Community Banks Part of the Solution, Not the Problem
As our nation fights through an economic downturn, the worst since the Great Depression, we continue to see the effects this crisis has wrought on Americans. National unemployment continues to hover near 10 percent, its highest level in 26 years. Foreclosure rates are not abating. And while there are some signs of relief in the credit markets, small businesses and consumers are still struggling to obtain credit.
The crisis also remains at the forefront of consciousness because of the immense government intervention this Administration and the Democratic Congressional leadership have pushed through. Companies that were once titans of finance and business failed. As a result trillions of dollars in bailouts and spending packages have been poured into our financial markets and the economy as a whole to prop up these institutions, all in the name of market stabilization. It continues to this day, as evidenced by another $18 billion spending package enacted last month. This unprecedented amount of spending is sending our national debt spiraling out of control.
At the heart of this intervention is the notion that institutions can be “too big to fail,” our government’s policy to provide assistance to prevent the failure of large financial firms deemed systemically significant to our economy. This perverts free market capitalism and suggests that entities can “privatize” their profits, yet “socialize” their risks. This absolutely must end. The American taxpayers should not be forced to pay the gambling debts of failed risky bets made by large financial institutions.
In the coming weeks we will begin debate on financial regulatory reform legislation that would put into law this “too big to fail” mentality. It is absolutely wrong to tie the fate of the national and global economy to the fortunes of a relatively small number of giant financial firms.
Of particular concern is the effect that proposed financial regulatory reform legislation will have on our nation’s community banks. Community banks in Texas and across the country serve as the backbone of our economy. Community banks were making home and business loans to local customers, while the giant financial institutions were playing the derivative and subprime market. Local community banks provide the lending and deposit services for our nation’s small businesses so that they may continue to operate, invest, create jobs, and drive our economy. Credit from a community bank allows the West Texas exploration company to drill new wells to deliver the oil and gas that fuels our state and nation. Credit from a community bank in Texas allows the Austin area tech start up to create a new product line that could soon revolutionize the way the world communicates. It is this business lending that will help create jobs and grow our economy.
Tom Hoenig, President of the Federal Reserve Bank of Kansas City, said recently that our nation’s largest banks would be well-served to take lessons from our community banks. Why? Because community banks have been committed to providing the vital credit and services needed for small businesses to create the jobs that will lead our nation into recovery.
It is precisely this ability to foster bottom-up growth through small businesses that sets community banks apart from other financial institutions. Unlike the big financial institutions we see in the headlines for bailouts and bonuses, community banks do not pose systemic risk to our financial system, nor are they identified as primary contributors to our latest crisis.
However, our community banks would soon be subjected to a considerable amount of new costs and regulatory burdens as a result of this legislation, a burden that would hamper their ability to effectively provide depository and lending services to our American consumers and small businesses.
Community banks should not be punished as a result of this legislation. We should preserve and enhance our dual-banking system, rather than impose additional federal regulations that stifle their ability to serve their communities. This legislation would gear the Federal Reserve’s monetary policy to the large banks mainly in New York without any regard for the 6,800 regional and community banks located across our country. And that means the Fed will lack a fundamental understanding of what small businesses, families, and workers across Texas and throughout our nation are facing on a daily basis.
We should stop “too big to fail,” protect taxpayers from bailouts and only regulate what needs to be regulated. It’s when government tries to fix what isn’t broken that trouble begins.
Kay Bailey Hutchison is the senior U.S. Senator from Texas and is the Ranking Member of the Senate Committee on Commerce, Science, and Transportation.