By Steven Cinelli, CrowdFunding Beat Sr. Editor, CEO PRIMARQ/REMARQ
Personally, I have enjoyed the whitepaper series on community banking and its positioning and potential opportunities by aligning with the “crowd space”. I believe the biggest takeaway for members of community banking industry is that “times continue to change” and the fundamental principles, practices and disciplines of banking have shifted so new models need be pursued for not only profitability but survival.
Let’s assess the banking industry. In 1985, there were over 14,000 banks in the US. Now, in 2014, we have less than 7000. And it wasn’t the big banks that have failed. In 2012, 51 banks failed of which 35 were under $250 million in assets, and only one had footings in excess of $1 billion. And currently, 7.6% of the banks hold over 86% of all banking assets. Yes, there is a huge consolidation still occurring and our disdain for “too big to fail” is being promoted as the goal at the federal level. So do we aspire to have community banking, and its acclaimed role of supporting its locality? Or is the industry fundamentally shifting, where the ‘boutique’ players, subject to the regulatory requirements, really don’t have a place in the market any longer? And if so, how do they compete?
The banking industry is subjected to one-size-fits-all in terms of the regulatory landscape. A review of banking regulation over time seemingly has been scribed to address “problems”, and subject all institutions to the same guidelines. Whether we look to Glass-Steagall (1933), Gramm-Leach Bliley Act (1999), Patriot Act (2001), Sarbanes Oxley (2002) and most recently Dodd-Frank (2010) and globally, Basel III accord, legislation was meant to address excessive risks taken on and apply new rules to the industry at large, even though the violators tended to be the mega-institutions.
Dodd-Frank has virtually hammered the community banking system with additional compliance costs, virtually wiping out the ability to operate profitability, where the JPM Chase, Citibank, Wells, BofA and others go along their merry way. Dodd-Frank was largely designed to address three key areas, all provinces of the large players – subprime lending, packaging and sale of securitized mortgages, and heavy utilization of risky derivatives – generally the activities of the monoliths. But the community bankers have had to adjust, and consume, the additional compliance costs and reporting.
Banking models have decoupled, based on both size and technology. Large banks assume everything on their respective balance sheets is marketable, liquid and “risk-shiftable”. The smaller brethren still attempt to fight out a spread by intermediating portfolio lending with core deposits. The challenge however is that banking as we knew it has experienced an onslaught of new players, comprising an exponentially growing shadow banking environment.
Whether funds are held and moved outside the regulated depository institutions, loans originated being securitized, intermediation in toto happening off balance sheet, and direct funding coming from private equity funds, finance companies, and even now crowdfunding platforms, have created a challenge for the conventional banking model for many to compete in bread-and-butter banking. And beyond the typical intermediation, think of the role that companies like PayPal, Square, WePay and others are having on historic fee income centers for banks, while the consumer lending space has bred peer-to-peer lending stalwarts, LendingClub and Prosper, impacting high spread areas.
The size of the shadow banking industry is estimated to exceed $120 trillion, where as the collective reflective assets of the US banking industry amounts to about $13 trillion. Yes, the large ‘regulated’ banks are indeed the largest of the shadow banks to be clear, but with so much operating outside the regulatory framework, how do we expect the smaller ‘community’ banks to carve a path for sustainability? Lastly, we must also posit the impact of crypto-currencies, such as Bitcoin, where value exchange takes place outside the monetary system. I was skeptical of the role of Bitcoin, but when researching that of the 7 billion people that live on the planet, 2.5 billion are considered “unbanked”, meaning not having a bank account, yet having access to technology and mobile devices, one begins to wonder.
So, what does this stricture on banking conclude? The community banks need to look outside their boxes, understanding the alternatives that their clientele are exposed to and willing to embrace, yet if they can, develop new methods to create a model that works. Is it collaborating with crowdfunders? Maybe. And then something a bit more.
Steve Cinelli is Founder, CEO of PRIMARQ Inc., a paradigm shift in the world of housing finance. Our goal is to bring prudence and opportunity into a fundamentally crucial segment of the US and world economies, namely homeownership. @