By Martin Olsson
My, how time flies. It has been four years since the financial crises of 2008, wherein all Montanans became familiar with the federal government’s “too big to fail” policies. The Federal Reserve has stated that the 2008 financial crises demonstrated that many of the large banking firms were too large, too levered, and too interconnected and, as a result, posed a tremendous threat to America’s financial stability. Further, economists have noted that the implicit government backing of too big to fail institutions encouraged excessive risk taking and damaged healthy competition in the financial market place.
Despite steps taken by Congress and regulatory agencies to prevent financial institutions from growing once again to ‘too big to fail sizes’, incredibly, the United States banking industry is now more concentrated than ever. In 2012, half of the industry’s assets are held by a mere five financial institutions with combined assets that equate to 58% of the nation’s gross domestic product (GDP). The combined assets of our country’s ten largest depository institutions equate to 65% of the banking industry’s assets and 75% of this nation’s GDP.
Community banks in Montana, like the one I work at, and elsewhere are part of the solution to this financial concentration problem. How?
First, Community banks, which are locally owned and main-street oriented, are working with Montana’s congressional delegation and federal regulators to reform the present financial model that: (1) allows large financial institutions to combine retail banking with high risk investment banking; and (2) then provides those institutions with an implicit taxpayer-backed guarantee against poor decision making and financial failures. Among the proposals advocated by Montana’s community banks are proposals to increase capital and liquidity requirements for the largest financial institutions, to require annual, comprehensive stress tests for institutions with assets over $10 billion, and to implement early remediation programs at financially distressed institutions. Stress testing of large banks in 2008 would have helped to identify those institutions that were overexposed to derivatives and to subprime mortgages. If implemented, these proposals will stabilize our financial system, discourage the largest financial institutions from growing even larger, and mitigate to some extent their funding advantage over community banks
Second, since 2008, Montana’s community banks have undertaken an effort to remind Montana residents to’ go local’ in their shopping, their dining, and in their banking. Local banks are a safe haven from impersonal bank and risky investment practices that resulted in the 2008 financial crises. Not a single Montana community bank has failed since 2008; and, as local small businesses themselves, Montana’s community banks invest prudently and put the customer first because they know that, unlike the national banks, they are not going to be bailed out by the federal government for engaging in poor business practices.
As stated, until such time as Congress sees the writing on the wall and splits investment banking from traditional deposit banking, and until such time as Congress determines that it is poor public policy to allow the largest financial institutions to place the burdens of their risk taking on the average American taxpayer, community banks serve as the best answer to ‘too big to fail’ policies. At the same time, community banks are beneficial to Montana’s economy because they provide the capital for small communities to prosper. Despite challenging economic times, community banks continue to fund nearly 60% of all small businesses under $1 million and provide the loans used by Montana’s families to finance the purchase of their homes, to buy a car, and to obtain a college degree.
Change begins at home. By banking with a community bank, you will both realize the convenience that comes from working with your local banker and keep your money in the community where it will be put to work on behalf of your friends and neighbors. To locate the community bank located closest to you, visit the community bank locator at www.icba.org/locate and simply type in your zip code. Information on Montana’s Independent Banks can be found by visiting http://www.mibonline.org/membership/.
Martin Olsson is president of the Montana Independent Bankers Association. The MIB represents over thirty Montana community banks located throughout the State of Montana. Martin serves as President/CEO of Eagle Bank and as a director for the Salish and Kootenai Bancorporation. He and his wife Vickie live in Polson.