The Effect Fewer Community Banks Have on Small Business Growth
Small business owners have benefited from small community banks for several years. With a 41 percent drop in community banks between 2007 and 2013, this is a sad situation. Small business owners have learned to rely on financing options from the smaller, more local banks.
With about 5,700 small community banking institutions in the US, most of these are holding less than $1 billion in assets. They represent about 98 percent of the US commercial banks, which are federally insured. Their assets make up less than 20 percent of banking assets.
Relationship building is the key to the business model for small banking. Perhaps having an advantage over larger banks, by developing more symbiotic relationships with small business owners, is the key to the success of small banks.
The Federal Reserve Bank cites that the Dodd-Frank Act is partly to blame for these changes. The Dodd-Frank Act went into effect in 2010, after which the decline in small community banks started. This is based on a study conducted by Harvard University. This affected the opening of any new banks, even in the midst of economic recovery.
The Dodd-Frank Act has made community banking more difficult. The law increased total U.S. financial regulatory restrictions by almost a third. Purchases of new software, hiring more compliance personnel, and answering to the oversight of government affected the costs of compliance.
With such compliance demands, the community banks face increased regulations. Sadly, they had very little to do with the issues for which the Dodd-Frank Act was created. Higher regulations bring about greater expenses. This affects any decision making about growing more small community banks. Larger banks do not run into these kinds of problems.
With profits for small banking affected by regulatory expenses, there is a significant decline in start-ups. When small community banks cannot show a substantial profit, they cannot offer to fund small businesses. This creates a challenge that can be resolved.
Community Banks versus Big Banking
Small community-based banks are often the source of capital for small businesses. There is a mutual relationship established between the business owner and the lender, when using a small bank. The relationship is a mutually based where the bank relies on the small business to provide steady growth with interest and a base of substantial capital.
Relationships are built with small community banks. Lenders term this as relationship lending. Factors such as credit scores and financial statements, while important, do not become the focal point. Bankers look at the total picture, skimming past the hard edges to see the potential business relationship as an asset. Providing over half of small business loans, small banks still account for less than one-quarter of business lending.
Big banking can raise capital by stocks and bond processing, as well as commercial paper. They find that the expense of servicing, underwriting, and automating small business loans is unfavorable.
There Is a Fix
Policymakers have the ability to exempt small community banking institutions from the Dodd-Frank regulations. Problems cited are not a true representation of the model for community banking. As a result of these unnecessary regulations, the small business owners are denied access to credit. With an exemption of this act, there would be a better function for community banking.
A statutory amendment could be enacted that would allow the Federal Reserve Board to increase the size of banks that are covered by the Small Bank Holding Company policy statement. This statement issues in 1980 to assist in the transfer of small community bank ownership. Having a limited access to equity funding may mean that ownership of small banks would be allowed utilization of acquisition debt.
Tiered regulation can also be exercised so that the banking industry can maintain a solid ground while fostering growth overall. With efficient tailoring of regulations, the supervision of small community banks can lead the way for financial reform.
The bottom line is that with an open mind to the possibility of small community banking growth and financial health, there is a fix. To lose the advantages of small banking is bound to affect small businesses. In the long run, this can be devastating to commercial growth within communities and loss of revenues, affecting jobs.