Anyone interested in how regulators and regulated interact should try to attend the community-banking conference hosted by the St. Louis Fed every October. Instead of rich bankers wining and dining poor regulators to curry favor, rich regulators (the Fed, the FDIC, and the less well- known Conference of State Bank Supervisors, or CSBS) wine and dine small bankers and researchers from regulators and academe.
Conference highlights always include the stories that community bankers tell about themselves and their institutions. Most interesting, this year, was the story of the Bank of Bird-in-Hand. It is headquartered in Bird-in-Hand and operates branches in Intercourse and Paradise. All three of those interestingly named towns are near Lancaster, Pennsylvania, in the heart of Pennsylvania “Dutch” country, the land of the Amish.
Most Americans, if they know anything about the Amish at all, think of them as a quaint but harmless group of country folk who dress in strange garb and deny themselves modern conveniences. Out of sight, out of mind, until you get stuck behind one of their horse and buggies on a state highway or need some quality wooden furniture or playground set. Although a small minority overall, they are rapidly growing and pervasive in certain areas of Pennsylvania, Ohio, and Indiana.
The Amish are people too, and American citizens who pay taxes (except Social Security, to which I say, good for them!), and deserve access to financial services, all of which existed in the early 19th century and hence, unlike electricity, are open to their use. (If you did not know that banking, insurance, and financial markets date that far back, shame on you and read this book ASAP.)
Yet until the Bank of Bird-in-Hand came along in 2013, the first de novo bank that regulators allowed to form after the Panic of 2009, many Amish found it difficult to bank. Most have no credit scores, find it costly and time-consuming to physically travel to banks, and of course they are not fond of internet banking. Most bankers could not be bothered to cultivate the market, but the non-Amish founders of Bird-in-Hand saw opportunity because most Amish own significant collateral and carry little or no debt. (It’s not like they are up all night telling Alexa to order crap they don’t need and putting it on their credit cards.)
The Bank of Bird-in-Hand caters to the Amish by building their drive-up windows so they are horse and buggy–friendly. They also make lending decisions the old-fashioned way, by building long-term relationships and assessing each applicant’s character, collateral, and income in the context of their lives and communities. And it has been amply rewarded with a growing balance sheet and few charge-offs. It has been named one of the 200 healthiest banks in America and one of central Pennsylvania’s top 50 fastest-growing companies in any industry.
This is exactly the traditional American, market-based approach to reducing financial discrimination and predation that I recommend in Financial Exclusion: How Competition Can Fix a Broken System. Often, governments need do little more than get out of the way. Yes, the bank’s deposits are FDIC-insured and all that, but as Stephen Davies recently reminded us, Americans don’t need government plans to solve problems; they just need to be allowed to innovate without undue restriction in an environment where property rights find sufficient protection.
If America’s good regulators would simply make it clear that they will not stand in the way of innovators, if they would declare, as one community banker put it, a regulatory sandbox not just for fintech but for all financial-services innovation (banking, various types of insurance including health insurance), financial entrepreneurs would soon flourish by insuring and banking all those uninsured and unbanked millions that so many wring their hands about.
It is no wonder that loan sharks and note shavers (check cashers today) support stringent financial regulation as it keeps competition and innovation down and their profits up. Or, in other words, it keeps costs for the poor higher than they need to be. Many other financially underserved groups, from Ethiopians in Sioux Falls to the physically challenged in Chicago to members of the LGBTQ community in North Carolina, would benefit if only regulators stopped worrying so much about the failure of a few small institutions and concentrated instead on the very real systemic risks still posed by America’s megabanks.