Community Banks on the Brink

The Factors Hammering the Final Nail in the Community Bank Coffin... And How to Stop It.

An institution that was once the bedrock of American communities is today on the verge of extinction.

Thanks to overregulation, technological inefficiency, and an outdated business model, the number of community banks in the United States has been cut in half over the past 18 years. Down from ~8,000 in 2008 to ~4,000 today.

Today, we’ll look at the multitude of factors wearing away at this bedrock. From stablecoins and full-reserve banking to overregulation, technological efficiency, and geopolitics… It’s becoming clearer every day that Community Banks just can’t compete.

Here, it is argued that for community banks to survive, they’ll need a new business model and a new regulatory framework… But most importantly, they’ll need Bitcoin.

The Consequences of the Great Financial Crisis

The Paradox of the Great Financial Crisis (GFC) is that the Wall Street Banks caused the Crisis, and the Community Banks paid the price.

You know the old saying… “Never let a crisis go to waste.” Well, the Cantillion class of Too Big to Fail Bankers used their political leverage in DC to pass legislation that made it all but impossible for smaller banks to compete.

Dodd-Frank legislation dramatically increased Community Banks' overhead costs by forcing them to hire full-time compliance officers, internal auditors, and risk managers.

If those increased compliance costs weren’t bad enough… around this same time, the Federal Reserve began its Zero Interest Rate Policy (ZIRP).

ZIRP was a wind in the sails for many of the TBTF banks, which profited from increased equity trading and asset management fees.

But ZIRP all but crushed the business model of the Community Banks, which depended almost solely on relationship lending and local deposits to fund those loans.

As deposits at Community Banks were pushed toward the 0 bound… the incentive to park your money in said banks began to fade.

Now those deposits face an existential threat…

Stablecoins, Full-Reserve Banking, and Technological Disruption

Stablecoins and blockchains are incentivizing massive deposit flight not only from Community Banks but from every bank that doesn’t find a way to compete.

It’s a new model of banking that puts the U.S. Treasury in the driver's seat while kicking the Federal Reserve to the curb.

Take checking accounts, for example. Under fractional reserve lending, Traditional Banks like Community Banks take your deposits and loan that money out to their other clients… usually earning themselves anywhere from 6-10% on that money.

The thing is… Community Banks share 0% of those earnings with you.

Stablecoin checking accounts, on the other hand, pay you 3-4% interest on your money. They invest only in the highest grade bonds, U.S. Treasuries, and pass that interest on to you, the consumer… what's more, you can spend your money instantaneously with far, far lower fees than those charged by the credit card companies. (Visa, Mastercard, etc.)

Essentially, technology has made the former rent-seeking behaviors of traditional banks unprofitable… Gone are the days of wire fees, ACH-batching, and early withdrawal penalties.

It’s akin to how the camera phone ended the disposable film industry, or how streaming ended Blockbuster. And Stablecoins and Blockchains are winning because they are better products for the consumer.

Many of the TBTF Banks saw the writing on the wall years ago… and are hedged. From J.P. Morgan and BNY Mellon to Goldman Sachs, Citi, and Bank of America… all of them are in on the blockchain action… Inking partnerships with crypto firms and developing their own in-house blockchain solutions.

Community Banks, unable to innovate, are unfortunately left sitting out in the cold.

And the worst part is… Thanks to geopolitical constraints and a global power competition… The United States literally cannot afford to side with the Community Banks.

Geopolitics Trumps Everything

If you haven’t been paying attention, the U.S.-led financial order, for the first time in its 80+ years of existence, is facing a real threat… As China, too, has entered the digital currency game.

Over the past 5 years, they’ve been working with their BRICS+ counterparts to build an alternative global monetary order to bypass the dollar’s dominance.

Everything from the settlement of trade in Gold to the use of a cross-border Chinese CBDC. Yes, Chinese Stable Coins… that pay interest.

The Chinese are holding nothing back.

For dollar supremacy to continue, it’s imperative that the future of the global economy runs on U.S. dollar stablecoin rails.

But what good are those dollars to foreigners if they’re yielding 0%?

And in our current affordability crisis, how cheated would the American middle class feel if they saw dollar stablecoins paying foreigners 5% while dollar stablecoins back home are forced to pay you 0?

Simply put… You don’t sacrifice the dollar’s role in the global economy and the economic well-being of the middle class to save Community Banks. You just don’t.

Instead, you give the Community Banks a chance to compete. And you do that through deregulation and through…

Non-Sovereign Money

Let’s start with the deregulation bit. Because, ultimately… as we move ever further away from fractional reserve banking, many of the fiat-shenanigan fragilities… (fragilites that necessitate the strict regulatory regime that the Community Banks can’t afford)… take care of themselves.

Capital requirements, liquidity ratios, stress tests, deposit insurance, and lender-of-last-resort facilities exist solely to prevent panics…

A full reserve system, because of its increased transparency, all but obviates the need for those guardrails.

There is no maturity mismatch; what you see is what exists. The liquidity is real, not assumed. There is also no hidden leverage. Each stablecoin, or satoshi, exists once, so credit must be explicit and separately priced… Rehypothecate at your own peril.

Because the full resereve system is far more transparent, withdrawals don’t threaten solvency, and bank runs become a thing of the past… making deposit insurance all but unnecessary.

And in this system… Capital rules can be simplified, stress testing obviated, and compliance costs dramatically reduced. Letting Community Bankers get back to what they do best, spend their time and energy building relationships and giving their clients the best possible product.

Now onto that best product. Bitcoin.

Although a full-reserve dollar system is a huge upgrade to the fractional reserve system… it doesn’t eliminate the fact that the government can issue as many treasuries (print as much money) as it damn well pleases.

And that’s why its clear that all of this fuss over stablecoins… Well, it’s missing the forest for the trees. Looking at the forest… we can see that, in Bitcoin terms, all fiat-currency stablecoins will go to 0. Even the U.S. dollar.

Because, unlike the Dollar, Chinese Yuan, British Pound, or Japanese Yen… no government authority can print more Bitcoin.

And by offering Bitcoin products to their clients, Community Banks now have a finite hedge against said fiscal and monetary irresponsibility. And that’s why the future of banking will be built on Bitcoin.

Hopefully it’s clear now… that instead of lobbying for government protection… ie. playing “not to lose”… Community Banks instead should embrace Deregulation & Bitcoin… As Herm says…