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ICBA to Financial Crisis Commission: Too-Big-to-Fail Must End

Despite Challenges, Community Banks Continue To Lend

Washington, D.C. (January 13, 2010)—The Independent Community Bankers of America (ICBA) today told the Financial Crisis Inquiry Commission that too-big-to-fail institutions and shadow banks were the root cause of the financial crisis and that our nation’s more than 8,000 community banks are still meeting the credit needs of their communities and helping in the nation’s economic recovery. ICBA also made recommendations to help community banks continue to lend to the increasingly important small-business sector.

“A little more than a year ago, key elements of our financial system nearly collapsed due to the failure of systemic-risk and shadow institutions to adequately manage their highly risky and irresponsible activities,” said C.R. “Rusty” Cloutier, a past ICBA chairman and president and CEO of MidSouth Bank, Lafayette, La. “By contrast, community banks like mine stuck to their knitting and had no role in the economic crisis. Community banks are engaged in relationship, rather than transaction, banking. We know our customers and operate under the quaint but effective practice of only lending money to people who can pay it back.”

Cloutier said that while community banks did not cause the economic crisis, they have been affected because of less demand for credit, a decline in overall loan quality, heavier FDIC assessments and a suffocating examination environment. He said that regulators are overreacting and are forcing community banks to be overly conservative in underwriting all types of loans. While this is to be expected during a deep recession, the regulatory pendulum has swung too far in the direction of overkill and choking off credit to credit-worthy customers. Despite these challenges, Cloutier assured the commission that the vast majority of community banks remain well-capitalized and committed to taking deposits and making loans on Main Street.

“Community banks specialize in small-business relationship lending,” said Cloutier. “We serve a vital role in small-business lending and local economic activity not supported by Wall Street.” While community banks represent about 12 percent of all bank assets, they make 31 percent of all small-business loans less than $1 million and more than half of all small-business loans less than $100,000. In contrast, banks with more than $100 billion in assets—the nation’s largest financial firms—make only 22 percent of small-business loans.

ICBA recommended the following to enhance lending to small businesses:

  • Maintain diversity in Small Business Administration (SBA) lending options to meet the needs of both small and large SBA-loan-program users,
  • Restore reasonable value to Fannie Mae and Freddie Mac preferred stock,
  • Extend the five-year net-operating-loss (NOL) carryback through 2010,
  • Allow new IRAs as eligible Subchapter S Corporation shareholders,
  • Allow community bank S Corporations to issue certain preferred stock, and
  • Preserve the 35 percent top marginal tax rate on Subchapter S income.

Cloutier concluded by telling the commission that the best financial reforms will protect small businesses from being crushed by the destabilizing effects of too-big-to-fail institutions. “A diverse and competitive financial system with regulatory checks and balances will best serve the needs of small businesses,” he said.

Cloutier is author of the newly released book Big Bad Banks, which explores the financial crisis and the role that too-big-to-fail institutions and lack of regulation played in the economy’s downfall.