The federal response to the ongoing banking crisis could have a big impact on the nation’s smallest banks, which bear no responsibility for the turmoil. Community banks have an outsized impact on local economies, so hamstringing them with new costs could have broad consequences.

Community banks are typically financially well-positioned, carrying more short-maturity, local loans than their bigger counterparts, which have often loaded up on Treasuries and mortgage-backed securities that have declined in value due to aggressive Federal Reserve rate hikes.

Yet community banks’ loan-making ability could be threatened by their depositors transferring tens of billions of dollars to large institutions in a perceived flight to safety. Bank of America alone received $15 billion in new deposits in the days following the collapse of Silicon Valley Bank (SVB) and Signature Bank.

Community banks may also have to pay a Federal Deposit Insurance Corp. “special assessment” imposed on all banks to fund the federal bailout of the two insolvent banks even though the community banks played no role in the failures. New regulations and fees coming out of this crisis would disproportionately hurt small banks compared to their large competitors, which can afford to treat them as a line-item cost. According to Goldman Sachs, small banks are likely to reduce lending by 15% to 40% in the wake of this crisis.

Some commentators and policymakers have responded to these hurdles facing community banks. Entrepreneur and “Shark Tank” investor Kevin O’Leary said recently, “The truth is, we don’t need regional banks.” Investor Bob Doll echoed this sentiment on Fox News, pointing out how America has far more banks than Japan or Canada, where banks are little more than government-regulated utilities.

These shortsighted perspectives ignore small banks’ big role in the U.S. economy. They make local loans based on relationships, not algorithms. They offer personal service, not automated phone trees. They keep money within communities, often purchasing local bonds and funding local projects rather than sending deposits to New York or San Francisco.

Community banks provide roughly 60% of all small business loans and more than 80% of farm loans, but they are already struggling from an increased regulatory environment. Between 2000 and 2021, the number of banks nationwide fell from 8,315 to 4,236.

Some banks have simply chosen to close, deciding that continuing to serve their communities is not worth the regulatory burden that has little to do with banking safety in their regions.  For many community banks, more regulation and fees could be the final straw.

To ensure small banks can continue providing loan services for their communities, policymakers should exempt them from new fees and regulations coming out of this crisis. Research from the Minneapolis Federal Reserve Bank finds that the costs associated with adding only two compliance employees to bank payrolls would make one-third of community banks unprofitable.

Protecting small banks from new costs, in recognition of their key role in the U.S. economy and lack of blame for this crisis, can help ensure they continue to make the loans on which small businesses and local communities depend.

This is condensed version of an article that first appeared March 28 on Foxbusiness.com and was written by Earl Wright, board chairman of AMG National Trust, and Alfredo Ortiz, president and CEO of Job Creators Network.

Read the article here: Don’t let Silicon Valley Bank’s financial catastrophe spill over to these crucial banks

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