to stop whining; Sarbanes-Oxley may be a teensy bit burdensome, but it will prevent corporate wrongdoing in the future. And it won’t hurt small businesses much at all.
But since then, the number of IPOs has plunged 75 percent. And you can ask the investors of MF Global whether Sarbanes-Oxley prevented their $1.6 billion from disappearing so mysteriously.
From past experience, we know Dodd-Frank and many of the other new bank regulations will utterly fail to prevent the next financial catastrophe. But we do know they will burden small banks and force many to sell out, often to much bigger banks.
Funny, but one goal of the new bank regulations was to punish big banks. In reality, they will help big banks buy up their smaller competitors.
Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].
