Small Banks Undecided On Financial Overhaul

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Big financial firms, insurance companies and credit card issuers are not the only ones who would be affected by President Obama's sweeping regulatory overhaul. There are thousands of community banks across the country, and the president's plan is making some of them nervous.


Big financial firms, insurance companies and credit card issuers are not the only ones that could be affected by President Obama's regulatory overhauls. Small banks would also fall under the proposed regulations. So today, we're going to hear the reaction from some community banks. There were thousands of them across the country, and the president's plan is making some nervous. NPR's Chris Arnold reports.

CHRIS ARNOLD: When you talk to a community banker these days, they like to point out that they have very little in common with those much bigger and more complicated financial firms at the heart of the banking crisis, companies like Citigroup or AIG.

Mr. MIKE MENZIES (President, Easton Bank & Trust) Community banks did not create the train wreck.

ARNOLD: That's Mike Menzies, the president of Easton Bank & Trust in Easton, Maryland.

Mr. MENZIES: We have five branches altogether, so we're a small company. We have about 50 associates, 50 employees. So our frustration is that we are, frankly, like other small businesses, somewhat victims of the behavior of a few.

ARNOLD: Menzies says banks like his weren't taking huge risks or making lots of money off of toxic subprime loans.

Mr. MENZIES: Community banks are well regulated and still doing what they've always been doing for a long time, which is making basic, good sense loans to people and businesses they know.

ARNOLD: So Menzies and other community bankers are a little worried now that they could be facing a whole bunch of new regulations from Washington. Menzies is also the president of the trade group the Independent Community Bankers of America. Karen Thomas is the vice president.

Ms. KAREN THOMAS (Vice President, Independent Community Bankers of America): Community banks not being part of the problem, you can understand that we don't want to bear the pain and the costs of the solutions.

ARNOLD: The Obama reform plan would create a consumer protection agency, and Thomas says there are some parts of the financial industry where people could use some more protection. She says mortgage brokers, for example, are not regulated very well. But she worries that this new agency doesn't have experience regulating banks.

Ms. THOMAS: Our fear is that the new agency will add a tremendous amount of new burdens. I mean, community banks, because of their smaller size, regulatory burden really disproportionately impacts them. We have 8,000 community banks now. That's a terrific strength of our economy. And a lot of those banks could be merged out of existence as regulatory burden overwhelms them.

ARNOLD: The community bankers, though, do like some parts of the Obama administration's proposal. Just about everybody acknowledges that one of the biggest problems in this crisis are these firms that have grown so big and so interwoven into the fabric of the economy that the government decided it couldn't let them fail. Mike Menzies, the Community Bank president, likes that the Obama plan would have a separate set of regulatory requirements for firms like that.

Mr. MENZIES: I'm personally thrilled that the administration is taking on the challenge. We need to deal with institutions that are so large that they cannot fail.

ARNOLD: Karen Thomas explains that the Obama plan would require such firms to basically hold more cash on their books to create more of a safety net for themselves.

Ms. THOMAS: The bigger you are and the more threat you pose to the system as a whole, then the higher capital requirements you ought to be - you ought to have to hold.

ARNOLD: Community banks like that idea because the biggest banks have always had a competitive advantage over them. Investors assumed that the government wouldn't ever allow the biggest banks to fail. So these huge banks could borrow money more cheaply and have an easier time attracting large deposits.

So by creating tougher standards for the biggest banks, that would take away some of their advantage. Lawrence Summers is the director of President Obama's National Economic Council. He spoke about this with NPR yesterday.

Mr. LAWRENCE SUMMERS: (Director, National Economic Council): We're going to level the playing field, and so the community banks, the mid-sized banks, the regional banks, they're all going to be able to compete much more fairly with the Citigroups or the J.P. Morgans or the Wells Fargos than they were before precisely because we're going to recognize where there's the prospect of government support and regulate appropriately.

ARNOLD: Some small bankers are disappointed that the administration didn't lay out a plan that would be more aggressive and really block firms from being so large and interconnected that they can't fail, but Mike Menzies thinks overall, the plan is a step in the right direction.

Chris Arnold, NPR News.

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Summers Sees Dramatic Shift With Banking Reforms

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Lawrence Summers i

Lawrence Summers (center), director of the National Economic Council, and Fed Chairman Ben Bernanke. Jewel Samad/AFP/Getty Images hide caption

itoggle caption Jewel Samad/AFP/Getty Images
Lawrence Summers

Lawrence Summers (center), director of the National Economic Council, and Fed Chairman Ben Bernanke.

Jewel Samad/AFP/Getty Images

Lawrence Summers, the director of President Obama's National Economic Council, defends the president's financial regulatory reform plan, saying it will result in a "very different financial industry." Summers adds that having a new agency separate from bank regulators is the best way to protect consumers.

In an interview Thursday with NPR's Robert Siegel, Summers brushed aside the judgment of New York Times columnist Joe Nocera that the administration's plan is "little more than an attempt to stick some new regulatory fingers into a very leaky financial dam, rather than rebuild the dam itself."

Not so, says the former Treasury secretary. "Respectfully, the clamor of concern — particularly about the consumer regulation from financial industry lobbyists — suggests that they don't share Mr. Nocera's view. More profoundly, this is about reducing leverage, causing there to be more capital, getting rid of the gaps. And that's exactly what we're going to do. I think financial practice is going to be very, very different in that when we look back a few years from now, we're going to see a very different financial industry."

Some critics have also asked whether more profound changes are needed at the Federal Reserve to protect consumer interests. Summers says there has been "a lot of soul-searching" at the Fed — something he expects will continue.

"I think the critics are right that an agency charged with maintaining the health of the banking system is always going to be prone to look out for bank profits rather than consumer interests, and that's why we've established a separate consumer agency," he says.

In the U.S. and around the world, Summers says, central banks play a key role because of their technical expertise with risk modeling. The Fed has been a "highly imperfect actor — it's made serious mistakes," he says.

"On the other hand," he says, "I think it's important to remember that some of the worst cases — Countrywide, Washington Mutual — involved institutions that actually moved away from the Fed's regulation and were allowed to because they thought the Fed's regulation was too tough."

The new financial regulatory legislation calls for the creation of a separate agency, independent of the Fed, to look out for consumers. Summers says the establishment of the Consumer Financial Protection Agency is "one of the key pillars" of the plan, which also calls for eliminating gaps in financial regulation and creating an authority to handle failed financial institutions.

"The entire regulatory system has to be changed in fundamental ways to protect consumers," he says.



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