To understand the current congressional debate over banking regulations, we turn to some of our favorite political commentators, the Southern rock band the Drive-By Truckers.
They may not be talking heads on your favorite cable propaganda channel of choice, but they get to the heart of the matter with their song about American politics, “What It Means.” Specifically the lines:
We want our truths all fair and balanced
As long as our notions lie within it
That’s a pretty good all-purpose set of lines to explain that we want things simple and predictable — which makes it hard to have a conversation about anything complicated that might challenge political orthodoxy on either side.
Such as, say, banking regulations.
After the financial collapse of 2008, Congress responded in 2010 by passing The Dodd–Frank Wall Street Reform and Consumer Protection Act, named after its two sponsors, then-Sen. Chris Dodd, D-Connecticut, and then-Rep. Barney Frank, D-Massachusetts.
The law, which runs 2,300 pages, sets up 243 different rules to regulate the banking industry and guard against the problem of banks being “too big to fail.” Good news: We won’t be dealing with all of those 2,300 pages today. But we will be citing the Drive-By Truckers again.
Consumer groups thought the Dodd-Frank law was a much-need reform; banks not so much, and ever since they have pushed to have the act repealed or at least revised.
A bill to do just that — the revision part — is now moving through Congress. Last week, it cleared a procedural vote in the Senate and seems set for passage later this week. Then it moves on to the House of Representatives. The bill has prompted a lot of teeth-gnashing among some of those left of center, who wonder why so many Democrats are backing this bill.
“Why Are Democrats Helping Trump Dismantle Dodd-Frank?” asked an opinion piece in The New York Times.
The website Vox was more blunt: “The 17 Democrats selling out on bank regulation is worse than it looks.” To accompany the story, it ran a photo of one of those 17 Democrats — Virginia’s Tim Kaine. Both he and Virginia’s other U.S. senator — fellow Democrat Mark Warner — are among the co-sponsors.
To some, this is — or ought to be — a clear-cut liberal versus conservative, Democrat versus Republican, consumers versus big banks sort of issue.
So why isn’t it?
First of all, the bill runs 68 pages and we can’t begin to vouch for everything in it. Like many bills, there probably are things in here that aren’t so great. We’d be naïve to think otherwise. The bill would, for instance, reduce the number of banks subject to the toughest regulations. That’s why Sen. Elizabeth Warren, D-Massachusetts, tweeted out the names of the Democrats backing a revision and complained that thanks to them, “the Senate just voted to increase the chances your money will be used to bail out big banks again.” However, the main reason so many Democrats — including Kaine and Warner — have signed onto the revisions is their concern about small banks, what we often call “community banks.”
It’s a fine, fine thing to rail against the big banks. But it’s no accident that the 17 Democrats backing the bill all come from states with a lot of rural areas — which is where community banks tend to be. There are unintended consequences for these small banks under one-size-fits-all regulations that are aimed at making sure the big banks don’t collapse in a heap so that taxpayers have to them bail out.
“Virginia only lost one community bank during the financial crisis,” Warner says. “We’ve lost 21 since Dodd-Frank passed. Regulations should keep Wall Street in check, not run small community banks out of business.” Nationwide, about one-fourth of community banks have disappeared. “I think a primary reason for that is regulatory fatigue,” says Lyn Hayth, president and CEO of the Bank of Botetourt.
So why should we care about community banks? If they can’t keep up with all the regulations, maybe their disappearance is really a good thing?
Here’s why we should care: Rural areas have a unique interest in community banks for one simple reason. The big banks often don’t have much presence in rural communities. They’re simply too small to make a difference to the global bottom line. If we want to build a new economy in rural America, that means – well, lots of things. But surely one thing is to encourage small business, particularly those that might grow into bigger businesses. Those are often the entrepreneurs who turn to community banks. Their proposals may not fit into whatever lending formula a big bank might use. A community banker, though, might actually know the applicant, and have a better understanding of whether their business is likely to succeed or fail in that community’s market.
However, between 2008 and 2016, small business lending has declined 13 percent while lending to large firms has increased 49 percent, according to Sen. Jeanne Shaheen, D-New Hampshire. The demise of community banks probably has something to do with that. Sen. Jon Tester, D-Montana, has explained his support for the Dodd-Frank revisions this way: “This has everything to do with access to capital in rural America.”
The New York Times disputes that community banks are in trouble, pointing out that their profits in 2017 were up 9.4 percent over the year before. That may be so, but some of that profit has been achieved by small banks merging — which means that post-merger, they are less of a community bank than before. And the number of new community banks formed in Virginia is zero — not exactly a sign of economic growth in rural areas.
We hate to make this political, but any proposed piece of legislation is inherently political. Part of the problem here is a lot of Democrats simply don’t understand rural America, and this debate provides a good example. Warren doesn’t have many rural localities in Massachusetts to look out for; Warner and Kaine have vast swaths of Southwest and Southside Virginia. Those places may not count for many votes anymore (especially for Democrats) yet they’re there, nonetheless. And if we’re going to build a new economy there, we need community banks. Is this bill perfect? Likely not. But can the Democrats voting against it tell us how we keep those remaining community banks — plus grow new ones? Or, to paraphrase the Drive-By Truckers, is that a notion that doesn’t fit within their truth?