Yesterday, the House Financial Services Committee's Subcommittee on Oversight and Investigations held a field hearing entitled “Too Big Has Failed: Learning From Midwest Banks and Credit Unions.” The hearing was held in Overland Park, Kansas on the campus of Johnson County Community College. The Committee heard testimony from the following witnesses: Panel One:

  • Thomas M. Hoenig, President and Chief Executive Officer, Federal Reserve Bank of Kansas City

Panel Two:

  • Chuck Stones, President, Kansas Bankers Association
  • David L. Herndon, President and Chief Executive Officer, First State Bank
  • J. Mariner Kemper, Chairman and Chief Executive Officer, UMB Financial Corporation
  • Jonathan M. Kemper, Chairman and Chief Executive Officer, Commerce Bank – Kansas City and Vice Chairman, Commerce Bancshares, Inc.
  • Marla Marsh, President and Chief Executive Officer, Kansas Credit Union Association
  • John Beverlin, President and Chief Executive Officer, Mainstreet Credit Union

Mr. Hoenig, the only speaker on panel one, began the hearing by emphasizing the continued viability of the community bank model, commenting that community banks will continue to survive and thrive so long as they “are not put at a competitive disadvantage by policies which favor and subsidize the largest financial institutions.” Mr. Hoenig stressed the pervasive nature of so-called community banks, pointing out that and all but 83 of the over 6,700 banks in the country would be considered community banks based on a commonly used criterion of less than $10 billion in assets. Mr. Hoenig stressed that community banks, which account for the majority of offices and deposits in nearly a third of all counties nationwide, “are essential to the prosperity of the local and regional economies across the country” and play a “particularly crucial” role in rural areas and smaller cities in the Midwest. Mr. Hoenig also pointing out that the most significant threat to the continued prosperity of community banks comes from the community banking model being placed at a competitive disadvantage to larger banks. By way of illustration, Mr. Hoenig pointed out that because the largest banks are perceived as being “too big to fail,” they have had the advantage of operating with much higher levels of leverage and a consistently lower cost of capital and debt.

Mr. Stones began the panel two discussion, and focused on the increasing regulatory burden being placed upon smaller community banks. Mr. Stones pointed out that for the typical small bank, “more than one out of every four dollars of operating expense goes to pay the costs of government regulation.” According to Mr. Stones, the recent Dodd-Frank Act, which includes the creation of a new Consumer Financial Protection Bureau and significant changes to Truth in Lending, RESPA and Regulation E, will place significant pressure on the earnings of banks, particularly small community banks such as those found throughout Kansas and the Midwest. Mr. Stones argued that the costs associated with new regulations will inevitably drive smaller banks to consolidate, curtail the services they offer to consumers or close. Mr. Stones questioned who “will fill the void in small town Kansas if the current local bank decides it can no longer make a fair profit, and closes?” and called for “Washington to realize that traditional banks have economic value in this country.”

Mr. Herndon stressed that while larger banks across the country struggled during the recent financial crisis, many smaller community-based banks in Kansas and other Midwestern states have positioned themselves to remain profitable cornerstones of their respective communities. Mr. Herndon commented that, despite their continued success, the owners and management of many small to medium-sized banks in the Midwest “feel they are needlessly under attack” and that they are “being punished for actions for which they never took.” He argued that his bank and many others like it throughout the Midwest “never participated in sub-prime lending activities” or relaxed their lending principles, even “when it was in vogue to do so.” Mr. Herndon echoed the sentiments of Mr. Stones, arguing that “the profits of small and medium-sized banks are being attacked,” and that “recent legislative and regulatory actions have dramatically decreased income and increased operating expenses.” Mr. Herndon expressed concern that the newly passed financial reform legislation will drive many small and medium-sized banks out of business. Speaking with regards to the 26 people his bank currently employs, Mr. Herndon stated that “the recently passed Financial Reform legislation will create nearly 250 new regulations for these 26 people to read, comprehend, implement and then try to explain to clients.”

Mr. Kemper, who focused the majority of his comments on UMB Financial Corporation’s perspective on the financial crisis, stated the United States is entering a “new financial era” which, for banks and other financial institutions, will be characterized by what he referred to as the “new normal.” According to Mr. Kemper, two characteristics of the “new normal” already in place and impacting the economy and the lending environment are the “hangover from a period of financial excess and the ensuing crisis” and the “increase in regulatory involvement with banks and other financial institutions.” Mr. Kemper also reiterated the concern mentioned by other panel members that many smaller banks, like those in the Midwest, will likely “have a difficult time dealing with” the proliferation of new regulations affecting the banking industry.

Ms. Marsh offered an account of the impact of the recent recession on the economy of Kansas as a whole and on Kansas credit unions in particular and the “lessons to be learned from Kansas credit unions.” According to Ms. Marsh, “Kansas credit unions are faring well compared to their peers in the financial services industry nationwide and particularly their peers on Wall Street” due to “time tested, prudent business practices that have served Kansas consumers well through many adverse situations.” Ms. Marsh stated that the primary point to be taken from the relative success of Kansas credit unions is that “relationships matter.” Ms. Marsh pointed out that the biggest difference between the Wall Street business model and the credit union business model is “the member ownership component.” Ms. Marsh argued that “[e]very decision made at a credit union is driven by the focus on bettering the members and the financial institution they co-own, while a for-profit entity’s primary focus is on driving the bottom-line return back to their owners, whether that is one individual or family or a large and diverse group of stockholders.”

Mr. Beverlin was the final speaker at the hearing. Like a number of the other panelists, Mr. Beverlin expressed concerns over “legislative and regulatory burdens.” In particular, he noted that his credit union has had to deal with legislated changes to its credit card portfolio, has spent nearly $50,000 educating its members due to the imposed regulatory change regarding fees on over draft protection (despite not having been an abuser of such fees), and will face additional lost revenue due to the recent amendment on debit/credit card interchange.