Since the government rescue of major Wall Street firms during the 2008 financial crisis, the Independent Community Bankers of America has been one of the loudest critics of ‘too big to fail,’ arguing that the big banks have enjoyed a competitive advantage over smaller banks. Morning Consult’s Timothy R. Homan sat down last week with ICBA’s president and chief executive officer, Camden R. Fine, to gauge the impact of the long-awaited Government Accountability Office report on the funding costs and advantages for banks based on their size. Fine also discussed what a Republican-led Congress might mean for small banks and what he thinks Wall Street should watch out for. This interview has been edited and condensed.

Morning Consult: What’s going to be the immediate impact of the GAO report?

Camden R. Fine: We’re already seeing the immediate impact. We’re having hearings held at the very highest policy levels, in the Senate Banking Committee, on the GAO report and its impact on the competitive marketplace. This report will eventually bear fruit and lead to some form of congressional action to level the playing field to more balance the competitive landscape within the financial services industry.

MC: What would Congress need to do to make that happen?

CF: There are already several bills, actually, in both the House and the Senate that approach the ‘too big to fail’ subsidy in different ways. There’s, of course, the Brown-Vitter bill, which ICBA publicly endorses. We think that would go a long way toward leveling the playing field. There’s a bill in the House of Representatives, H.R. 2266, called the subsidy reserve. That bill would force the ‘too big to fail’ banks, the mega banks, to recognize their market subsidy by calculating what that subsidy is and then setting aside a reserve. They would be in a way penalized for enjoying a market subsidy, which would have the impact of then leveling the competitive landscape between small banks and mega banks.

MC: What impact, if any, do you see the GAO report having on Dodd-Frank rulemaking?

CF: The Dodd-Frank rulemaking is sort of baked in the cake already. I think it may influence the regulatory agencies’ actions with regard to how they interpret some of the Dodd-Frank current regulations and regulations yet to be promulgated. Obviously, that’s outside of the congressional scope; that’s within the agencies themselves. So, while Dodd-Frank statutes are already on the books, not all of those regulations relating to Titles I and II of Dodd-Frank have been written. In that way I do think the GAO report could influence regulations yet to be written.

MC: Should community banks be compensated for any period during which they may have been at a disadvantage in the marketplace?

CF: Community banks could best be compensated by ending ‘too big to fail’ as soon as possible. In other words, we’re not operating in a truly free-market system. You have participants in this market who are subsidized to the disadvantage of other participants in the same market. To the extent that that exists, whether it’s a great disparity or a small disparity, is immaterial. There is an imbalance in the competitive market – that’s the bottom line. That should be corrected as soon as it possibly can be corrected. That would be the best compensation for community banks. When the other side has the referees in the ballgame in their favor, you’re not competing equally.

MC: Some of the trade associations for bigger banks have argued that the funding advantage they receive in the marketplace is no different than other industries, where larger companies enjoy favorable conditions in the marketplace. How do you respond to that?

CF: Banking is unique in that we’re not making widgets and we’re not making inventory parts. Money is fungible. Money never spoils. So when you’re dealing with finances and money, that is a unique commodity. Whether you’re large or small should be immaterial to the competition within that financial marketplace. It isn’t like I’m selling a million widgets and somebody else is selling 10,000 widgets. They spoil; they go out of favor; they’re seasonal. There is no seasonality to financial services. It never spoils. The inventory is the inventory. Therefore, everyone should compete equally and the competition should be among how well they execute their services, not on whether somebody has $2 trillion and somebody has $100 million within our industry.

MC: Is it a subsidy or is it a funding advantage? You use the term “market subsidy.” Could you explain that term and why you use it?

CF: Shakespeare said a rose by any other name would smell as sweet. Well, a subsidy by any other name is a subsidy. You can call it whatever you want to. If they’d prefer we can use the word ‘bailout.’ But I don’t think they like the word ‘bailout,’ so we use a kinder, gentler word: subsidy. Whether someone is being bailed out by the taxpayer, that’s one form of subsidy, or if somebody is able to get their funding in an open marketplace more than someone else merely because there’s the perception that the government’s going to come in and save one institution but not another. Regardless of how you cast all of that it’s still a subsidy. Because the general public, or third-party creditors or counterparties, believe that Citigroup will not be allowed to fail by the federal government, Citi then can go out and get its funding more cheaply than my little community bank because everybody knows the government’s going to let that go down if they get in trouble. That is a market subsidy. At ICBA we don’t care where the subsidy comes from. We believe that subsidies should be eliminated or at least compensated for in the form of either tiered regulation for community banks, where the regulatory load is lighter in compensation for the market advantage of the ‘too big to fail’ status.

MC: The common perception of a subsidy is that there’s an actual exchange of money. For example, if parents subsidize their child’s education, there’s an actual exchange of money. Where is the exchange of money in a market subsidy?

CF: Let’s say a community banker and I’m competing against JPMorgan Chase and they have a branch three blocks away from my bank. And let’s say it costs me on average 1 percent to attract my funding, but it only costs that JPMorgan branch 75 basis points – three quarters of a percent – to attract its funding. The only difference there is because the counterparties think that JPMorgan Chase is safer, in that the government won’t let it fail and so I will be protected regardless as a transactor of business with JPMorgan Chase, I’ll always be protected, whereas I’m a little unsure about that community bank. So there’s a quarter of a percent difference – that’s real money. That is an exchange of money because then JPMorgan Chase can price all of its lending and deposit products more cheaply than I can, which then turns into a government-subsidized marketplace in favor of JPMorgan Chase. That’s real money. A quarter of a percent of a million dollars is real money.

MC: You’ve been critical of the $50 billion threshold for designating a financial institution systemically important. Do you consider it to be a somewhat arbitrary dollar amount? If so, what should it be and what should the factors be in addition to dollar amounts for the Financial Stability Oversight Council when designating a company a systemically important financial institution (SIFI)?

CF: I think that drawing a line is too arbitrary. The $50 billion line: a) is arbitrary and b) I believe that it’s too low. If they’re going to draw a line, which I don’t really favor, but if they’re going to draw a line I think it should be much, much higher. If you’re going to just draw lines, probably in the $250 billion area would probably be more appropriate. My approach would be to look at an institution on a case-by-case basis, because I think you can have, say, $75 billion or $100 billion or even a $150 billion institution that is pretty simple and basic and straightforward in its banking services and not necessarily intertwined and interconnected, heavy overseas presence and doing a lot of market-making activities. Or you could have a $50 billion institution totally heavily entwined in market-making and interconnectedness. You have to look at that nature of the institution and what its business model is before you can determine whether it presents a systemic risk to the entire banking system. You get to a point in size where it does become absurd. Obviously, a $10 billion bank is not going to destabilize national or world markets. That’s pretty easy. But when you get into the $75 billion, $100 billion, $150 billion range then it’s not as clear whether that institution by itself could destabilize national or world markets. It would depend on what its business model is.

MC: If Republicans take back the Senate and maintain control of the House in the November midterm elections, what would a GOP-led Congress look like in terms of the regulatory landscape for community bankers?

CF: If the Republicans would happen to end up as the majority, not totally baked in the cake, but there’s a strong likelihood that Senator Shelby would become the Banking chairman. I think Shelby would be much more activist in his approach to regulatory burden in general. I think he would initiate within his committee a number of regulatory-relief bills, most of which would probably be favorable to community banks. One thing that I think should probably concern Wall Street a bit is that Shelby does have a populist streak within him. He has a long public record of having a distrust of overly large institutions, whether they be banks or commercial firms. He’s just leery of economic concentration, I would put it that way. From that standpoint, I think that would be good for community banks.

MC: This past week ICBA launched a petition calling on regulators to ease the reporting requirements for community banks for what’s known as the Call Report. What would constitute victory and how are things looking so far?

CF: I don’t think it’s going to be an easy campaign, but at the end of the day we’re going to win on this issue. Common sense demands it. For example, you have a $100 million community banking institution filling out an 80-page call report four times a year. Every 60 days they have to begin filling out the next report. Our surveys show that the typical community bank spends 274 hours dealing with filling out and preparing call reports. In an 8-hour workday, that’s 34 work days a year on just this call report – 80 pages in a $100 million bank. What’s so earth-shaking 60 days later from 60 days ago that they need 80 more pages to tell the regulators? Now in 1986, the call report was 18 pages long; today, it’s 80 pages long. Nearly every page of those additional pages has been triggered by some egregious act from some Wall Street bank. This is another example where community banks are having to pay for the sins of the mega banks.

MC: Deutsche Bank recently said it’s going to hire 500 employees to address what the Federal Reserve Bank of New York called inaccurate reporting. Do you see that development as hurting or helping your campaign?

CF: It’s a double-edged sword. Those who want to defend the complexity and the length, and the granular nature of the quarterly call report, will point to Deutsche Bank as an example of why it needs to be as detailed as it is. But there will be others who will say this is exactly why community banks need to be relieved of at least some of the regulatory burden from call reports because community banks can’t hire 500 compliance people. When I was running my community bank I wore about seven different hats: I was the chief lender; I was the chief compliance officer; I was the chief executive; I was the chief financial officer. I was sort of a jack-of-all-trades, master of none. I couldn’t afford to hire an army of people to just pore over call reports and new regulations.

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