When is Big Too Big?

After partially disclosing the findings of its "stress tests" of the nation's biggest banks, the government made another disclosure: none of the 19 largest will be allowed to fail. That means taxpayers are going to be paying billions for bankers' bad decisions made over the past decade.

Government has made a determination that the consequences of allowing some banks to fail would be unacceptable. Maybe they're right, but quite possibly, they also are perpetuating the cycle that got us into this fiasco.

The American public can avoid a future repeat of this scenario only if they understand what it really means to be "too big."

I'm sure you share my discomfort when some people lump all banks into the same category--"greedy and reckless." As employees and owners of a community bank that has been successful for more than 100 years, we know that many banks have succeeded for decades by employing a simple formula: Do the right thing for customers and employees, and they'll do right by you. While never realizing extraordinary profits in boom cycles we operated profitably enough to retain capital for the inevitable rainy day. For us it was enough to get through the Great Depression, and through dozens of other boom and bust cycles. We're still here because we've remained a trusted financial partner to the customers and communities we serve.

It is useful to look at those banks dubbed "too big to fail" -- yet failing nonetheless-- and learn from the important lessons they offer about what it really means to be "too big":

• Too big is when a bank stops identifying its customers by name and starts identifying them only by account numbers. If a bank's employees don't know a customer by name, that customer should move his account.

• Too big is when a bank stops having a stake in the communities where it operates. When banks take in deposits in one town and invest most of them in projects thousands of miles away--a bridge in Dubai, for example--maybe all they really care about is chasing higher profits. Banks should employ their deposits within the communities where they gather them--using their customers' money to help build neighborhood businesses and local jobs--and applying some of their profits to support the charitable organizations that help meet the needs of the community's children, elderly, disabled and low income individuals.

• Too big is when a bank depends upon outside middlemen to gather its deposits or loans. Analyze the failed and struggling banks of the last few years and you'll notice their reliance on brokered deposits and loans (which they must pay crippling high interest rates to attract.) If a bank's services don't attract and retain customers, someone better ask why--because deposits made solely on the basis of rates will be out the door the minute somebody offers more. That's the kind of volatility that undermines a bank's stability.

• Too big is when a bank markets a product or service that isn't in the best interests of its customers. Loading someone down with an adjustable rate loan that will become unaffordable is simply unforgivable. It's a lot harder to do when that customer is your neighbor--which is one reason why so few local banks participated in those reckless lending practices.

• Too big is when all of a bank's owners and managers live "elsewhere." Managers have an incentive to build prosperous communities where they live; where their children attend the local schools and playgrounds. The greater the distance to corporate headquarters, the less likely it is that management will care what happens in their customers' home towns.

• Too big is when a bank collects big fees for making risky loans it wraps up in "securitized" packages and sells to someone else. Why care whether the loan goes bad if it's going to be someone else's problem? If a bank keeps most of its loans on its books (as we do), it also is more likely to work with borrowers when times get tough.

• Too big is when "big" becomes one of the benefits a bank touts. If we've learned anything from this mess, it's that "bigger" doesn't mean "better" in the banking business. After all, how many customers will ever need a $100 million loan? But all of our customers can use a financial partner they can trust--one that is not too big to care about them individually.

• Too big is when the people running the bank begin to have different interests than the employees, the depositors and the shareholders. When executives get compensated even while employees are laid off, shareholders are taking a shellacking and unsecured depositors' cash is placed at risk--and then turns to taxpayers to save them--isn't it time to say, "Too much" and "never again"?

Finally, too big is when a bank forgets where it came from and who got it there; its employees, depositors, communities and investors. No bank can ever be too big if it keeps that firmly in mind.

I thank all the employees of Mechanics Bank for committing their personal best every day, and keeping us strong and profitable for more than 100 years!