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Editorial: Nurture community banks

Thomas Hoenig director Federal Deposit Insurance Corp. has called for revising rule intended for large banks thwould end up overburdening

Thomas Hoenig, director of the Federal Deposit Insurance Corp., has called for revising a rule intended for large banks that would end up overburdening community banks. | Mark Lennihan~AP

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Updated: October 26, 2012 6:12AM

Few places in the world have a community banking system as large as the one in Illinois.

But community banks nationally are under increasing pressure, which puts at risk the way many Chicagoans like to bank. Federal officials need to do more to nurture smaller banks.

So far this year, five community banks have failed just in the Chicago area. Of all the states, only Georgia has had more.

And last week, the parent company of the Hyde Park Bank and Trust Co., while still financially solvent, threw in the towel, agreeing to sell itself to Wintrust Financial Corp.

In addition to the struggling economy, community banks face the challenge of a proposed revision in international standards designed for large banks. The rule would squeeze small banks in a way that Camden R. Fine, president and CEO of the Independent Community Bankers of America, says is “just insane.”

The proposed rule issued in June, called “Basel III” in the financial industry, would increase the amount and quality of capital banks would have to set aside. Basel III is designed to protect the international banking system from institutions that are too big to fail, but it would cover all banks.

And that’s not all. Basel III is just part of an “avalanche” of regulation small banks face, Fine said.

“Community banks are not the ones that created a lot of the problems, but they are getting some of the backwash associated with it,” said Jeannine Jacokes, CEO of Partners for the Common Good, which seeks ways to bring capital to low-income communities.

Though they don’t provide as many branches, ATMs or services, community banks do things their larger cousins don’t. They make an outsized percentage of small business loans. They serve rural and low-income urban areas that big banks see as unprofitable. Often, their board members are local, and they generally have a stake in their communities.

Thomas Hoenig, director of the Federal Deposit Insurance Corp., has called for revising Basel III partly because it would overburden community banks.

We hope Hoenig can get regulators to listen and find ways to treat small banks sensibly.

Chicago and its low- and moderate-income communities have a big stake in ensuring that community banks have a healthy future.

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