The fate of many small community banks is likely to be decided by the end of this decade. Everyone has a stake in the eventual outcome but no one’s stake is larger than that of the small business owner. Sadly, consumers do not perceive the value of the community bank and rarely feel any significant impact when one is taken over by a larger institution. Small enterprise owners, relying on a rapport built up over several years of doing business with the local banker, have a totally different perspective and often a radically different experience.
The relationship between small business owners and their local bank is a symbiotic one. Both need each other to survive and prosper. On the other hand, local banks that have been swallowed up whole by giants like Bank of America, PNC, or U.S. Bank no longer rely on local business owners for their life’s blood. Relationships which were once mutually beneficial are reduced to minor irritations. The mega-banks are not impressed with the small business that churns out a few hundred thousand in revenue annually. They have bigger fish to fry, ardently pursuing the big corporate accounts that generate millions in revenue, and they typically spend no more time doing so than they would with the comparatively tiny enterprise right at their doorstep. It is understandable that the small business owner is given little or no attention.
The Irony Is Palpable
Thirty-years ago, there were almost 18,000 banks in the United States. Today there are about 6,900, a reduction of around 61 percent. This is not to say that 11,100 banks have disappeared. People would notice that. Rather, 11,100 banks have been taken over by larger banks. To be sure, some few have shuttered their doors, but the majority has been absorbed by its larger cousins.
This is a uniquely ironic turn of events in the wake of the financial crisis during which these behemoths were deemed too big to fail and became the beneficiaries of the taxpayer’s largesse.
This fact is no doubt the underlying cause of banks being less popular than airlines and phone companies. The banks do, however, have a slight edge on Congress in the popularity polls.
No one can deny that big banks are almost universally viewed as a serious risk to our financial system, while at the same time being propped up and coddled by the very government that condemns them. Thirty years ago, banks with $10 billion and greater in assets controlled about a quarter of the banking industry. Today that figure is 80 percent. During the financial crisis, the big got bigger, with the mergers of Chase Bear Sterns and Washington Mutual, Wells Fargo with Wachovia, and Bank of America with Merrill Lynch.
It Has Been a Fight
The boxing match that is taking place between the community banks and money center rivals is very much like a title fight in which the competing boxers publicly denigrate one another. In one corner we have the big banks looking down their noses at their country cousins, referring to community banks as yahoos, incompetent, and in the way of progress. From the opposite corner, community banks view their money center rivals as arrogant, greedy, uncaring, and responsible for the financial crisis and its subsequent regulatory backlash. The facts lay somewhere between these two extremes.
About the only thing the two have in common is an unfavorable opinion of regulators and politicians.
Opinions Vary
The value of community banking is not apparent to everyone outside the small business world. Take, for instance, the recent tirade launched by blogger Matthew Yglesias, writing for Slate, in which he labels community banks (he refers to them as micro banks) as:
- Poorly managed
- Difficult to regulate
- Noncompetitive
- Too numerous
How one can arrive at the conclusion that a country with 3,144 counties, 10,016 cities, 4,431 towns, and 3,770 villages is over-served by a mere 6,900 banks is beyond my powers of comprehension. As for the remaining arguments, suffice it to say they are hotly contested by community bankers.
On the Flip-Side
Rob Blackwell, writing in the American Banker, penned a piece in opposition to Yglesias’ conclusions and his colleague, Paul Davis, chipped in by way of another rebuttal article.
Blackwell offered the following arguments in support of the community banking concept which are in sharp contrast to Yglasias’ claims:
- The vast majority of community banks are very well run.
- Small banks are actually easier to regulate because of their small size and geographical reach.
- Community banks highly competitive and operate at a profit for themselves and their investors.
- The community bank is essential for the health of small business.
Davis, in his piece, added the following points:
- If the number of small banks continues to decline, so will the amount of credit available to the communities they once served.
- Small banks drive innovation and have been instrumental in the creation of new products and services for consumers.
- A reduction in the number of community banks could create a crisis of leadership in affected communities because community bankers are leaders and an integral part of the fabric of community life.
There is some merit in all the arguments, pro and con, but one fact is not in dispute: small business will suffer the most if the small banks go the way of the American bison or the California condor.
If history is any guide, the fate of the community banks is all but sealed. Their numbers have been in decline for 3 decades and the FDIC has granted but one new charter in the past three years. If this is any indication of the prospects for new bank formation, the future looks bleak for small banking institutions.
If other industry examples such as, airlines, telephone companies, cable providers, and broadcast media are any guide, it is difficult to believe that consumers or businesses will be well-served by the Goliaths of the banking industry.
The post David versus Goliath: Where Is Community Banking Headed? appeared first on AllBusiness.com
The post David versus Goliath: Where Is Community Banking Headed? appeared first on AllBusiness.com.