Black Banks and the Bailout

Some worry more regulation may increase costs, competition

moneygreen3Now that Congress has passed the $700 billion Emergency Economic Stabilization Act of 2008, the question remains whether black-owned banks will find it easier to operate. Even the largest African American banks are relatively small, with many being community banks.

For transforming the original failed bailout plan into a winner for community banks, higher Federal Deposit Insurance Corp. insurance is a key change, says Steve Verdier, senior vice president and director of congressional affairs with the Independent Community Bankers of America (ICBA), a Washington, D.C.-based trade group.

While insurance for retirement accounts stays fixed at $250,000, coverage for all other accounts increases from $100,000 to $250,000.

“That’s something we have been asking for for years,” says George G. Andrews, president and CEO of Atlanta, Georgia-based Capitol City Bank & Trust Co. (No. 10 on the B.E. Banks list with $272.3 million in assets). This change is a plus for banks’ consumer and especially, business accounts. “It will be helpful in our efforts to bring in additional deposits,” says Paul C. Hudson, chairman and CEO of Los Angeles, CA-based Broadway Financial Corp. (No. 4 on the B.E. Banks list with $356.8 million in assets).

But bailout benefits come with caveats. The likelihood of increased governmental involvement and new regulations worries Michael Pierce, chairman and interim president of Mobile, Alabama-based Commonwealth National Bank (No. 25 on the B.E. Banks list with $66.2 million in assets). “It may make it very difficult for small community banks to continue to operate because of the sheer cost associated with coming into compliance with the increased regulation,” Pierce says. More specialist staff may need to be hired.

Community banks will face increased competition, with investment banks now able to become holding companies and start other banks, Pierce says. Broadway’s Hudson, however, predicts less competition, with fewer big- and mid-sized players. He says big banks are not right for everybody and that big banks’ safety reputation has been tarnished. “That will benefit smaller banks,” Hudson says.

Hudson says the bailout was somewhat misdirected. “The biggest risk to our financial system right now is less the financial structure than the consumer’s confidence in the financial system. Whatever is done has to be done in a way that builds consumer confidence,” Hudson says.

Capitol City’s Andrews, however, says what’s needed is to put together a plan that would stabilize the financial market for years to come. “We need a complete overhaul, not a Band-Aid. And what I’m seeing now is a Band-Aid approach.”

Other rescue package provisions favorable to community banks:

- The Securities and Exchange Commission is empowered to suspend mark to market accounting rules that record assets’ value at current selling prices.

- A nondiscrimination clause enables any bank of any size to participate in the loan buyback program. “It’s one thing to have favorable language included in the legislation, but it’s going to be up to the ICBA and others who represent community banks to make sure that the implementation follows the legislation,” ICBA’s

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