Why do community banks fail? We are being called by a growing number of community banks that have serious credit problems, usually related to commercial real estate loans. These banks desperately need capital, as losses from loan write-offs have eroded the capital base. Why have so many community banks found themselves in this situation?
I could argue that the nation’s policies and regulations pushed community banks into their current situation. If the problem today is too much concentration in real estate loans, I’m sorry, but this was the only lending niche left for community banks after interstate banking allowed large-scale mega-banks to form and compete on price for Commercial and Industrial loans and the consumer loan business was handed to the credit unions with their non-taxable status and the auto companies with their ability to finance their cars at giveaway rates. Where else could community banks turn but local businesses and their real estate needs.
Now, having argued that they couldn’t help it, I would also argue that the real problem was a lack of leadership. Lack of leadership started in Washington, where Congress allowed unfair competition. Regulators tried to bring attention to the concentration of real estate loans being built-in community banks, but they were obviously not very convincing in so doing. Boards of Directors allowed concentration risk to build because they assumed that real estate value would always appreciate. Finally, too many CEOs and other senior officers of community banks took the easy way out and grew their banks down the path of least resistance. People ALWAYS make the difference; on the way up and on the way down.
Armchair quarterbacking is easy, and I can’t claim that I saw the enormity of the impact of the real estate bubble or the liquidity crisis, but these things worried me and I tried to warn clients that diversity of assets, funded by a strong local deposit franchise was a worthy goal. Alas, wholesale funds were too cheap and real estate was booming, so that approach seemed pretty boring. Perhaps next time, we will all risk being stronger leaders.
