Community banks represent the economic heart of any community. These banks stimulate economic growth through quality risk management and knowing their markets. Community banks are the drivers of small business growth. Community banks hold just 14 percent of all banking assets, but originate about 45 percent of all small business loans. Communities depend on local banks to create economic growth and stability. In the aftermath of the 2008 recession, consolidation has been the driving force in banking. Many of the smaller community banks have been acquired by either large regional banks or the very large, significantly important, financial institutions. There were 12,343 commercial banks as of December 1990 and by December 2014, the number of commercial banks declined to 5,642 . This has created a significant void in the banking structure of the United States.
As larger banks have filled this void, communities have suffered. Community banks provide economic stability in their communities, lend to small businesses, and develop relationship banking. These banks understand the market, know their customers and subsequently maintain higher loan quality than other larger institutions. Community banks are built on the foundation of local market knowledge, relationship banking, and have a vested interest in their markets. Branches of larger financial institutions are fulfilling a specific strategic need of the larger corporate bank. These branches of larger institutions may be seeking deposits; others may be seeking loan originations of a specific type (such as only originating commercial, real estate, or installment loans). This may artificially heat up specific lending or deposit markets depending on the need of the corporate bank. Once the corporate strategy is achieved, then that specific market slows down. Thus, these banks can create significant swings in the local economies. Consequently, if an individual does not meet the strategic need of the larger corporate bank, then they lack access to capital. Lack of capital access slows a community’s economic growth. Furthermore, since branches of larger banks do not want full relationship banking, they lack a fundamental tool in determining credit quality. Knowing your customer and their complete financial situation is key to originating a quality loan portfolio. Knowing your market and providing a full range of services is equally important to local businesses and individuals. This is lacking in a banking environment dominated by national banking firms and numerous regional banks.
By creating a new bank, it can benefit the community, the stakeholders, and the national economy.
[1] Doreen Eberley, Director, Division of Risk Management Supervision for the FDIC, Testifying before the Committee on Banking, Housing and Urban Affairs, US Senate, February 10, 2015.
[2] Historical list of banks insured by the FDIC, FDIC.gov
