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Community Banks Gear Up For A Fight

By Bizbox

We reported Monday that from the government's perspective the point of the $700 billion capital injection into big banks is less to encourage the banks to loan out that money in turn and more to give the banks the capital necessary to acquire smaller banks and promote consolidation in the financial industry. (A crack reporter even listened in on an employees-only JPMorgan Chase conference call and heard top brass discussing the government cash they are receiving in exactly these terms.)

Well guess who, according to the Wall Street Journal, is not happy about the government's encouraging of consolidation? The 8,000-strong community banks, those locally focused institutions who each have under $1 billion in assets--really, when you think about, these are the industry's small businesses. Their objection is that the big banks have faltered because of dumb decisions they made, while the community banks have not because of their own wisdom and sound practices; now, the goverment is not only bailing out the big banks but actually encouraging them to buy up the small ones.

Fortunately, community banks have a lobby called the Independent Community Bankers of America. "It will be a battle royal from day one in Congress" said the group's chief executive. "The one part of this system that has functioned well has been the community banking system...We're going to be screaming every step of the way."

We've covered the community banks extensively, both because they seem a particularly promising avenue for small businesses to borrow money during the current credit crisis and because they are themselves mostly small businesses--the small businesses in the hardest-hit industry who nonetheless appear, for the most part, to be doing just fine. The bailout was not without help to them--it changed the tax system in order to cushion the blow dealt by the fall of preferred shares of Fannie Mae and Freddie Mac, which many community banks held. But this is nothing compared to the massive help the government has pledged to give to big banks.

In fact, consolidation encouraged by government capital has already begun: late last week, PNC announced that it is purchasing a Cleveland community bank for a little over $5 billion. The acquisition was helped along by the $7 billion PNC is receiving from the federal government (which is to say, from you, the taxpayer) as part of the first, $250 billion phase of the capital injection.

The lobby may seek not just to prevent the government from encouraging consolidation, but even to have the government to force the largest institutions to divest some assets. If predicted Democratic gains in both houses of Congress come to pass, they may find a yet more sympathetic ear. "I remain especially concerned that, in the Treasury's zeal to make the capital-injection program easily digestible for the banks, we're feeding them a little too much dessert and not making them eat enough of their vegetables," remarked Sen. Charles Schumer (D-N.Y.), quite possibly the most powerful member of the chamber.

This isn't just about fairness or moral hazard--although, really, giving the banks that screwed up a lot of money to buy up the banks that didn't screw up isn't the best way to encourage future good behavior. This is about convincing skeptical small business owners that the federal government has their best interests at heart, too. How it deals with the community banks could serve to reassure small business people...or confirm their worst fears.

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