Community banks are no strangers to challenges, but what they are facing in 2022 may be enough to give even the longest-tenured banker pause: an uncertain economy, growing competitive threats from fintechs and big banks, and record inflation not seen in decades.

Yet if there’s a bright spot, it’s that community bankers’ political power may be at its height. In just the past year, it has flexed its muscles to stop a controversial regulatory nominee and hold back a drive by the White House to require institutions to collect more information on behalf of the IRS.

But will community bankers’ political power be enough to help the industry amidst the economic outlook, growing consolidation, and other threats? To find out, I sat down with Karen Thomas, the recently departed senior executive of government relations and public policy at the Independent Community Bankers of America, for an episode of Banking with Interest.

We discussed the state of community banking, numerous policy battles from the past few decades, existential threats facing the industry, and where things go from here.

What follows is our conversation, edited for length and clarity.

You joined ICBA in 1982. What made you stay so long?

My role fit me like a glove, given my interest in policy, and the issues are ever changing, so I never got bored. Also, community bankers are wonderful people.

Are lawmakers and policymakers more willing to consider the impact of something on community banks now than they were 20 or 30 years ago?

Yes. The financial crisis and the pandemic response highlighted the value of community banks to their communities and the economy. The challenge is translating that goodwill into legislative action. But you can see evidence of the willingness to accommodate community banks in the dozens of examples of tiered regulations over the last 20 or 30 years.

What doesn’t Washington get about community banks and vice versa?

If you want robust competition, if you want consumers to have options besides a behemoth national bank, you have to accommodate community banks, not overburden them with regulation. Take Section 1071 and small-business-loan reporting, which the CFPB is working on. That could chill small business lending by cramming it into some kind of cookie cutter, and that’s just not what it is.

Banks won’t make those loans if it’s too much hassle.

Right. And they’re going to be criticized because regulators are going to compare unique small business loans—which aren’t comparable—and try to draw conclusions that one borrower was treated less fairly than another.

What don't community banks understand about Washington? First, it's a different milieu from the state legislature, and things can take much longer—multiple congresses, even. You have to bide your time, lay the foundation for important issues, and strike when the conditions are right. Also, politics trumps policy.

Like with cannabis banking—I'm not sure many people are against it, but it doesn’t get done because one side or the other is always trying to make another point.

Right. Some issues are hard to keep clean. We’ve tried looking at cannabis in terms of banking services only; we’ve not taken a position on legalization. But there are some who are concerned about cannabis in general.

You’ve helped usher in many policy changes at ICBA. Personally, what was your best moment?

The most recent example would be throwing myself into the Paycheck Protection Program. I knew our bankers would need help navigating the details of it. Treasury and SBA launched on a Friday, and they issued the first interim final rule around eight o'clock that night, even though we begged them to give bankers the weekend.

That's the way the whole program went: interim final rules issued in the evenings, one after another. We did around 20 banker briefings, and every time there was a new pronouncement, we got hundreds of questions. We set up a special inbox, divided the issues among our team, and responded to literally every single question. Still today, bankers tell me that they wouldn’t have gotten through it without our help.

Another example, going back to the aughts, is deposit insurance reform. We’d for a while argued that the FDIC should use total assets—not just deposits—for its assessment base for deposit insurance premiums, because it would place a bigger burden on larger banks that posed more systemic risk. Eventually, the financial crisis created the opportunity to get it done. That change alone saved community banks billions.

Why hasn’t the ILC loophole been closed? There was a point when I was sure it would be done. Wal-Mart applied, and even after they withdrew their application, there was enough heat on the issue that people were focused on it. Then, in 2010, a moratorium was put into law as part of Dodd-Frank, yet it stuck around. Why was the unitary thrift loophole closed, which ICBA did make happen as part of Graham Leach Bliley, if I’m not mistaken—

That's correct.

Why was it closed, preventing unitary thrifts from being owned by commercial companies (that’s why we’re talking about it), and the ILC loophole wasn’t?

It goes back to the circumstances and the players. The nonbank-bank loophole was closed in ’87 and the Competitive Equality Banking Act was passed, creating the ILC loophole. There's only a handful of states that can charter ILCs, including Utah. Back then, Senator Jake Garn from Utah was on the banking committee. After Garn, Senator Bennett from Utah was on the committee. They made it a challenge by protecting the interests of their state.

You're right, when Wal-Mart applied, it got people to focus on the dangers of mixing banking and commerce. But I think if Don Powell had remained chair of the FDIC, he would have approved that application. As it turned out, Sheila Bair became chair, and she put the moratorium in place.

Anyway, we couldn’t get the loophole completely closed with Dodd-Frank, and then it was sleepy time for a while. Nobody was applying for LLCs until fintechs started doing it. So we have to re-educate Congress on why it's important to separate banking and commerce.

So are Big Tech fintechs the biggest threat to community banks right now?

Well, they're the largest companies with the most power. Technology keeps evolving, and at an ever-faster pace, it seems like. We want fintechs to enable community banks, not disrupt them. Some want to be disruptors, and that's fine. But there needs to be a level playing field, where like activities are regulated in a like manner. If a fintech can own a bank without having to deal with the responsibility and oversight of a bank holding company, like it can with an ILC, that's very attractive.

What about a central bank digital currency (CBDC)?

Also very concerning. A CBDC isn’t a liability on the books of the bank, so it creates competition for deposits. Sure, deposits are FDIC-insured, but the Fed is the Fed—there’s no liquidity risk. So a CBDC would have a huge competitive advantage.

Are you also worried about disintermediation with stablecoins? Obviously, that's not quite the same issue as CBDCs, which the Fed is behind.

I suppose. There’s a lot of uncertainty over what stablecoins are, exactly. Are they a money market fund? A security? A store of value? Are they just for speculation? Will they be used for payments? Obviously, there's enormous volatility, too.

What strikes me most about all this is that we seem to be going back to a time before the National Bank Act, when we didn’t have a central bank. There are a lot of existential issues facing community banks and the financial system, with profound implications.

Is further consolidation inevitable, or will it plateau? How many banks will there be in 10 years?

I don't have a crystal ball [laughs], but hopefully it plateaus. I think it will continue, though. There are many factors driving consolidation—regulations, technology, succession challenges. But hopefully there will always be a role for community banks, because they have been very positive for our country.

You’re known for being unflappable. How do you keep your cool?

It's partly my nature. But I can lose my cool, I just do it in a private setting. My colleagues will tell you the same. (So would my husband.) When people lose it in front of everyone, they also lose credibility.

What’s next for you?

I have some unfinished business with ICBA. Besides that, I’ve been recalibrating my work-life balance, which was heavily weighted toward work the last 30 years. Now, I plan to spend time with family and friends, travel, and do things I haven't been able to do in a while. If it's a beautiful day, like it is today, I’m heading outside. Goodbye!