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PCBB Banc Investment Daily May 21, 2014
Banc Investment Daily
May 21, 2014

Diversification To Boost Knowledge

Diversity of expertise doesn't always lead to better results. For instance, it is unlikely that you would want the gardener that tends the bank's plants to join your ALCO committee. It is also unlikely that despite certain skills in other areas, you also probably wouldn't want your high school coach to attend such meetings or a doctor in charge of the psychiatric ward of a mental hospital (although this one might help with some of the management team personality quirks, as well as interpreting byzantine regulatory rules, so we might reconsider).
Another organization that could use some diversification of experience right now urgently is the FOMC. Recent resignations and a slow Congressional process have left 4 of 7 seats vacant and the latest announcement could push the total down to only 3 members. That hasn't happened before in the Fed's history. We don't need any issues when the economy is just recovering so we sincerely hope Congress gets its act together soon.
Perhaps it is also time for the FOMC to consider filling one of those seats with a community banker in order to get that additional perspective. Certainly one could argue that the community banking share of financial industry assets is relatively small at only 14% or so, or that the work of the group is more global in nature, but we beg to differ. Given the focus on managing TBTF banks and a dual mandate of maximizing employment and controlling inflation, we would argue community banks are exactly the place to go for answers.
To back it up with some other statistics, consider that community banks provide almost 50% of loans to small businesses and farms. These businesses (with < 50 workers) employ some 48mm Americans. That is critical to our economy. Further, community banks serve different markets and especially in rural areas and smaller towns, may be the only banking option. The FDIC reports that 37% of counties in the U.S. (1,200 of 3,238) would have limited access to banking services without the presence of community banks. That is a lot of people.
The FOMC has a defined role and it also previously had two governors with retail banking experience, but the makeup today leans towards academics. This includes economists and representation from the investment banking, private equity and legal fields. Consider that the Federal Reserve Act itself even calls for governors from diverse backgrounds.
Yes, we think it is time to offer a chair to a community banker. It will help the group better understand the impact of regulation and actions on community banks (and in turn small businesses) and better balance discussions perhaps. As community bankers know firsthand, the credit crisis issues caused by the largest banks have had an untold negative impact further downstream as well as regulatory agencies have jumped in with policies that seem written without concern about what is going on in the trenches.
Large banks already have a competitive advantage in complying with regulations given huge internal legal and compliance teams community banks just cannot afford. Given that the Fed's role in banking has expanded significantly since the financial crisis, we think it only makes sense that a part of governance would include membership with experience in the vital community banking sector.