On June 29, 2010, Sarah Wallace, chair of the board of directors of First Federal Savings and Loan Association in Newark, Ohio, authored a passionate opinion piece in the Wall Street Journal titled “The End of Community Banking.” While I agree with many of Ms. Wallace’s points, I do NOT see the end of community banking in the foreseeable future.
I do think that we are going to see tighter regulations and tighter credit than we saw in the five years before the financial meltdown – 2002 through 2007. Those five years were the culmination of a world wide expansion of credit and leverage that began in the US around 1980, so we really had a great run. Nonetheless, by 2002, a good number of observers would argue that credit availability was running somewhat out of control.
As Mrs. Wallace suggests, we will have tighter rules, but they will by nowhere near as tight as those that prevailed until the late 1980’s or early 1990’s. During my career beginning in the late 1960’s, we have done away with limits on interest paid on deposits, most commercial usury limits, limits on branching and cross state expansion, certain caps on real estate lending, and we have expanded the lending limit in many cases from 10% of capital to 25%. Most of these changes will not be reversed, and credit will continue to be available for borrowers who can demonstrate an ability to repay the loan. However, I do not see banks going to the credit excesses of the 2002-2007 period, and there will be people who might have gotten loans then who will not be able to get loans in 2011… and that is probably not all bad.