by William M. Isaac & Robert H Smith for American Banker

Everyone has an interest in policies that will foster a strong economy and sustainable job growth. While some steps have been taken, we are not getting the job done.

Over half of U.S. job growth is initiated by small businesses. In recent years, many of our larger companies have been a declining source of new jobs due to outsourcing key elements of manufacturing, assembly, customer service, and technology functions to lower cost countries.

While many factors stimulate small business creation and growth there are three overarching prerequisites: 1) confidence in the future, 2) available capital, and 3) access to credit.

Business and investor confidence remains very weak and improvement depends on an improved regulatory climate and sound monetary, fiscal, and tax policies. New business funding is being curtailed awaiting a clearer understanding of where we are headed in these critical government functions.

Washington has encouraged banks to make additional credit available for small business growth while routinely condemning the past actions of banks. Policymakers cite banker greed and mismanagement as principal culprits in nearly bringing down the financial system.

We agree that banks bear a portion of the responsibility for the 2008 financial meltdown, alongside very poor government regulation and policies. But this charge is largely applicable to a comparative handful of big commercial and investment banks, mortgage banking companies, insurance companies, rating agencies, and government-sponsored mortgage entities.

Thrown under the bus in this environment are some 7,000 community banks that are feeling the full brunt of the Dodd-Frank financial “reform” legislation. The 2,300 page Dodd-Frank legislation will heap at least 10,000 pages of new regulations on community banks while doing almost nothing to solve the problems that brought us to financial panic in 2008.

Our government’s “one size fits all” mentality has a disproportionate effect on the smallest banks. Keep in mind that the average community bank of $230 million in assets is 1/10,000 the size of Bank of America. Yet that little bank is subject to the same public condemnation and regulatory backlash.

The “Collins Amendment” to the Dodd-Frank legislation, which eliminates “trust preferred stock” as a future source of capital, has a particularly insidious impact on small banks. While elimination of trust preferred stock is likely a good policy for larger institutions, it cuts off one of the few alternatives for community banks to raise new capital.

To deny access to an important source of capital almost certainly forces increased consolidation among small banks, particularly when coupled with an enormously increased regulatory burden. Over the past 25 years community banks have declined at a rate of between 3 to 4 percent per year. Trends suggest that the number of community banks can be expected to decrease from 7,000 to 3,500 within this decade.

At a recent meeting in Washington of 1,000 bankers from all size of banks, members of the audience were asked to raise their hand if they believed banks less than $100 million in size had a future. Virtually no hands were raised. The same question was asked about $500 million banks and produced a 50 percent show of hands. While not surprising, this is a highly disturbing result that does not bode well for America’s smaller communities and businesses. Community banks are the heart and soul of their communities, supporting much of the civic good while serving as the primary source of small business credit.

The sad truth is that many community banks are weakened and no longer able to adequately support small business. It is past time for Washington to take note of this situation and move quickly to restore the future of community banking.

The regulatory burden on community banks must be reduced, and we must remove unnecessary impediments to community banks’ ability to raise capital. Years ago community banks were able to obtain capital in the form of subordinated debt from large correspondent banks. This worked exceptionally well because the correspondent banks were sophisticated creditors that imposed and enforced operating conditions on the safety and soundness of the community banks issuing the subordinated debt.

It is imperative that we foster stronger community banks more capable of meeting the needs of small businesses and helping to create job growth. We are running out of time to fix the problems that bad government policies have created for community banks and for those who depend on them.

Mr. Smith, former Chairman & CEO of Security Pacific Corporation, is a founder and director of Commerce National Bank in Newport Beach, California.