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Small Banks Undecided On Financial Overhaul


Big financial firms, insurance companies and credit card issuers are not the only ones that could be affected by President Obama's regulatory overhauls. Small banks would also fall under the proposed regulations. So today, we're going to hear the reaction from some community banks. There were thousands of them across the country, and the president's plan is making some nervous. NPR's Chris Arnold reports.

CHRIS ARNOLD: When you talk to a community banker these days, they like to point out that they have very little in common with those much bigger and more complicated financial firms at the heart of the banking crisis, companies like Citigroup or AIG.

Mr. MIKE MENZIES (President, Easton Bank & Trust) Community banks did not create the train wreck.

ARNOLD: That's Mike Menzies, the president of Easton Bank & Trust in Easton, Maryland.

Mr. MENZIES: We have five branches altogether, so we're a small company. We have about 50 associates, 50 employees. So our frustration is that we are, frankly, like other small businesses, somewhat victims of the behavior of a few.

ARNOLD: Menzies says banks like his weren't taking huge risks or making lots of money off of toxic subprime loans.

Mr. MENZIES: Community banks are well regulated and still doing what they've always been doing for a long time, which is making basic, good sense loans to people and businesses they know.

ARNOLD: So Menzies and other community bankers are a little worried now that they could be facing a whole bunch of new regulations from Washington. Menzies is also the president of the trade group the Independent Community Bankers of America. Karen Thomas is the vice president.

Ms. KAREN THOMAS (Vice President, Independent Community Bankers of America): Community banks not being part of the problem, you can understand that we don't want to bear the pain and the costs of the solutions.

ARNOLD: The Obama reform plan would create a consumer protection agency, and Thomas says there are some parts of the financial industry where people could use some more protection. She says mortgage brokers, for example, are not regulated very well. But she worries that this new agency doesn't have experience regulating banks.

Ms. THOMAS: Our fear is that the new agency will add a tremendous amount of new burdens. I mean, community banks, because of their smaller size, regulatory burden really disproportionately impacts them. We have 8,000 community banks now. That's a terrific strength of our economy. And a lot of those banks could be merged out of existence as regulatory burden overwhelms them.

ARNOLD: The community bankers, though, do like some parts of the Obama administration's proposal. Just about everybody acknowledges that one of the biggest problems in this crisis are these firms that have grown so big and so interwoven into the fabric of the economy that the government decided it couldn't let them fail. Mike Menzies, the Community Bank president, likes that the Obama plan would have a separate set of regulatory requirements for firms like that.

Mr. MENZIES: I'm personally thrilled that the administration is taking on the challenge. We need to deal with institutions that are so large that they cannot fail.

ARNOLD: Karen Thomas explains that the Obama plan would require such firms to basically hold more cash on their books to create more of a safety net for themselves.

Ms. THOMAS: The bigger you are and the more threat you pose to the system as a whole, then the higher capital requirements you ought to be - you ought to have to hold.

ARNOLD: Community banks like that idea because the biggest banks have always had a competitive advantage over them. Investors assumed that the government wouldn't ever allow the biggest banks to fail. So these huge banks could borrow money more cheaply and have an easier time attracting large deposits.

So by creating tougher standards for the biggest banks, that would take away some of their advantage. Lawrence Summers is the director of President Obama's National Economic Council. He spoke about this with NPR yesterday.

Mr. LAWRENCE SUMMERS: (Director, National Economic Council): We're going to level the playing field, and so the community banks, the mid-sized banks, the regional banks, they're all going to be able to compete much more fairly with the Citigroups or the J.P. Morgans or the Wells Fargos than they were before precisely because we're going to recognize where there's the prospect of government support and regulate appropriately.

ARNOLD: Some small bankers are disappointed that the administration didn't lay out a plan that would be more aggressive and really block firms from being so large and interconnected that they can't fail, but Mike Menzies thinks overall, the plan is a step in the right direction.

Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.