The Federal Reserve Bank of Dallas is pressing the U.S. to emphasize local banking to get traditional lending practices restored and the nation back on proper financial footing, while repeating calls for splitting apart or containing the size of "too-big-to-fail" firms.
A multipart series from the bank advocates the idea that community banks, or those with no more than $10 billion in assets, were better off in terms of loan quality than the global banking giants during the financial crisis and that they now should be encouraged to flourish rather than be encumbered by unneeded regulations.
"Financial stability rests on a level playing field that rewards sound judgment and integrity and penalizes excessive risk and complexity financed by taxpayer dollars," Dallas Fed President Richard Fisher -- who has on more than one occasion criticized the system by which enormous financial institutions have been deemed so critical to commerce that they can't be allowed to go under -- said in prepared remarks. "Government must retain its role as the financial system's watchdog, but it should render no institution immune to market discipline."
One of the pieces in the series argues that local banks make better decisions on loans because they can truly get to know the businesses in their area. The smaller firms "tap direct knowledge of customers, going beyond the credit scores, financial statements or other quantitative assessments on which their larger competitors depend."
The series also takes aim at financial bailouts and reforms, including Dodd-Frank, saying regulations have been put in place that preserve and benefit the big banks yet make it overly difficult for smaller lenders to compete and employ the knowledge that will help their operations and their customers.
Another piece proposes that protections such as account insurance coverage and banks' access to Federal Reserve loans should apply only to financial practices that are necessary for commercial banks. In theory, the Dallas Fed says, limiting the available safety measures would lead to fixes driven by the marketplace, punishing banks if they take too much risk or become too complicated. However, this market-based approach might not happen quickly enough, meaning legislative action could be needed in some areas, such as limiting how large banks can get, the series says.
While the issue of immensity has come up repeatedly since the collapse of financials like Lehman Brothers started the banking panic in the fall of 2008, neither lawmakers nor bankers have shown an overwhelming interest in mandating a ceiling. That needs to change, the series says.