Op-Ed: After Bank Failures, Capitol Hill Blame Game Does Nothing to Help Small Businesses and Consumers
Banking executives were recently grilled by members of the House Financial Services Subcommittee about failures in the financial system this year.
The proceedings spiraled into a blame game about whether the former leaders of Silicon Valley Bank, Signature Bank and First Republic Bank were at fault for the collapses, or if factors beyond their control played a starring role.
But regardless of who or what is to blame, the real winners in this scenario are the big banks. And the losers are, unfortunately, small businesses and consumers.
As the banking crisis unfolded earlier this year, talking heads on television and Biden administration officials doubled down on “too big to fail” rhetoric — a term coined following the Great Recession of 2008. It’s a line of reasoning that prioritizes large banks over community institutions.
In March, Kevin O’Leary of “Shark Tank” notoriety appeared on Fox Business to downplay the benefit of smaller financial institutions, saying, “The truth is we don’t need regional banks.”
Around the same time, Treasury Secretary Yellen provided similar commentary to the Senate Finance Committee. In her testimony, she suggested the federal government would only provide a backstop for depositors if the failure of the institution posed “systemic risk” and would create “significant economic and financial consequences.”
Translation: Money is only safe in big banks.
While the secretary attempted to walk back the comment the following week, the damage was already done.
Individuals, investors and companies began parking capital in “too big to fail” institutions. Giant lenders like JPMorgan Chase, Wells Fargo and Citigroup, for example, enjoyed a significant influx of cash. It was reported that Bank of America alone received more than $15 billion in new deposits following the meltdown of Silicon Valley Bank and Signature Bank.
Where is the money coming from? It’s being drained from community and regional financial institutions.
The new status quo is bad news for Main Street businesses — think restaurants, modest manufacturers, franchisees and local retailers. These operations rely on community banks for lines of credit to expand. In fact, it’s estimated that community banks provide a majority of small business loans and more than 8 in 10 farm loans.
Why? Because community banks provide a level of personal service entrepreneurs can’t find with large financial institutions.
As financial lifelines for small businesses dry up, banking consolidation presents another challenge — something Yellen recently predicted there would be more of.
With giant institutions like JPMorgan Chase gobbling up the smaller players, the big banks — along with their credit card partners, Visa and Mastercard — have even greater leverage to hold small businesses hostage with so-called “swipe fees.”
You see, every time a consumer swipes, inserts or taps a credit card to purchase an item, the credit card companies and banks collect a fee. With just two credit networks — Visa and Mastercard — controlling about 80 percent of the market, these swipe fees are ballooning out of control to a point where it often accounts for a small business’ largest expense behind labor costs.
In 2022, over $160 billion was collected in swipe fees, which is nearly $20 billion more than the year before. And these extra costs inevitably roll downhill to consumers, fueling inflationary pressures on everything from the price of a gallon of milk to a tank of gas. Further consolidation within the banking industry will only exacerbate the problem.
So where do we go from here?
Continuing to play the blame game on Capitol Hill over the banking failures is an exercise in futility. Instead, lawmakers need to take concrete action to help the small businesses and consumers that are most threatened in the aftermath. One piece of legislation that could help is the Credit Card Competition Act.
As banks continue to consolidate, the bill would inject competition into the credit card market to provide a check on rising swipe fees for small businesses and consumers. The best part is that the legislation would apply zero additional government red tape to community banks that are already struggling to survive.
Furthermore, the Biden administration should stop playing favorites, whether it’s in official public policy or simply rhetoric.
While giant financial institutions have the most lobbying power in D.C., community banks play a critical role in supporting the backbone of the U.S. economy — small businesses.
We can’t leave them out to dry.