No bank should be too big to fail

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The biggest maker or breaker of business in rural America is not Washington rulemakers, state environmental agencies or local taxing bodies. Instead, it’s usually the local bank. A bank’s collective fairness and wisdom can be seen from Main Street to surrounding farms.

Not so with the money center and Wall Street banks. Citibank, Bank of America and the 17 other financial giants the U.S. Treasury Department has deemed “too big to fail” are more casinos than banks.

They use your money to roll their dice in risky games no one fully understands and only few can ever win.

Golly, they don’t even call themselves banks; they’re “financial service providers.”

Given how Will Rogers famously explained the service industry (“Service is what the bull did to the heifer behind the barn.”) little wonder you and I got stuck holding their empty bag.

Going broke

Other American banks, however, are going broke. So far this year, the Federal Deposit Insurance Corporation (FDIC) has closed 29 banks. Most were immediately sold to nearby institutions to instill confidence and ensure continuity. A handful were small, rural banks like Sherman County Bank in Loup City, Neb., and Corn Belt Bank of Pittsfield, Ill.

“I call these banks ‘too small to save,'” says Mark Scanlan, vice president of ag and rural policy at the Washington-based Independent Community Bankers of America. “They competed, and 8,400 other community banks still compete, everyday with the big banks and none asked for help.”

Why? Because no bank should be too big to fail, Scanlan suggests.

“If they’re too big to fail then they’re simply too big,” he notes. “Right now, eight banks control 64 percent of all U.S. deposits. No bank should be so big that it can threaten the entire banking system. The large institutions should be broken up.”

His counterpart at the American Banking Association’s Center for Agricultural and Rural Banking, John Blanchfield, concurs. “The concept of too big to fail is unequal and unfair and is proving too costly to taxpayers as well as banks,” he says.

Special assessment

In fact, if you’re a bank that is making money — and most rural and ag banks fall into that category, say both — the FDIC plans to issue a special assessment on banks (20 basis points for every dollar on deposit) to finance others’ losses.

There’s a better, more equitable plan, explains Blanchfield: a special, 10-basis point assessment and have Congress expand FDIC’s current borrowing authority from $30 billion to $100 billion.

“That would be much fairer for community and rural banks and, at the same time, not threaten their futures by having to pay for others’ past mistakes,” he says.

Also, he adds, another helpful tool Congress could give rural banks would make permanent today’s temporary, higher deposit insurance guarantee.

Deposit guarantee

As part of the overall bank bailout plan, FDIC raised its deposit guarantee from $100,000 per account to $250,000. That boost, however, expires Dec. 31.

“It’s very important to all banks, and especially to rural and ag banks, to have that $250,000 guarantee made permanent,” he advises, “because, first, the increase has boosted bank liquidity; it’s made them more safe. That safety has attracted more deposits.”

In turn, Blanchfield explains, more liquidity means more equity and more equity means more loans. “And more local loans mean more local business for the community. Everyone’s a winner.”

It’s a return to good, straightforward banking policy, says Scanlan, after a decade where “a lot of bad policy led to a lot of bad banking.”

Equally simple

Tomorrow’s policy should be equally simple: No one is too big to fail. Some, however, will always be too greedy or too stupid to succeed.

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Alan Guebert was raised on an 800-acre, 100-cow southern Illinois dairy farm. After graduation from the University of Illinois in 1980, he served as a writer and editor at Professional Farmers of America, Successful Farming magazine and Farm Journal magazine. His syndicated agricultural column, The Farm and Food File, began in June, 1993, and now appears weekly in more than 70 publications throughout the U.S. and Canada. He and spouse Catherine, a social worker, have two adult children. farmandfoodfile.com

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