Pub. 3 2015 Issue 1

6 The Community Banker www.mibonline.org M ontana is now well into the Spring months. Having grown up in ontana, I believe this is one of the best times of the year to be a resident of the Treasurer State. Spring sees the leaves return- ing to the trees, the grasses are greener than they will be for the remainder of the year, the bears are out of hibernation, and the roads into Glacier National Park are being snowplowed open. Spring 2015 finds the Mon - tana community banks in the midst of a challenging time for the industry. It seems as if every time we open the newspaper, we are seeing consolidation. This consolidation trend is not only happening nationally, but is occurring more frequently between banks located here in Montana. In just this first quarter of 2015, three Montana community banks out of 55 are in the process of consolidation. What is driving the consolida- tion trend? At a recent hearing of the U.S. Senate banking committee, one witness, Pro- fessor Allen Meltzer, advanced the theory that the root cause of increased consolidation can be attributed to the substantial number of federal regulations that were passed in the wake of the financial crises of 2007-08. Professor Meltzer testified that those regulations, which were designed under Dodd-Frank to reign in the too-large-to-fail institutions, have actually had a distorting impact on the ability of community banks to effec- tively compete against national banks. A study released on March 17, 2015 by the Mercatus Center located at George Mason University appears to back that theory up. That study, prepared by Hester Peirce and Stephen Matteo Miller, found that U.S. banking assets and deposits have, since the enactment of Dodd-Frank, disproportionally found their way into the vaults of a handful of gigantic financial institutions. The study deter- mined that, by the end of 2014, the number of small banks (defined as $10 billion or less in assets) has declined nationally 27%, from 8,263 in Quarter 1 2000 to 5,961 in Quarter 4 2014. At the same time, the number of large banks increased 32%, from 76 in Quarter 1 of 2000 to 101 in Quarter 4 2014. As to assets held, the Merca- tus Center study determined that the five largest banks in Quarter 4 of 2014 held 46% of U.S. banking assets and 40% of domestic deposits. “That’s up from 28 percent and 20 percent, respectively, in early Quarter 1 of 2000 . . . [and] even though small banks’ assets and deposits have grown since 2000, small banks’ share of domestic depos- its has fallen from 40 percent in Q1 2000 to 22% in Q4 2014, and their share of US banking assets has declined from 30 to 18 per- cent .” A summary of the study can be accessed here: http:// mercatus.org/publication/small- banks-numbers-2000-2014. Based on my discussions with MIB’s members, this consoli- dation in the industry is of no surprise and was a predicted re- sult of the increased regulatory burden placed upon banks of all sizes as a result of the wrong- doing of a few mega financial institutions. Obviously, there are other factors at play beyond increased regulatory burden, which such factors would help explain the consolidation trend. For example, a study performed by the Conference of State Bank Supervisors noted that many owners of privately held banks were getting older and determined that this would be a good time for them to exit the industry. In addition, rural pop- ulations are shrinking and some small banks are expanding to become bigger banks. This consolidation trend pos- es several immediate questions. First, the question needs to be asked on whether consolidation in the industry, namely consol- idation of Montana commu- nity banks, is a bad thing. The second question that needs to be asked is what can be done to curb the trend of a small number of financial institu - tions holding a majority of U.S. banking assets. As to the former question, that is a question that is best answered by your institu- tion, your customers, and your owners/shareholders. As to the second question, at the Senate Banking hearing, Professor Meltzer posited that the way to stop the trend of too-big-too- fail growth was for Congress to start undoing the regulatory morass created by Dodd-Frank and to allow banks (and market forces) to regulate themselves. Meltzer noted that a regulator’s incentive to get a regulation correct is much weaker than the incentives of bank shareholders to operate their bank in a sound fiscal manner when it is the shareholders’ money on the line. As you know, we here at the MIB have been working hand-in- hand with our national organi- zation, the ICBA, to pass through Congress a series of regulatory bills that will recognize the difference between a Wall Street bank and a hometown bank, such as your bank. The general idea is to create a regulatory sys- tem that regulations a bank of $10 billion or less in a different manner than a bank of $100 billion or more, which such reg- ulatory system would recognize the reality that small banks have a more difficult time complying with today’s highly complex regulatory environment than do the Chase Manhattans of the world. We will be discuss- ing these legislative proposals with Montana’s congressional delegation during ICBA’s Wash- ington Policy Summit held April 28-30, 2015. The good news for Montana’s community banking industry, as we stand now in the Spring of 2015, is that there is a grow- ing optimism in this state and across the nation that both the national and state econo- mies are recovering from the negative impacts of the financial crises. In Montana, this can best be seen in Gallatin County where housing is once again picking up and in the fact that Montana’s unemployment is, ac- cording to the Montana Depart- ment of Labor, down to 4.3%. All-in-all, the financial crises, and the bank consolidation trend that followed in its wake, have demonstrated that the financial world has changed permanent- ly and the need for Montana’s community banks to adapt their businesses to an increasingly “regulated free market.” Jim Brown, Executive Director of MIB Executive Director’s Report