New Bank Tax Part III: Community Banks Not Immune

In this series of posts on the new bank tax the Obama Administration has proposed, we have reviewed how:

• the new tax will increase the cost of credit
  
• the new tax will cause banks to reduce lending as the tax reduces bank capital

Today we see that, although community banks will not be paying the tax directly, since their assets are less than the $50 billion threshold, community banks will still feel the effects of this tax.

Since this tax is imposed on non-insured liabilities, impacted banks will shift their funding mix away from these sources and rely more heavily on insured deposits. The increased competition for insured deposits will pinch net interest margins at community banks as they compete with larger banks for deposits. Not only will this tax reduce profits for community banks, but also impede their ability to build capital and slow lending across the country.

Also see:

• Part I: Increases the Cost of Credit
  
• Part II: Reducing Capital Hinders Lending
• Part IV: The Markets Don't Like It