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November 9, 2011

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Changing State of Community Banks


Galen Kusic

The RNH sat down with Bank of Rio Vista CEO Virginia Varela Friday to discuss the changing state of community banks, the Occupy movement, and new federal regulations that are impacting the banking business.


Photo Contributed by Bank of Rio Vista
Bank of Rio Vista CEO Virginia Varela has been in the banking industry for over 27 years.

Varela has been in the banking industry for over 27 years, beginning her career in the savings and loan crisis, and through transitional periods of banking through different economic climates.

"I never thought I would see these unprecedented times in banking," said Varela. "My observation is that there is more of a definition between the large multi-billion dollar banks and the smaller community banks. I've never seen it as well defined, and there have never been as large global financial institutions as there are today."

Varela explained there are more effects from outside markets as we are experiencing now, and when the global market, like Europe, begins to collapse- it affects us here in the U.S. more than ever.

"In the past several years there has been a lot of consolidation of banks in the industry through merger and acquisition activities. The amount of community banks ($500 million or less in assets) has decreased dramatically throughout the United States.  A lot of them just choose not to compete with the larger banks and/or can't afford to stay in business because of economies of scale and other reasons.” 

Varela feels that this does a disservice to the community because it does not provide as many banking options to local residents.

"It's kind of like coffee shops, do you go to a large chain, or do you go to your local coffee shop. It's a different style. When you sit down, it comes down to what kind of environment you want."

She explained that the playing field is less level, and the community banks are being affected by a lot of new regulations.

"One of those new regulations that is going to have significant consequences on banks of all sizes is the Dodd-Frank Act," said Varela. "There are upward of 300 proposed new regulations. A lot of those apply to any type of financial institution - any size, insured or non-insured.”

This means for a bank like Bank of Rio Vista, which has around $170 million in total assets, they will have some of the same regulatory concerns of a bank that has billions of dollars in certain areas. She explained that Bank of Rio Vista has to look a lot more closely at gearing up for these new regulations.

Varela feels that in some ways the regulators are well intended to protect customers, but in turn, it causes local banks to deal strictly in "black and white" banking.

Varela has been a regulator in her career, working for the Federal Reserve Bank and Treasury Department for different federal agencies as a regulator of banks. The RNH asked Varela about her take on the reasons for the economic downturn.

"I think there was a whole combination of events, like the perfect storm," said Varela. "Government sponsored entities, like Freddie Mac and Fannie Mae, they have an implicit guarantee from the federal government when they purchase loans and form securities. Wall Street had credit agencies that rated those types of securities. It became economically beneficial for many to buy and re-package mortgages and sell them. Also, realtors and mortgage brokers benefited from selling a lot of homes.  Borrowers thought they were benefiting by getting into larger sized homes- a whole spectrum of individuals who were benefiting very short term from what became a real estate bubble. The bubble finally burst when people couldn't continue to make payments on the homes they bought."

Varela gave her thoughts about the Federal Reserve's recent activities.

 "I personally believe that they really have the right intentions to work on the behalf of stabilizing the economy," said Varela. "They may do things that are controversial, but I believe the intention is to kick start the economy. They put certain things into effect that they think are doing that. Whether or not that will work, time will tell."

The RNH brought up the Occupy movement's "Bank Transfer Day" that took place on Nov. 5, in which citizens were encouraged to take their money out of larger banks an put them into credit unions or community banks.

Varela would like to see how much is taken out of big banks and put into small sized banks. When you get into the realm of closing your account and moving it, she doubts that there will be a large run on the banks that will have a significant impact on Bank of Rio Vista.

Regarding the Occupy movement's stance on banks, Varela was complimentary of the educational aspects of the movement.

"I'm glad the Occupy movement has a perspective that separates out the mega banks from the smaller community banks," said Varela. "I was concerned that across the board the movement believed that all banks and bankers are bad. Now I see there is more of an educational component that community banks are not the bad guys. I've seen signs that say, "support your community banks".

According to Varela, many community banks are so flushed with liquidity, unless they can lend the money out in a useful way- it won't be as helpful to get new customers unless local banks can get loans to go along with those new customers.

"It's very competitive to get loans," said Varela. "You see some of the large major institutions competing for some small size local business loans that were not in their market niche previously- you seem some of them coming into the Delta even. Getting good loans is increasingly competitive."

She also noted "Too Big to Fail", and the theory that from one standpoint claims that some institutions are too large to fail, and if they did- the ramifications might be disastrous to the global economy. On the other hand, critics of the bank bailouts believe if the institution is too big to fail, then it is too big. Some feel it is necessary to break up the bigger banks into smaller, regional banks to create less of a systemic risk.

"I'm curious to see how this plays out," said Varela. "There are a lot of opinions and theories of how this can work."

Varela noted that Bank of Rio Vista does a lot of donations to the local community, and hires interns that grew up in the area. To her, providing jobs to the local community is important to the bank's makeup. She believes that community banks should have their fingers spread in the local area.

"We have a lot of pride here at the Bank of Rio Vista," said Varela. "I don't think you can find those aspects at a larger bank."

Bank of Rio Vista recently began online banking, and is modernizing their systems and infrastructure to be more competitive. Varela noted that some of the sophisticated transactions bigger banks offer would never apply to a bank the size of Rio Vista.

"We offer a very straight forward way of banking," said Varela. "We are making sure we have regulatory compliance. Automated products have requirements that we make sure we are geared up to have capabilities of offering that product in a safe and sound manner."

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