George Bailey’s Bank Is Dead! Long Live George Bailey’s Bank!

Small community banks trying to serve average people have a profit problem

To save small banks we'll need new heroes fighting for the average American.

To save small banks we’ll need new heroes fighting for the average American. Wikimedia Commons

Television networks will soon start re-running Frank Capra’s classic It’s a Wonderful Life. Like millions of Americans I will watch the beloved movie again with my family, get choked up as George Bailey realizes that he has to give up his dreams to run the Building and Loan, and then grab the tissues when the town pulls through for Bailey as he did for them.

George Bailey is America’s favorite banker. He isn’t worried about profits, but is in it to help the people of his town and, eventually, he’ll beat the greedy Potter because of his goodness and loyalty to his principles (and, of course, the help of an angel). Bailey is also distinctly American, the embodiment of a strong strain of populism that deems banking as a war where small is good and big is bad. Unfortunately, in the world of banking, Bailey’s Building and Loan is as mythical as Santa and the elves.

If George Bailey’s Building and Loan was a real American bank, it surely would have merged with Potter’s bank by the 1980s, shifted toward a high-net-worth customer base just so it could stay alive, and, within the last decade, the Potter-Bailey bank would have been sucked into Bank of America by choice or by force.

It’s not because bankers are all greedy Potter-type villains, although they do have to make money; small community banks trying to serve average people have a profit problem.

Since 1980, the number of small community banks has shrunk by two-thirds, largely decimated by the financial crisis. Now, the type of bank George Bailey once ran are almost non-existent. The loss of these banks has been felt mostly by low-income and rural communities: Since 2008, 93 percent of bank closures have been in low-to moderate-income areas. There were virtually no payday lenders in the 1980s, but as community banks shutter, payday lenders and check cashers have moved in to fill the void. Today, fringe lending is a multi-billion dollar industry with more branches than McDonalds and Starbucks combined.

This change wasn’t inevitable. The only reason thrifts and community banks worked so well during the era of George Bailey is because of strict regulation. The federal government prohibited banks from merging with other banks or operating branches across state lines. If you lived in Bedford Falls, your only options were Bailey’s Bank or Potter’s Bank. You could not have an account at Bank of America. And so banks failed or they thrived, but they didn’t merge and become too big to fail.

Once banks were deregulated, huge behemoth banks began to form and small community banks just couldn’t compete. It’s not because bankers are all greedy Potter-type villains, although they do have to make money; small community banks trying to serve average people have a profit problem. Taking small deposits and lending small loans is just not as profitable as the trading, investing and deal-making the big banks now engage in.

But if regulation was what made community banking sustainable in the first place, you wouldn’t know it by the way the financial industry has been framing their fight to repeal Dodd-Frank. Though there is no evidence whatsoever that Dodd Frank is responsible for the decline of community banks, the financial industry keeps hiding behind community banks and claiming that they’re actually fighting to protect them. For example, the Financial CHOICE Act pending before Congress, which House Financial Services Committee Chairman Jeb Hensarling sponsored, seeks to exempt banks under $50 billion in assets from being stress-tested. The reason, bakers of the bill claim, is to help community banks. The ruse is that a bank with $40 billion in assets is not a community bank, which holds more modest assets. In fact, 95 percent of the nation’s actual community banks are already exempt from the stress test.

The financial industry is also crying foul against the Consumer Financial Protection Bureau, arguing it too is destroying community banks. Never mind that CFPB rules only apply to banks with over $10 billion in assets.

The other option is to recognize that George Bailey is a fictional hero from a bygone era, and to meet the needs of low-income earners we will need new heroes.

If we’re serious about saving community banks, we must break up the bank behemoths that gobbled them up in the first place. And we have to stop believing the financial lobby PR that relaxing legislation actually helps community banks. Helping community banks, unfortunately, means reducing competition. I suspect that Congress will not be able to do that so long as financial institutions have such a loud voice there.

The other option is to recognize that George Bailey is a fictional hero from a bygone era, and to meet the needs of low-income earners we will need new heroes. One way to do it that would bring banking services back to rural areas is to allow the United States Post Office, which could use new sources of revenues, to provide simple banking services. There are several other ways we can meet the need of average Americans who have been left out of the financial sector, but we first have to put aside the fiction of the rebirth of Bailey’s bank and recognize the world we’re actually in.

But let’s not stop watching It’s a Wonderful Life because the fight between the town’s citizens and Potter is real. It’s just that Potter has a lot more power now. As George Bailey points out to his adversary, the working class and poor “do most of the working and paying and living and dying in this community.”

Mehrsa Baradaran is Associate Professor at the University of Georgia School of Law and author of How the Other Half Banks (Harvard University Press).

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