Wednesday, May 26, 2010

EC:Wall Street reform hurts Main Street banks

Rep. Blaine Luetkemeyer

For more than 60 years, my late father, Bill, spent every day looking into the faces of family farmers and ranchers hoping to realize their dreams as they walked into his bank in St. Elizabeth, Mo. My father understood the importance of community banking the day he started in 1940, and he passed that understanding to me when I later joined him in the family business. In a town of 300 that lacks both a stoplight and significant financial resources, the community always came first in the role of our small bank. Now the federal government is redefining the role of a community bank in the name of "Wall Street reform." Few people I talk to at home, Republican or Democrat, would argue there is not a need for financial reform, but to achieve real improvements, we must take the time to differentiate between firms whose actions have national and international implications and real systemic risk, and those that service communities by funding small businesses and lending to local families. The American financial sector will be reformed, but it should not be at the expense of our local institutions.

People on Main Street understand that community banks did not cause the financial crisis and that they already carry daunting regulatory burdens. The regulatory reform legislation proposed by the administration will subject all banks, regardless of size, to the potentially overreaching rules of another new government agency, placing new rules that have very little to do with correcting the deficiencies that led to the financial crisis. This new bureaucracy would have sweeping examination and enforcement authorities and the ability to restrict consumer access to credit. Big banks may be able to weather the regulatory storm, but some smaller community banks will be unable to stay afloat. The impact of this ill-conceived and dangerous plan will destroy jobs by making it more expensive and difficult for hardworking Americans to thrive in a modern economy built on access to affordable and available credit. In my view, we do not need another layer of regulation. We need the existing regulators just to do their job, and if they will not, then we need to clean house.

If Congress is going to pass meaningful reform legislation in hopes of preventing another financial meltdown, we need to focus more on what is broken and less on changing what already is working. First and foremost, we have to scrap the idea of more government bailouts and the notion that certain institutions are too big to fail - implying that community banks are too small to save. It's my belief that large, failing firms should be unwound by declaring bankruptcy - just like the rest of us - so we are not forced to rely on regulators and taxpayer-funded bailouts to maintain financial stability.

But Senate Democrats have offered reform that makes more bailouts a permanent part of the regulatory arsenal. House Democrats even want to establish a $150 billion permanent bailout fund. The only purpose of such a fund is to pay off creditors of failed financial institutions, leaving the taxpayers as the financial backstop to failed investments. Instead of forcing creditors to internalize their losses and be held accountable for managing their credit risks, the bailout fund permits these creditors to spread their risk and losses across the entire financial system, infecting small banks and individuals and putting our taxpayer dollars at risk.

My experience as a former bank examiner and community bank officer has shown me that managing risk is one of the most important things a bank, particularly a small community bank, can do. That's why it's poor regulatory business to have the same capital requirement for a bank involved in high-risk lending or heavy concentrations of particular loans as for one that's servicing a broad spectrum of small businesses. After more than 30 years as a community banker, I am certain the current approach to banking reform and risk isn't balanced and will give the big banks an economic advantage, which, in the end, will cause credit to be restricted and be more costly to the small business borrowers.

And like the bailouts, any reform must address the real causes of the problem, and that includes the mortgage crisis. The legislation in the Senate, much like the legislation passed by the House in December, does nothing to reform or even regulate Fannie Mae or Freddie Mac, the government-sponsored enterprises that contributed extensively to the U.S. banking turmoil. Communities across our nation understand that Fannie and Freddie recklessly abused their then-implicit government guarantee, and taxpayers have forked out more than $145 billion to bail them out and will continue to put billions more into these failed entities before the losses stop. While Democrats continue to defend their failures, House Republicans have introduced several bills to help protect taxpayers and return Fannie and Freddie to working order and off the government payroll.

Community banks, like the one where I worked, understand that looking a person in the eye, offering a firm handshake and making sure that no additional burdens are placed on our neighbor's dream is the recipe for a growing and prosperous community. Anything less than that constitutes failure, and that's exactly where the Democrats' plan for financial regulatory reform will lead our financial system, including our community banks and our economy as a whole.

Rep. Blaine Luetkemeyer is a Missouri Republican..

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