Banking Law

"This financial crisis started with the big guys, but the little guys have wound up paying a disproportional price.?

As the story discusses, consolidation of the banking business in New Mexico, which has seen the number of banks in the state halved in the last 25 years, mirrors what's happened on a national scale, especially since the enactment of the Gramm-Leach-Bliley Act in 1999. That law battered down the wall between commercial and investment banking and added racket fuel to the growth of the nation's biggest banks.

?Since the change in the law, the largest 20 firms have increased their control of the nation?s banking assets from about 35 percent to an astonishing 70 percent,? [Federal Reserve Bank of Kansas City President Thomas] Hoenig said. ?Even more striking, perhaps, is the fact that some of these firms are now 30 to 40 percent larger than they were when this [U.S. financial crisis] began, and as you know, many of these firms were protected during the crisis.?

Banking consultant Joe Bidal expressed a view held by many community bankers, inside and outside of New Mexico, when he talked about how the federal regulators catered to and saved the biggest banks while lopping off the heads of local lenders like Charter Bank (previously discussed on this blog here and here).

?When you lose a Charter, which invested almost exclusively in New Mexico, it makes it more difficult for local businesses to finance their needs. You add that to the incredible pressure that federal regulators are putting on local banks to reduce their exposure to commercial real estate and you have a big problem.?

Yes, you have a big problem. And it's a problem that's growing with every seven-bank "Bank Fail Friday" like the one we had last week. A paranoid person might suspect that there's a method to this madness, that the federal regulators have decided to nationalize the entire commercial banking system of this country, in the same way that it's in the process of effectively nationalizing the residential mortgage lending business through its de facto nationalization of Fannie Mae and Freddie Mac and its dramatic expansion of FHA lending. The fewer the number of banks, the easier the system is to capture.

A cynic, on the other hand, would simply assume that the inmates are currently running the asylum, and that the damage they are inflicting is due to the fact that their reality and everyone else's reality are operating on mutually exclusive planes of existence, rather than from the execution of any grand conspiratorial plan. As for me, I'm a cynic.

Whichever view is correct, let's hope that the damage that is being done to the community banking industry is not so irreparable that it can't be fixed, staring with the off-year elections this November.