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Published onFeb 12, 2017

On February 10, 2017, the Wake Forest Journal of Business and Intellectual Property Law (“JBIPL”) hosted its Spring Symposium: Banking Law: Current and Future IssuesJBIPL’s Zack Young had the opportunity to sit down with Arthur Wilmarth, a Professor of Law at George Washington University Law School and one of the panelists on the Community Banking Panel, to discuss some of his insights on community banking and banking law in general.


JBIPL: What got you interested in community banks and banking law generally? What keeps you interested and working with a focus on it?

AW: I grew up in a small city in northwestern Pennsylvania.  When I was growing up, I became aware of the important services that our three local banks provided to the community and its business firms.  When I returned to my home town after being away for college and law school, I noticed that two local banks had disappeared after being acquired by large out-of-town banks.  As a consequence, my home town lost much of the business credit those two banks had provided. The out-of-town banks simply weren’t very interested in making loans to local entrepreneurs or in supporting local community organizations and charities. Those experiences persuaded me that community banks play vital roles in providing credit and other services to their local communities, and the survival of local banks is essential to the prosperity of small and midsized communities.

In addition, throughout my higher education and later career, I’ve studied history and politics and the influence that a nation’s financial system has on its political system. Debates over banking and politics go back to our Founders, and there have been many political disputes over the proper role and regulation of banks (two early examples are the arguments between Alexander Hamilton and Thomas Jefferson over the First Bank of the United States, and the battle between Andrew Jackson and Nicholas Biddle over the Second Bank of the United States).  As I think about those political controversies, I recall a very wise statement attributed to Mark Twain: “History doesn’t repeat itself, but it rhymes.” I think that statement holds true when we look at past financial crises that have occurred in this country and around the world.  A careful study of those crises reveals common patterns that frequently recur, yet we tend to forget the lessons of past financial crises as they recede from our collective memory, and we therefore repeat a lot of the same mistakes as we set the stage for future financial crises.  I’ve always been interested in learning from history, most recently in analyzing the global financial crisis of 2007-2009, and I try to warn my students and readers against repeating the same mistakes that led to that crisis.  My study of the banking industry has given me a great opportunity to pursue my interests on a daily basis.

 JBIPL: What value would you say community banks chiefly bring? What separates them from big banks and other competitors like fintech?

AW: As I’ve already indicated, community banks have established an impressive record of supporting the needs and interests of their communities. In the mid-1990s, I took a break from law teaching and practiced law for three years in Lancaster, Pennsylvania.  I had the opportunity to work at Barley Snyder, a mid-sized firm that represented Fulton Bank as well as many local businesses in that tight-knit community.  I was very impressed by the excellent service that Fulton Bank provided to businesses and individual customers.  Fulton Bank was a vital part of the Lancaster community, and the bank’s success and public reputation had a lot to do with the long-term relationships the bank built with its customers and its very high ethical standards.  My experiences in representing Fulton Bank further convinced me that community banks play a unique role in supporting entrepreneurship, prosperity, and a robust civic life within the communities they serve.  The leaders of community banks know their customers personally and see them on a regular basis, and they therefore have strong reputational incentives to provide effective and ethical services to their customers.

 In my view, community banks separate themselves from big banks and online fintech financial firms through their relationship-oriented approach.  Instead of pursuing an impersonal, transaction-based business model that focuses on maximizing short-term revenues and boosting short-term stock prices, community banks follow a strategy of creating long-term value for their communities, their customers, and their shareholders by providing credit and other services that support long-term economic growth in their communities.  The community bankers I have known take the relationship-building aspect of their job very seriously and, as a result, are dedicated to the long-term success of their customers and their communities.  Big banks and fintech financial firms are primarily funded by Wall Street money managers, mutual funds, and other asset managers.  As a result, the leaders of those organizations focus almost exclusively on providing short-term returns to their investors.  Big banks are also determined to take advantage of the federal safety net subsidies they receive through their “too-big-to-fail” status, which was confirmed by the government bailouts given to them during the recent financial crisis.  I am greatly concerned that current proposals for “fintech national banks” could lead to additional “too-big-to-fail” problems if giant technology companies like Amazon, Apple, Facebook, Google, and Microsoft are permitted to own such banks and use those banks to advance their business strategies.  For example, the proposed “fintech national banks” would automatically become members of the Federal Reserve System.  Would such banks and their parent companies be eligible for loans from the Federal Reserve’s discount window if they encounter serious financial problems?

 JBIPL: A lot has been said recently about the Trump Administration, and within it, about its approach to regulatory measures in place like Dodd-Frank. What is something the Trump administration should be wary about changing as it moves forward on financial regulation? What do you think is the best thing this administration could do for community banks?

 AW: Trying to weaken the Consumer Financial Protection Bureau (“CFPB”) would be a terrible idea, because the CFPB has been instrumental in protecting consumers against exploitation by providers of financial services, and the CFPB needs to keep doing its highly effective work.  As I and many others have shown, one of the major causes of the recent financial crisis was the collective failure by federal banking regulators to protect consumers from unsound subprime mortgages and other financial abuses.  Given that history, the Trump Administration and Congress would be very wise to maintain the current structure and authority of the CFPB.

 One of the best things the Trump Administration could do would be to implement a two-tiered system for regulating banks. Community banks are struggling to cope with excessive and unjustified compliance burdens, and the community banking system could be revitalized if we moved toward a two-tiered system of bank regulation.

JBIPL: You’ve written aboutthis two-tiered system and you discussed it a few times during the panel today. Can you provide a little more color on what it is and why we should think about moving toward it?

 AW: The two-tiered system I have proposed is similar to a recommendation made by FDIC Vice Chairman Thomas Hoenig.  He and I agree that the most effective approach is to regulate banks based on their functions rather than their size.  Unfortunately, community banks are now expected to comply with most of the regulations that apply to large banks, including the Basel III international capital standards.  A “one size fits all” approach to banking regulation simply doesn’t make sense in a world where big banks and community banks follow completely different business strategies.  Vice Chairman Hoenig and I propose that banks trading in the capital markets and engaging in “universal banking” activities, which sweep across the financial markets, should be regulated very differently from banks that follow a traditional, relationship-based banking business.  Traditional community-oriented banks, which focus on taking deposits, lending, and providing trust services, should be supervised in accordance with a much simpler and less burdensome regulatory model.  The most important requirement for traditional banks would be to maintain tangible common equity capital equal to at least 10% of their assets.  In contrast, the full range of Dodd-Frank regulations should be applied to complex universal banks, and I have proposed even stronger rules for those institutions, in view of the systemic risks they create.  A two-tiered “business model” approach for classifying and regulating banks would greatly reduce the unjustified regulatory burdens on traditional, community-oriented banks, and it would properly focus regulatory attention on the big, complex financial institutions that were the epicenter of the recent financial crisis.  I hope the Trump Administration and Congress will give serious attention to the two-tiered approach that Vice Chairman Hoenig and I have recommended.

JBIPL: In light of all of this, what is your sense about community banking going forward?

AW: I believe that community banks will survive and will continue to add great value if our policymakers and regulators help them to do so.  A study published in the FDIC’s Quarterly Banking Profile for the third quarter of 2016 showed that the core profitability of community banks has remained remarkably stable over the past 20 years.  Community banks have suffered from macroeconomic shocks like the recent financial crisis, but they have maintained the intrinsic profitability of their business model.  The long-term success of community banks is due in large part to the loyalty and appreciation of their customer base.  I will add that a legal practice that involves representation of community banks is exceptionally rewarding. When I had the opportunity to represent Fulton Bank and other community banks, I left work every day believing that I had made a positive difference for the customers and communities served by those banks.  Instead of focusing on how much money they could make on a single deal, my community banking clients sought to serve the long-term interests of our customers and their communities.  There’s something very satisfying in doing work like that, and I hope lawyers will continue to seek opportunities to work with community banks in the future.

JBIPL is extremely grateful to Professor Wilmarth for his time and contribution, both on the Community Banking Panel and in this interview. Professor Wilmarth added a lot of value to our Spring Symposium, and we thank him.

 Zack Young is a third year JD/MBA candidate at Wake Forest University. He has undergraduate degrees in Political Science and Philosophy from Marquette University. Zack’s goal is to practice as an investment management attorney upon graduation.

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