How Democrats became captured by the myth of the wholesome “community bank”

The mostly symbolic deadline for Congress to codify the Deferred Action for Childhood Arrivals program into law passed Monday. And, once again, Congress has delayed action on America’s epidemic of gun violence.

However, Republicans and Democrats have found time to work together on one piece of legislation, which seeks to deregulate Wall Street and undo several key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed in the aftermath of the 2008 financial crisis.

For years, Republicans have made rolling back Dodd-Frank a major legislative priority. Now, Democrats suddenly seem willing to turn back the clock on Wall Street regulations, too. The main reason? An apparent fixation on the idea of community banks.

The Economic Growth, Regulatory Relief and Consumer Protection Act introduced by Senate Banking Committee chair Mike Crapo (R-Idaho) includes a number of provisions that would exempt large swaths of the banking industry from oversight around lending practices. At its core, the bill is designed to make sure that regulations to prevent banks from plunging the country into another financial crisis apply only to the largest lending institutions, like Bank of America and J.P. Morgan Chase.

As it currently stands, the bill would make it so that only banks with more than $250 billion in assets would be subject to the most stringent oversight that’s typically reserved for banks considered “systematically important” to the financial industry, according to Vox. That would exempt major banks like SunTrust, Key Bank and American Express from oversight concerning their potential risks to the financial sector. Banks with less than $100 billion in assets would be “freed of current oversight requirements,” Vox reported.

In addition to its Republican backers, the bill has support from 12 Democrats, which is enough to give it a filibuster-proof majority. Its Democratic cosponsors include Sens. Mark Warner and Tim Kaine of Virginia, as well as several vulnerable 2018 incumbents, like Sens. Joe Manchin (D-W.V.) and Heidi Heitkamp (D-N.D.)

Democrats who support the bill say that while it isn’t perfect, it will provide much-needed relief to small community lenders, which they claim shouldn’t be considered in the same category as large, “too-big-to-fail” banks.

The phrase “community banks” is evocative of the kind of small mom-and-pop lenders immortalized in the collective consciousness by Jimmy Stewart’s character George Bailey in the 1946 film classic It’s a Wonderful Life. Many Democrats and progressives — even those who oppose the legislation currently being debated by Congress — have lionized the concept of community banking as an alternative to our current system, which relies on big, powerful institutions.

While the definition of what constitutes a community bank is flexible, many people tend to think of community banks as smaller regional banks that often bear the name of the state or locality of the community they serve. Some even put the term “community bank” right in their name, like the First Community Bank of Central Alabama.

According to Sen. Elizabeth Warren (D-Mass.) a vocal opponent of the measure, discussions about the bill began three years ago as a well-intentioned attempt by Democrats to alleviate the regulatory burden on smaller community banks. But it was hijacked by Republicans seeking to broaden the scope of the bill to include many larger financial institutions, Warren said.

“All the Democrats got together on the banking committee and said, ‘What can we do to reduce regulations for small banks?’” Warren said in a Wednesday interview on MSNBC. “We sat down, a lot of people put things on the table and [we] agreed as a group, ‘We could go for all of these.’ We show them to the Republicans and they say, ‘Not unless you agree to reduce regulations on the giant banks.’”

That’s been the narrative among progressives and regulatory advocates who believe the bill has moved away from its original intention of helping smaller banks in order to serve more powerful financial interests.

Yet some experts say these so-called community banks are not as wholesome as they’re made out to be — and that the term “community bank” is at best misleading, and at worst an attempt to fool the broader public into supporting legislation that makes our financial system more reckless and risky.

Mehrsa Baradaran, an associate dean at the University of Georgia School of Law, has written several books on banking regulation and how poor, minority and other underserved communities interact with it.

In an interview, Baradaran said that whenever a politician uses the phrase “community banks,” it should be a red flag for advocates of consumer protections and financial stability.

“Community banks are not who we think they are,” Baradaran said. “They are very strong, very powerful. They’re doing the same kind of loans [as large banks]. The way they profit is not by doing different loans. They just do less of them.”

Baradaran noted that community banks themselves make up a powerful financial interest group, capable of its own attempts to manipulate the political system for financial gain.

“ICBA, the Independent Community of Bankers of America, is [America’s] biggest bank lobbyist,” Baradaran said, referring to the lobbying organization that represents nearly 5,700 community banks and supports the legislation. “It’s the most influential bank lobby out there. And people don’t assume that. They think they’re the underdogs. They think that they’re the little guy.”

“The more we deregulate [community banks], the more they merge. The only reason we’ve had the George Bailey community bank model for so long, and [why] it was so healthy for 70 years, is because of heavy state regulation.”

The community bank lobby has been pushing for regulatory relief in some form or another for decades. But Baradaran said community banks have historically only served their communities’ interests when they were heavily regulated.

“The more we deregulate [community banks], the more they merge,” Baradaran said. “The only reason we’ve had the [It’s a Wonderful Life] George Bailey community bank model for so long, and [why] it was so healthy for 70 years, is because of heavy state regulation. We had geographical restrictions, we had activity restrictions. You couldn’t merge. You couldn’t be[come] Bank of America. And all of a sudden, we deregulated and that was the death of community banks. They just ate each other alive.”

In her 2015 book, How the Other Half Banks, Baradaran chronicled how time and again throughout U.S. history, different sectors of community banking — from savings and loan companies to credit unions — have emerged as altruistic attempts to fix the gaps in our nation’s credit system for underserved communities. However, in every instance, those institutions were eventually able to use the outsized political power that came with such mandates to push for deregulation, defraud their customers and wreak havoc on the nation’s financial system.

For example, the savings and loan crisis of the late 1980s occurred after lawmakers in Washington lifted regulations on an industry that had historically served to provide loans to working-class borrowers who couldn’t get credit elsewhere.

“Not only is the community banking rhetoric so cynical and evasive, but it also seems to me like there’s a collective amnesia about what caused the [2008] crisis in the first place,” Baradaran said. “It was the midsize banks. GMAC [the financial arm of General Motors that was bailed out by the federal government amid the 2008 crisis] and all these other banks that failed were not massive banks. So the idea that smaller or midsize banks [like those with $50 billion to $250 billion in assets] are less risky — there is no data to show that.”

Now Baradaran sees echoes of those same historical trends in the current debate over deregulating community banks. She pointed to provisions in the bill that would exempt many community banks and credit unions from having to comply with reporting requirements about the race and gender of their mortgage applicants — regulations intended to prevent discrimination in lending.

This myth of the “wholesome community bank” doesn’t just loom over Democrats in Congress. Many progressive activists have come to see community banks and local credit unions as saviors against the excesses of large financial institutions. In 2011, Occupy Wall Street protesters organized a day of action for people to pull their money from large corporate banks and move it into credit unions and other community institutions.

“I hear people on the left, too. Every time I go somewhere talking about the financially disenfranchised, progressives and leftists and Libertarians are saying, ‘Well, community banks, community banks,’” Baradaran said. “Well, I think the image that we have of community banks and the reality of the strong community bank lobbies just doesn’t match up.”

While Baradaran disagrees with financial reform advocates’ focus on small community lending institutions, she backs their goal of creating a safer banking system reduces reliance on “too-big-to-fail” banks. The best solutions are those that think bigger, not smaller, Baradaran said, pointing to proposals that create national, federally run and regulated banks through institutions like the U.S. Postal Service to help provide financial services to underserved communities.

Financial reform advocates like Warren have already toyed with the idea of creating a postal banking system — in other words, using post offices around the country to provide basic, publicly backed banking services to communities who need them. But to build broad public support for those kinds of programs, those reformers will first have to give up on the idea that the George Baileys of the world can save us from financial catastrophe.