Crisis sparks new battle between small and large banks

Brace yourself for bank-on-bank warfare in Washington.

The banking industry’s factions of lobbyists are beginning to draw battle lines following the collapse of regional lenders Silicon Valley Bank and Signature Bank, as a regulatory crackdown looms.

The opening salvo is coming from the Independent Community Bankers of America, a trade association representing the nation’s smallest banks. The group is one of Washington’s lobbying powerhouses, with members beloved and protected by lawmakers on the left and the right.

ICBA is gearing up to make the case that the smallest, "community" banks shouldn’t have to pay for the rescue of bank depositors and that the largest lenders deserve stricter oversight from regulators. The group entered the fray early Monday with this message to reporters covering the crisis: “Silicon Valley Bank and the Nation’s Largest Banks Are Not Community Banks.”

"There's a great deal of anger" among small banks, said Cam Fine, ICBA's former leader. "They do feel like they're being lumped in with a bunch of high-flying, high-risk takers."

The conflict — which is starting to look like a similar small bank vs. big bank lobbying fight in the wake of the 2008 crisis — underscores what's at stake for players across the industry as Washington revamps fundamental banking policy and looks for accountability.

"From a lobbying policy disagreement point of view, it's 2008 all over again," Fine said.

ICBA President and CEO Rebeca Romero Rainey said in an interview that community banks shouldn’t have to pay any special assessments “to cover the sins of the largest and riskiest institutions.” It’s a live issue now that the government has promised to backstop all deposits at two failed lenders, with individual banks potentially on the hook for fees to cover the cost of replenishing the deposit insurance fund.

Looking ahead, Romero Rainey said Congress and the regulators need to consider strengthening rules for the largest banks.

Everyone is still assessing the situation, but bank capital regulations are part of the discussion, she said. Bank capital rules set standards for funding that lenders must maintain to absorb losses during economic downturns and spare taxpayers from having to bail them out.

“As we saw the systemic impact that failure would have, we have to learn from that and avoid it in the future,” Romero Rainey said.

It’s a message that’s already starting to annoy bigger players in the industry.

“When you see deposits flooding out of small banks to large ones, it gets really tough to claim that large banks need more capital or liquidity,” said one large bank representative, granted anonymity to respond candidly. “But salmon swim upstream, so perhaps the ICBA thinks it can too.”

Fine said the "salmon" comparison, which first appeared in a POLITICO newsletter Tuesday morning, was an "unprofessional insult to a class of banks that make up 98 percent of all insured banks."

Small bank representatives "are ripped about that quote, and they're ready to go both to the regulatory agencies and to Capitol Hill and make their case that they're anything but salmon swimming upstream," he said.

Underscoring the dispute are real-world competitive tensions between small and large banks as depositors rethink where they park cash. A Bloomberg headline Tuesday read: "Too-Big-to-Fail Lenders Rake In Deposits After Three Banks Fail." The biggest of the big banks — known in regulatory parlance as global systemically important financial institutions — also want to put some distance between themselves and regional banks like SVB and Signature.

Financial Services Forum spokesperson Barbara Hagenbaugh said the U.S. “broadly benefits from a strong and resilient system of banks of all sizes to meet the many and diverse needs of our economy.” The group represents eight of the largest U.S. banks.

“As we saw during the pandemic and we are seeing now, the eight Forum members are strong and diversified, acting as a source of support for the economy,” she said.

Romero Rainey said part of her challenge is ensuring “differentiation” as larger banks use the uncertainty to win over customers from smaller lenders.

“I hate to see folks taking advantage of this situation to portray a different scenario or a lack of strength,” Romero Rainey said.