The federal response to the ongoing banking crisis may end up having a big impact on the nation’s smallest banks that bear no responsibility for the turmoil. Community banks have an outsized impact on local economies throughout the country, so hamstringing them with new costs would have broad consequences.

Community banks are financially well-positioned, carrying more short-maturity, local loans than their bigger counterparts that have often loaded up on Treasuries and mortgage-backed securities, which have declined in value due to aggressive Federal Reserve rate hikes. 

Yet community banks’ loan-making ability is threatened by bank depositors transferring tens of billions of dollars from small to large institutions in a perceived flight to safety. Bank of America alone received $15 billion in new deposits in the days following Silicon Valley Bank and Signature Bank’s collapse.

SILICON VALLEY BANK’S RAPID WITHDRAWALS, MANAGEMENT MISSTEPS CREATED PERFECT STORM

Community banks must also pay a Federal Deposit Insurance Corp. "special assessment" imposed on all banks to fund SVB and Signature Bank’s bailouts even though they played no role in their failures. New regulations and fees coming out of this crisis would disproportionately hurt small banks compared to their large competitors who can afford to treat them as a line-item cost. According to Goldman Sachs, small banks will reduce lending by 15% to 40% in the wake of this crisis.

Some commentators and policymakers have responded to these hurdles facing community banks. Entrepreneur and "Shark Tank" investor Kevin O'Leary said recently, "The truth is, we don't need regional banks." Investor Bob Doll echoed this sentiment on Fox News, pointing out how America has far more banks than Japan or Canada, where banks are little more than government-regulated utilities.

Treasury Secretary Janet Yellen also seems unconcerned. During her testimony before the U.S. Senate last week, Sen. James Lankford, R-Okla., asked Yellen, "What is your plan to keep large depositors from moving their money from community banks to large banks?" Yellen had no answer.

Sen. Langford also asked Yellen whether community banks would be bailed out if they ran into similar troubles as SVB and Signature. Yellen responded that they would not. Only banks that pose a "systemic risk" would get this treatment. In other words, large financial institutions with elite relationships in Washington benefit from this backstop at the expense of community banks.

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This shortsighted perspective ignores small banks' big role in the U.S. economy. They make local loans based on relationships, not algorithms. They offer personal service, not 1-800 numbers. They keep money within communities, purchasing local bonds and funding local projects rather than sending deposits to New York or San Francisco.

For instance, AMG National Trust bank offers 90% of its loans to the Front Range of Colorado. Community banks have a symbiotic relationship with their borrowers and communities where all parties benefit together and are vested in seeing each other succeed. These institutions are the lifeblood of free market capitalism and economic growth.

Community banks provide roughly 60% of all small business loans and more than 80% of farm loans. Small banks also stepped up to deliver pandemic-era Paycheck Protection Program loans while many big banks dragged their feet. They serve rural America; approximately half of community banks are located in counties with fewer than 50,000 people.

Community banks are already struggling from an increased regulatory environment, including Current Expected Credit Losses (CECL) requirements, additional reporting on capital ratios, and concentrated oversight on general accepted banking practices that have disproportionately impacted small banks. Between 2000 and 2021, the number of banks nationwide fell from 8,315 to 4,236. Between 1985 and 2011, 183 new banks started each year on average, yet only four started annually between 2012 and 2019 as the industry consolidated.

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Some bankers have simply chosen to close up shop, deciding that continuing to serve their communities is not worth the regulatory burden that has little to nothing to do with banking safety in their regions. For many community banks, more regulation and fees could be the final straw.

To ensure community banks can continue providing loan services for their communities, policymakers should exempt them from new fees and regulations coming out of this crisis. Research from the Minneapolis Fed finds that the costs associated with adding only two compliance employees to bank payrolls would make one-third of community banks unprofitable. 

Protecting small banks from new costs, in recognition of their key role in the U.S. economy and lack of blame for this crisis, can ensure they continue to make the loans on which small businesses and local communities depend.

Earl Wright is CEO and Chairman of the Board of Directors of AMG National Trust Bank. Alfredo Ortiz is president and CEO of Job Creators Network.