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AFF Sentinel-Vol 20#12-A New Fight -- Over Banks

Big Is Good For Some Things, Small Is Crucial for Others

Steve Dittmer | AFF Sentinel

Colorado Springs, CO

Originally sent to subscribers 03/19/23

Taking up where we left off last time about regulations, in all the commentary about the banking problems of a couple banks, someone actually made the astute observation that it is the bigger banks that can deal with all the regulations the government puts on banks, just like other businesses. The smaller banks, for example, have had a harder time dealing with all the compliance issues coming from the Dodd-Frank law. They cannot have an entire compliance department or maybe even a compliance officer and still make some profit for the shareholders.

Then there is the issue of distraction from the primary job of banks -- to safeguard the funds of their depositors and grow equity for the bank’s shareholders. Economist Steve Moore pointed out that corporations, bankers and regulators have all been spending large chunks of time dealing with ESG (environment, social and governance) issues and images and “taking their eye off the ball,” when it comes to their primary, proper responsibilities.

He also pointed out that both Democrats and Republicans have expressed support for a bill to direct financial institutions to get their head screwed back on straight.

Rep. Andy Barr (R-KY) and Rep. Rick Allen (R-GA) introduced the Ensuring Sound Guidance (ESG) Act (HR 7151) to protect retail investors’ retirement and investment accounts from asset managers who put environmental and social goals ahead of returns. This legislation would require investment advisors and ERISA retirement plan sponsors to prioritize financial returns over non-pecuniary factors when making investment decisions on behalf of their clients.

The ESG Act is intended to protect investors from their returns being diminished because of politically motivated asset managers who prioritize environmental or social goals instead of returns.

“Asset managers should be in the business of maximizing returns for investors, not pushing their own political agenda at the expense of every day Americans. Our bill protects average Americans saving and building wealth through retirement plans. It also preserves access to capital for energy producers to ensure costs won’t skyrocket further for Americans at the pump during a time when gas prices are at a historic high,” Barr said. He is a senior member on the House Financial Services Committee.

“Americans trust their financial advisors to invest their hard-earned money in a way that maximizes returns, but more and more of the ‘woke’ left are forcing their climate agenda on middle-class families by pushing clients to invest in green funds or other politically charged goals,” Allen said. The ESG bill has 25 co-sponsors, all Republicans.

For example, the Silicon Valley Bank that put great emphasis on being woke and lending to dubious nascent companies involved in climate change and racial justice causes didn’t even have a risk management officer. Signature Bank of New York spent $3 million making a commercial of their staff parading around their offices singing about how woke and devoted to social justice they were.

Well known financier Kevin O’Leary (“Shark Tank”) has been interviewed a lot about the banking situation. He has been free with his opinion that the country doesn’t need regional or community banks anymore. Most of today’s banking is done online now and where the bank is located is not nearly as important as how good its management is. He made mention that agriculture might be important in North or South Dakota but that’s it. He claims 93 percent of banking transactions are online.

That may be true but those things are subsequent to companies -- including farmers and ranchers -- building a banking relationship before that.

Our first reaction to O’Leary’s comments was dismay that he thought specialized industries like cattle feeding or farming or oil and gas development could easily do business with some city loan officer that knew nothing about working on the ground on a daily basis.

On the other hand, O’Leary was very complimentary of North Dakota. It seems North Dakota has a state-run banking system, not beholden to federal banking regulations and successful in serving the state’s businesses and residents since 1919. He mentioned a thriving vaccine manufacturing industry there and Microsoft’s second biggest campus.

We’re sure some feeders and ranchers of scale deal with banks that may have correspondent relationships with money center banks, directly with money center banks or deal with specialized regional or farm credit banks. But many smaller feeders, ranchers and farming operations need regional and community banks that understand their business, their management skills, their character and the local community.

But some other folks with knowledge of the banking system wrote a column for the Wall Street Journal that aptly addressed that question.

It shouldn’t be necessary to do so, but the authors reminded everyone that small businesses are the growth engine for the American economy, providing new jobs and innovation.

According to the Independent Community Banks of America, community banks make 60 percent of all small business loans and more than 80 percent of farm loans, noted Kevin R. Greene and John Michaelson. Greene is CEO of Tassat Group and Michaelson is on Tassat’s board and chief investment officer of Michaelson Capital.

“The core of the U.S. banking system lies in community and regional banks that have strong relationships with their clients, serve a diverse array of customers and businesses and are deeply invested in their communities,” they said (“America Needs Its Small Banks,” Wall Street Journal, 03/17/23).

Cars and homes for households and operational loans for small businesses are the local focus of the U.S. banking system.

“These core features of our economy would incur significant damage with fewer community banks that have the motivation, infrastructure and resources to prioritize these customers.”

Greene and Michaelson mark this as a turning point for policy makers. They either allow further consolidation of bigger and bigger banks or “support a more stable and robust ecosystem of small, midsize and regional banks” to serve small business and American consumers.

For text of HR 7151, click here:

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