The questions being raised about the largest banks in America having to have more capital are shocking to most small banks. We have had to live with these capital requirements for years and all we had heard was that the large bank model was less risky.
Of course, the last few years have proved that to be a bigger fairy tale than a Walt Disney movie.
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We have never heard so much crying from the mega-banks as they complain about being put under these new capital rules. They liked it the way it was, and that was for them to operate with as small an amount of capital as they could and then get the government to bail them out when they got in trouble.
But the American people have had enough and want their congressmen to hold these firms accountable and the regulators who oversee their operations.
For years regulators bought into the notion that the largest banks had less risk to the system because of their size and global reach. We all now know that this thought process was garbage. They demanded 9 to 10 percent capital for the local 100 million dollar bank that served a community of 6,000 people while the trillion dollar bank could get by with 4 percent and no real supervision from regulators.
The risk of the largest banks that cover the world is much greater than the smallest banks in the United States. The local banks know their customers and communities, while the largest banks are doing business around the world - and in most cases don't have a good feel for the area or the risk they are taking on. One is based on relationship banking and the other on risk models that did not work in the last downturn.
Of course, the largest banks will cry that they won't be able to compete with other banks worldwide if they have to keep this capital. But they did not make that argument when they were buying up every bank in America that wanted to sell and took control of over 70 percent of the deposit base in America. It is OK for them to operate in a city like Omaha with 4 percent capital, but the local community banks that they are competing with are required to have 10 percent capital ratio.
So I just don't understand their argument that it is more important for banks to be able to compete with equal capital levels in Shanghai than in Omaha — unless they care more about bringing jobs to China than small business loans to middle America.
Now if they were arguing that they wanted all banks to have lower capital levels, I could understand their case better. But I just don't remember them ever asking federal regulators to lower the capital requirements on community banks.
I understand that they have no shame for what they do or say, as they are also asking for international preemption of all laws so that they can compete in other countries. Once again they claim that being able to do business with a third world country's sweat shops are more important than having to follow the rules not only of the State of Nebraska but of the United States.
The managers of these large firms only care about their paychecks; if they can get by without following the rules of the United States and dealing with no skin in the game, they are very happy. When what they do for their own best interest comes apart, they can go home to their mansions and let the U.S. taxpayers pick up the bill.
Meanwhile, back in real America, the community banks, their management teams and boards that get into trouble and are being closed and losing everything.
This all has worked well for them since they passed the Gramm-Leach-Bliley bill, but I am not sure it has worked too well for the rest of the American people. Why Congress did not break them up when it had the chance is beyond me, but I know the large banks had a lot of money to protect their interests on Capitol Hill.
So when you hear them crying about how unfair the world is to them, just remember how many of their peers are at their vacations homes this summer enjoying the backing that you as a taxpayer put up for their lifestyle. Of course they would tell you that only Fannie and Freddie had a government guarantee, but I would ask how many large banks defaulted on their preferred stock after the government made a capital injection, but Fannie and Freddie did default, and ended up closing many community banks that lost everything.
I understand their argument that it is not fair for them to have to compete in America on an equal capital level with every other bank since they have not had to do it for 20 years or longer. I guess if I had this advantage I would not want to give it up either.
Rusty Cloutier is the president and chief executive officer of MidSouth Bank. He is a former chairman of the Independent Community Bankers of America.
