I am fascinated by the study of the use of scare resources which have alternative uses. Further, I’m frustrated by the fact that I shrugged off Economics while I was going to college. Instead, I focused on engineering and math, physics and chemistry. In retrospect, how boring and useless ;-).
But the idea that all things have alternate uses is fascinating. And critical. Combine this with the fact that all people will pursue their individual self-interests and you will find the decisions people make to be interesting as well.
And it’s within this light that I judge and critique government policy.
I get the fact that we all want people to do the right thing. We want young kids to help the old lady across the street. We want those who can to care for those who can’t. We want people to not trick and fraud other people in order to increase their wealth.
I get that.
But what people forget is that you simply can not stand on a mountain and scream your will. And then have people listen to that will. The incentives have to be in line with those two facts above:
- Scare resources have alternative uses.
- People will pursue their individual self-interests
In this light, the reaction by banks should not be surprising:
Main Street Bank lends most of its money to small businesses and is earning decent profits. But the Kingwood, Texas, bank is about to get out of the banking business.
In an extreme example of the frustration felt by many bankers as regulators toughen their oversight of the nation’s financial institutions, Main Street’s chairman, Thomas Depping, is expected to announce Wednesday that the 27-year-old bank will surrender its banking charter and sell its four branches to a nearby bank.
Mr. Depping plans to set up a new lender that will operate beyond the reach of banking regulators—and the deposit-insurance safety net. Backed by the private investment firm of Microsoft Corp. co-founder Paul Allen, the company won’t be able to call itself a bank, but it will be able to do business the way Mr. Depping wants.
Now, to be sure, I don’t know that this will reduce the number of jobs. I don’t know if it will mean shutting down a branch. Maybe it means not opening a branch in the future. But what it DOES show is that people are willing to change their behavior in response to regulations. And in this case, that means reducing the number of banks by one.
And why is Mr. Depping doing this?
“The regulatory environment makes it very difficult to do what we do,” says Mr. Depping, who last summer saw his bank hit with an enforcement order from the Federal Deposit Insurance Corp
Is he alone? Hardly:
“The No. 1 complaint that we hear from community bankers is that they feel that regulators have gone one step too far and are choking off lending,” says Paul Merski, chief economist at the Independent Community Bankers of America, a trade group that represents small banks.
And Main Street’s experience?
In July 2010, the FDIC slapped Main Street with a 25-page order to boost its capital, strengthen its controls and bring in a new top executive. Regulators also said the bank was putting too many eggs in one basket. Mr. Depping says regulators wanted the bank to shrink its small-business lending to about 25% of the total loan portfolio, down from about 90%.
Mr. Depping says he explained to regulators that Main Street has focused on small-business lending since he bought the bank in 2004 with a group of investors. He says the bank makes credit decisions based on a combination of the borrower’s personal-credit and business-credit histories, among other factors.
Main Street also was required to increase its capital cushion and prohibited from substantially expanding its balance sheet.
FDIC officials told the bank to file financial reports that “accurately reflect the financial condition of the Bank as of the reporting date,” particularly regarding the money it set aside to cover loan losses.
The FDIC also ordered Main Street to shore up its lending guidelines so that loans are “supported by current credit information and collateral documentation, including lien searches and the perfection of security interests; have a defined and stated purpose; and have a predetermined and realistic repayment source and schedule,” according to the order.
Not for nothin’, but that sounds like a lot of stuff it has to do. And in the face of doing it or not, the bank decided not.
And I don’t think that’s what we want.