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Regulators owe community banks more than nostalgia


For years, scenes from “It’s a Wonderful Life” played on a loop in the FDIC’s public foyer, illustrating the romantic lens through which many regulators viewed community banks. And like George Bailey’s institution, small banks are often models of commitment to their communities. But a bank can’t thrive on good intentions and an increasingly obsolete business model.

Squeezed between larger banks and more innovative financial services providers, community banks know they can’t count on their neighbors alone to keep them afloat. Sadly, the search for other revenue sources is fraught with peril, as the recent failure of Citizens Bank of Iowa demonstrates.

To be clear, I have no inside knowledge of this situation, but a picture is gradually emerging.

This is the fifth bank failure this year. The first three - Silicon Valley Bank, Signature, and First Republic - were liquidity events. Despite having pristine credit, these banks failed when deposits fled, sparked as unrealized losses on fixed-rate bonds and loans stemming from poor interest rate risk management became apparent. On the surface, the failure of Citizens is different - as my colleague Brian Graham told Banking Dive, it’s “an 'old fashioned’ bank failure resulting from losses due to bad credit on loans.” But there is a common thread, and that’s the significant risk banks take by becoming overly concentrated and reliant on banking a single industry. Per the Iowa Division of Banking: “The bank had a concentration of out-of-territory and out-of-state loans to one industry and incurred heavy losses on some of those loans."

Why do banks do this? The aforementioned squeeze. And regulators, sadly, aren’t helping - instead, by refusing to consider M&A applications, they’re closing off what ought to be a lifeline for community banks.

Done right, an acquisition that couples a bank’s existing expertise and core business competencies with an acquirer’s financial and tech capabilities will improve the bank’s growth prospects and better meet the needs of the bank’s customers and community. Done right, this lifeline would also alleviate at least some of the pressure that sends banks down the road of becoming overly reliant on a single industry.

Regulators should thus welcome fintech applicants that have the necessary resources and expertise to revitalize the banks they seek to acquire - and then should approve acquisitions that will ensure these banks’ ongoing vitality.

A community bank’s failure is painful: painful to the bank’s leadership and staff and to the regulators, all of whom have worked hard to avoid the failure; painful to the local businesses that have relied on the bank for lines of credit critical to their operations; painful to the depositors who now need to move their accounts. Although the bank’s customers will find new banking providers, they will likely lose the personal relationships they had with their community bankers and miss the days when those bankers were their neighbors. Regulators have the opportunity to prevent more of these kinds of failures. Let’s hope they recognize that.

Image Source: Insomnia Cured Here via Flickr.


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