The American University radio station, WAMU 88.5 FM, reports on its Web site that Greg Fairchild, Director of the University of Virginia’s Tayloe Murphy Center, has studied what happens to poor communities when bank branches close.  (UVA Researcher Looks at Banks’ Effects on Neighborhoods)  His research found that bank branches were likely to decline in areas outside the areas of general affluence leaving a vacuum for other lenders.

And when the banks left, he says, predators stepped in.

“These would be check cashers, payday lenders, automobile loan companies, title loan companies,” he says.

They often charged very high rates, up to 300 percent on loans, and predatory lenders were not the only ones who took advantage of bank less consumers.

Mr. Fairchild also found that banks made areas more prosperous and that crime went up when banks left.

“Often times you’d find criminals who would bust into an apartment, find the gentlemen that were there with cash in hand, and take that cash with little worry of the police either patrolling at the moment and/or any of those individuals calling the police afterwards.”

If Congress and the federal regulators continue to push onerous regulations down to our community banks, his observations will spread beyond the poor suburbs of Virginia to the small towns of Middle America.  As the federal government sits back and counts the dwindling number of community banks without lifting a finger to stop the carnage, your neighbors are the ultimate victims.  Unfortunately, the government has positioned itself so that the banks will be blamed for this carnage while the federal government will claim that this happened despite their best efforts.

As an aside, at least as reported in this article, Mr. Fairchild falls into the familiar trap of misunderstanding the differences between banks and credit unions and the unfair competitive advantage afforded credit unions by federal tax laws.

But when communities had banks, crime rates dropped, and that helped push property values up. Fairchild also found it was possible for credit unions to prosper in poor neighborhoods without ripping people off.

“These are non-profit entities,” he says. “There are not shareholders. They’re owned by the community, and so often they’re able to offer a lower cost services, and they’re often able to offer better rates.”

If credit unions are able to offer lower cost services and better rates, it isn’t because they are non-profit, owned by the community, and lacking shareholders.  It is because they are allowed to grow without limits, do not pay federal income taxes, and face far less regulatory scrutiny.  Lest I go Rambo on Mr. Fairchild while chasing this red herring, I will merely assume that, because he spoke highly of community banks, when he juxtaposes credit unions against “banks,” he is talking about the Too-Big-to-Fail monoliths.

Notwithstanding his prejudice or misunderstanding of credit unions, Mr. Fairchild’s primary point that when banks consolidate it hurts consumers, particularly the poorest among us, is deadly accurate.

Watch IBAT President & CEO Chris Williston’s first vlog to IBAT Members.

It was music to all community bankers ears this week to hear three respected economists, one a 2001 Nobel prize recipient, tell a Joint Economic committee of Congress to break up the too-big-to-fail institutions and disassemble the oligarchy they have created.  I say Amen, too.

Breaking up the behemoth banks would mean recalibrating the disproportionate influence they have had on public policy.  Translated for community bankers…a bifurcated banking regulatory system just might be within our reach.  Community bankers are tired, and rightfully so, for paying for the sins of Wall Street in the form of higher FDIC insurance costs, and their owned tarnished credibility in the eyes of the general public and lawmakers.

There are obvious immediate benefits that will accrue to all community banks if Congress has the guts to set about a systematic plan to break up the big banks.  Deposits will funnel back to local communities where they were extracted and rightfully belong into the hands of the more than 8,000 community banks to be put to work for the local folks.  More money will be available for small business and consumers.

But perhaps the most significant benefit that could result from this is a reduction of the many hidden costs of regulatory burden…a burden that has most community institutions drowning in cesspool of paperwork.

Last month I heard one of the more sensible solutions to reducing the regulatory burden on community banks.  It was sensible to me because it is precisely what my colleagues and I have been advocating for the past ten years.  And, it came from a bank regulator no less.  He advocated that two charter types should be created; one a commercial charter for those institutions that choose to venture out of traditional banking services into exotic and risky product lines, and  a community bank charter for those institutions that wish to operate more on traditional banking product and service lines.  Each would be subjected to different regulatory and examination specifications proportionate to risk.

We are a long way from realizing the dream that one day community bankers would be rescued from over regulation…regulation that has largely been created thanks to the greed and corruption of the mega banks.  The testimony of  the three economists this week however was a good start.  It is nice to see that someone is hurling the stones precisely where they need to be hurled.

You never know when one just might bring the mighty behemoths down.