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.



) -- 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) - Get Report


Merrill Lynch

soon after it purchased


, while

JPMorgan Chase

(JPM) - Get Report


Washington Mutual

, and

Wells Fargo

(WFC) - Get Report

took on


. Clearly, what was considered "large" in the 90s is now dwarfed by these whales.

In 1999, with the repeal of the Glass-Steagall Act, the megabanks were able to cross the investment banking line, which had been forbidden to them since the 1930s. And, from that time forward, their capital ratios fell, because the natural inclination of an investment banker is to use leverage.

Shadow Banks

These megabanks, even when they were merely "large," were never community and small-business lenders. Instead, in the 80s and 90s, and up to the financial meltdown of '08, these institutions set up lines of credit lending to the "shadow" banking system.

By doing so, they were able to avoid the overhead and expense of managing large portfolios of small loans. The "shadow" banks were largely unregulated, and they became the lenders to consumers and small businesses, and consisted mainly of mortgage companies and consumer lenders. Many of these "shadow" banks got crushed in the financial meltdown and no longer exist.


Besides the "shadow" banks, community banks have traditionally been community and small-business lenders. And, in contrast to the megabanks, community banks have historically had higher capital ratios. But, like the megabanks, community institutions were hit hard by the financial meltdown.

In 2008 and 2009, the government rolled out the Troubled Asset Relief Program, or TARP. It was supposed to save the financial system, but what it saved was the Wall Street megabanks, as the lion's share of TARP funds went to America's 19 largest institutions.

In an academic paper titled "TARP Investments: Financials and Politics" (June 27, 2010), authors Duchin and Sosyura (University of Michigan) found that the 714 TARP investments favored larger banks, and that political activism was a large contributing factor in determining whether a small bank would receive TARP funding.

Access to Capital

By the end of the financial crisis, the megabanks were able to access the capital markets to pay back their TARP loans and to beef up their capital bases in order to weather the coming onslaught of souring loans. They were able to access the capital markets because the market participants knew that these banks were "Too Big To Fail."


Federal Reserve

has extended huge volumes of liquidity and created unprecedented levels of excess reserves through its QE1 and QE2 quantitative easing programs. Most of this excess had ended up on the balance sheets of the megabanks.

Until this past March, however, commercial and industrial loans continued to shrink. From their peak in October 2008 to their trough in October 2010, such loans contracted by 24.75%.

From last October through March, they have turned up slightly, and I note that the unemployment rate began responding in December. Rather than lend, the megabanks used their reserves to purchase new debt issued by the Treasury. For the three years ending in February, government securities on bank balance sheets have increased by 50% or $545 billion.

Unlike the megabanks, community banks have no such access to capital.

Like the megabanks, community banks suffered loan quality issues, and many of these institutions now have "impaired" capital. That means that their capital levels are below regulatory standards.

Many community institutions are under regulatory orders, and, in almost every case, those orders require additional capital. Until they raise such capital, their capital ratios do not permit them to lend new funds.

Furthermore, the regulators are generally heavy handed, and the capital that may be available is hesitant to enter for fear (borne out by many anecdotes) that the regulators will not quickly release the institution from its regulatory shackles. (Ask any community bank CEO with a regulatory order, "Who runs the bank?" He or she will tell you, "the regulators.")

Conclusion: No Lending, No Jobs

In the end, the capital markets are largely unavailable to community banks, and the regulatory process has displayed a complete lack of sensitivity to which institutions actually lend to small businesses, America's job creators.

What is said in Washington and what is practiced in the field are two completely different things. As a result, the Wall Street megabanks get bigger and fatter, and have used the reserves created by the Fed not for new loans, but to purchase newly created government debt.

The community banks, the only remaining lenders to America's small businesses are without access to capital. Under the thumbs of their regulators, they continue to disappear, and those that have survived are generally not able to lend or simply are too small to make a material difference.

The end result: Washington is happy (someone is buying the government's debt); Wall Street is happy (free money and wide spreads); but America still has no jobs.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.