The Federal Reserve has emerged from the fiscal crisis as either the devil wearing the black hat or the white knight who saved the day – depending on your particular view of quantitative easing and the Fed in general.
But, perhaps, the greatest development coming out of the Fed these past four years is the staff's focus on the Main Street-types of businesses that used to dominate America – namely community banks.
Whenever a Fed official speaks on the banking crisis and Basel III, they draw a clear line of demarcation between the risky global financial institutions that received bailouts and community banks.
Whether this philosophy eventually floats beyond speech material into policies that prevent smaller players from taking the regulatory hits necessitated by their larger counterparts remains to be seen.
But based on their speeches, some Fed officials seem to be listening to the hollers of community bankers who say they’ve always practiced safe lending — only to find themselves staring down the same hallowed walls of excessive regulation.
Fed Governor Sarah Bloom Raskin gave community banks more love this week.
Delivering a speech for Ohio Bankers Day, Raskin affectionately recalled a tight-knit community bank from her own youth.
It was a less bold and more personal business that put out sprinkled donuts while providing lending options to the neighborhood. As a kid, the free sprinkled donuts stood out apparently. Raskin remembers them today.
The bank gave off an aura of innocence and respect until it was taken over by a larger banking giant, Raskin remembers.
But it’s not just sprinkled donuts that Raskin is after.
The Fed governor’s faith in community banks was reaffirmed when the private-label mortgage-backed securities market collapsed in 2007, drying up jumbo mortgage lending.
"In the immediate aftermath, despite a substantial reduction in jumbo lending as a share of the overall mortgage market, the data indicate that the share of community bank jumbo mortgage lending held steady," Raskin told the crowd.
"Such lending actually increased at community banks that were not dependent on correspondent banking and at those that were sufficiently well capitalized and more profitable. And, by their sheer numbers and their central role in local communities, these banks are vital and competitive players in a highly diverse landscape for financial services. They often provide competitive options where none would otherwise exist, thereby lower borrowing costs for businesses and consumers."
But here is the rub – how do regulators separate the wheat from the chaff or the big from the small when writing banking rules and implementing them. Basel III being the prime example. While Basel III is noted for applying mostly to larger institutions, the Independent Community Bankers Association calls this assumption a myth.
The association wrote on its website: "Basel III applies to all banks regardless of size. The proposal even applies to $50 million community banks in rural areas. There is an exemption for consolidated bank holding companies under $500 million, but even their banks are fully subject to the provisions of Basel III. There is no exemption for savings and loan holding companies of any size."
It's concerns like those that are tackled in Raskin's speech.
"Whether we single them out for special advantage is a question for legitimate debate,” the Fed governor says of community banks. "What I do know is that what we most certainly should not do is hinder them from engaging in a fair fight.”
She notes regulations come with benefits and costs – not to mention a type of "complexity that should not be ignored."
Her overall discussion on community banks was subtle but clear: make sure regulations don't hamper the resiliency and strength of smaller players.
"We shouldn't be lulled into thinking that these unnecessary costs should be allocated to community banks, which are a segment of our financial system that provides meaningful benefits to many Americans," Raskin advised.