Community Bankers Object to More Quantitative Easing

Crickets chirping.

That's the sound many community bankers want to hear from the office of Federal Reserve Chairman Ben Bernanke. With U.S. markets rampant with speculation that the Fed will announce new efforts to stimulate the economy, leaders of small banks say they would prefer a hands-off approach from Bernanke.

"I'm hoping he won't do anything," says Wes Smith, the president and chief executive of Northwest Georgia Bank in Ringgold. "The Fed has used most of their bullets. They need to just sit on the sidelines and let this thing play out."

Smith and those who agree with him may be disappointed. It is widely believed that the Fed will again set out to buy mortgage-backed securities — commonly referred to as "quantitative easing" — or extend the period where interest rates are kept at record lows. The Fed has already pledged to keep rates artificially low until 2014.

Another round of bond purchases would do little to stimulate loan demand, which is what community banks need, some bankers say. "There is enough liquidity in the system," says Paul Freeman, the president and chief executive of Anchor D Bank in Texhoma, Okla.

A lack of action could still have severe consequences, given the market's expectations.

"Bernanke better do something, because people are expecting something," says David Smith, the chief investment officer at Rockland Trust, a unit of Independent Bank in Rockland, Mass. "If there's no action from the Thursday meeting, it would be very negatively received by the marketplace."

Bernanke seemed to be laying the groundwork for Fed action at the end of August. The central bank, he said, will "provide additional policy accommodation as needed to promote a stronger recovery and sustained improvement in labor market conditions in a context of price stability."

If the Fed must do something, it would be well served to address the country's budget deficit, says Vince Delie, the president and chief executive of F.N.B. Corp. in Hermitage, Pa.

"I'd love to hear Bernanke say that the solution lies with the president and with Congress and their ability to address the fiscal side of the house," Delie says.

Only after the budget is dealt with should the Fed pursue growth incentives, Delie says. Another round of quantitative easing would be "great for the bond traders and for fixed-income people, and not so great for the banking industry," he says.

Bernanke seems aware of the angst that pervades community bankers' offices. In a new publication and website unveiled this week, he stressed that the Dodd-Frank Act is aimed chiefly at the biggest banks. The law "was enacted largely in response to the 'too-big-to-fail' problem, and most of its provisions apply only, or principally, to the largest, most complex, and internationally active banks," he said.

Still, the Fed appears bent on stimulating the economy, even if it doesn't sit well with community bankers. The latest job report numbers cast a dark cloud on the U.S. economic recovery. Employers added just 96,000 jobs last month, according to the Labor Department.

The Fed may feel a need to lengthen the period they will keep historically low rates. Many community bankers hold little hope that rates are going to inch higher anytime soon, meaning continued pressure on their net interest margins.

"I hope rates would move up sooner," says Charlie Crawford, the chairman, president and chief executive of Private Bank of Buckhead in Atlanta. "Most of our forecasts show rates staying low to about 2015. That's a long ways away."

Extending historically low rates could force banks to take more risks — something many regulators and politicians would like to avoid.

"We're facing unprecedented territory in terms of margin compression" if low rates continue, Delie says. "It forces banks to take undue risks, like going out on the yield curve or taking on riskier asset classes. It actually has a negative impact in terms of risk management."

It's not just margins that are pressured by low rates. Bonds make up a much larger percentage of community banks' portfolios than in past years. Many of those bonds were bought at premiums, Freeman says. Low rates translate into more refinancing, which is "wreaking havoc on the yields we're receiving in our [loan] portfolios," he adds. "That's a pretty big negative on our bottom line."

Not all community bankers feel threatened, including Gilles Gade, the chairman, president and chief executive of Cross River Bank in Teaneck, N.J. Gade is comfortable with low rates or another round of quantitative easing but, then again, his bank is doing well in a relatively stable market around New York. "We have no problem with loan demand, either on the residential, commercial or small-business side," Gade says. "I don't mind deploying capital at 3.5% or 4%."

Other community banks aren't so lucky to be located in regions with loan growth. Northwest Georgia Bank operates in Georgia and Tennessee, which both have unemployment rates that are higher than the national average. Keeping rates low will do little to help the bank's customers.

"Folks don't want higher interest, but people aren't borrowing money anyway," Smith says. "Baby boomers aren't spending much money … because their retirement funds aren't producing them very much in interest."