U.S. Policy Hurts Community Banks: Opinion

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.



NEW YORK (TheStreet) -- Job creation remains the No. 1 economic and political issue of today despite the better-than-expected April employment data.

No amount of fiscal stimulus and excess reserve creation appears to be stimulating significant job creation. And most politicians are baffled as to why.

The monetary and fiscal medicine administered may have worked within the institutional structures of the past, but those structures have radically changed.

Part of the jobs issue is right in front of our noses. Simply put, the rapid changes in U.S. financial institutions over the past 25 years have been detrimental to job creation in the U.S., because capital is no longer readily available to the entrepreneurial small business sector, widely acknowledged to be America's engine of job creation.

The Changing Financial Landscape

From 1983 to 1989, the number of new community bank charters averaged 297 a year. In the 90s and throughout much of the last decade, the average was more than 130 a year.

Since the financial meltdown, however, new charters have all but disappeared. There were 29 in 2009, and only one last year. Meanwhile, community banks have been disappearing over the past 25 years through consolidation, driven partly by over-regulation, and, lately, by outright failures. In 1984, there were 14,507 commercial banks, and nearly all were community banks. At the end of 2009, that number had fallen to 6,840.

At the same time, the big have become gigantic. The table below shows the percentage of U.S. deposits of the largest banks in 1994, and then for 2009.

Percentage of Total Bank Deposits

The 1994 Riegle-Neal law allowed banks to cross state lines to build branches or purchase other institutions without restrictions, but it put a 10% cap on deposits for any single institution. There were loopholes, one of which allowed banks to exceed the 10% limit doing so was caused by taking over a failing institution.

So, the last few years have seen a feeding frenzy for the megabanks. For example, Bank of America (BAC) absorbed Merrill Lynch soon after it purchased Countrywide, while JPMorgan Chase (JPM) acquired Washington Mutual, and Wells Fargo (WFC) took on Wachovia. Clearly, what was considered "large" in the 90s is now dwarfed by these whales.

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