Small Banks Look to Government for Protection Against Banking Competition

November 13, 2017         By: Steven Anderson

Mobile banking is an option increasingly available from a variety of sources. It’s not just banks, either, that are getting in on this; we’re seeing tech firms like Amazon and major retailers like Walmart set to offer financial services as one more option alongside used DVDs and snow tires. That’s a development that small banks would most certainly rather not take place, and said banks are increasingly turning to regulators and lawmakers to make sure such a thing can’t happen.

Right now, several regulations are providing an insulating layer against the advances of firms with more capital behind them than these banks could dream of. With a new acting Comptroller of the Currency in Keith Noreika, however, may come some changes the small banks out there find gravely unpleasant. Noreika has been heard suggesting that the laws currently protecting small banks are potentially in need of at least review, and from there, change.

The biggest such law protecting small banks right now is the Bank Holding Companies Act, which prevents commercial activity and banking operations from intermingling. This was originally set in place after fears that banks might well use customer deposits as a ready source of capital to engage in non-banking business, business that could result in customer deposits being lost outright.

Options exist for tech firms, like offering financial services and industrial loans just short of the full run of banking services. There are also those who believe that Amazon, Walmart et al can be welcome in the banking pool, so long as they play by the same rules, committing portions of their capital to protecting depositors.

While it’s dismaying to see small banks run to the government like a small, frightened child runs to duck behind Mommy’s shins at the first sign of trouble, there is a certain point here. Larger operations like Walmart and Amazon have massive amounts of capital. For a while, Walmart even came under fire amid allegations it was absorbing losses until smaller businesses were run out of town, leaving only Walmart.

It would be better to see small banks innovate and offer new benefits to customers such that Walmart and Amazon offerings just weren’t used. Given the disparities in available capital, such a move might not end well.