Though the country's biggest banks have taken much of the blame for the economic crisis, the fate of the Obama administration's efforts to overhaul regulation of the financial industry could rest in the hands of thousands of small local banks, which have remained out of the national spotlight.
The country's 8,000 community banks are a powerful lobbying force, and no one knows that better than the nation's largest financial firms, most of which oppose the creation of an agency to oversee consumer products such as mortgages and credit cards. Wall Street firms have millions of dollars to spend on Washington lobbyists and public relations campaigns, but these companies possess neither the strong reputation nor the grass-roots reach of community banks.
"The larger financial institutions have the opposite of political clout today. They're radioactive," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "The only way the big banks can win is if they get the community banks to be their troops."
The alliance between big and small banks isn't a natural one. Community bankers are in an altogether different business than the nation's largest firms. They are far less involved with the mortgages and credit cards that the new agency aims to rein in. But they worry that they will face extra regulatory burdens nevertheless. That's why community bankers have spoken out mostly against the plan, even as it puts them in the awkward position of siding with the sullied banks of Wall Street.
Community bankers have recently begun to flex their muscles. They have written thousands of letters to lawmakers, questioning the creation of another federal regulator. They have written newspaper op-eds in Iowa and letters to the editor in Oklahoma. In North Carolina, a recent newsletter from the state bankers association urged members to "use the August congressional recess period to make the case that the Consumer Financial Protection Agency is wrong." It encouraged them to invite lawmakers to their banks, ask employees to send letters to Congress and reach out to local media and business groups.
"When the charge is sounded, these guys mount up, and they are credible," said Thad Woodard, president of the North Carolina Bankers Assn. "Today, people don't like banking, but they like their banker. There's believability in what they have to say."
Frank has recently met with local bankers, including delegations from Texas and Massachusetts, to tell them that the new agency is not aimed at them and that he doesn't intend to burden them with unnecessary new regulations, instead seeking to rein in the larger firms whose practices helped provoke the financial meltdown. Frank wants the small bankers on his side.
Community bankers point out that they didn't cause the current crisis. They say they shouldn't be forced to shoulder new rules because larger firms that embraced complex financial derivatives and abusive lending practices wrecked the system.
The Independent Community Bankers of America has urged its members to voice "serious concerns" about the proposed agency to lawmakers.
"Community bankers know their local congressman," said Peter Fitzgerald, a former Illinois senator and now chairman of Chain Bridge Bank in McLean. "They would be able to get in to see their local congressman. That is one advantage community bankers have. They have personal relationships in their community."
It's that attribute that also makes small bankers attractive to consumer advocacy groups, scores of which have banded together in support of the new agency, arguing that it would benefit community banks.
"It's really quite simple. The big banks are based in Charlotte, New York and a couple other places," said Ed Mierzwinski, consumer program director at the U.S. Public Interest Research Group and a member of Americans for Financial Reform.
"The little banks are based in Everytown, USA. They aren't out-of-town suits. That's why everyone wants them on their side."