The Future of Community Banking, and What it Means for Small Businesses

(avg: 3.75 of 5)

Above: Chairman of the Federal Reserve Ben Bernanke Addresses FDIC Conference this morning

Year in and year out, we honor the 100 fastest growing inner city companies. Part of the year-long process in finding and awarding these firms includes both quantitative and qualitative surveys and interviews of the CEOs. Through this process, we learn about how inner city companies come to fruition, what some of their business challenges are, and how CEOs finance their companies.

This year, like each year in the past, we are coming across a trend: overwhelmingly, most inner city companies view access to capital as one of their most prohibitive obstacles to growth. Yet, these companies are still growing and finding success.

How?

One thing the CEOs have attributed their growth to is their strong relationships with their bankers. In one of my most recent interviews, the CEO explained that he and his banker go out to lunch once a month just to chat, to address the needs of the CEO's business. Another CEO said he is a customer at a large bank that doesn’t understand his needs, and therefore, is shopping around to smaller competitors.

These smaller competitors are often local community banks. Community banks are defined as those with aggregate assets less than $1 billion. To put this in context, the four largest banks (Bank of America, Citi, JPMorgan Chase and Wells Fargo) have over $50 billion each in assets. From 1995 to 2004, community banks comprised 94% of the banking industry. From 2004-2008, there was a boom in big banking – which, as we all know, played a part in our tumultuous economy.

But signs are now pointing towards a resurgence of community banks. These banks have small regional footprints, and local decision-making is key. Small businesses, like the Inner City 100 companies we have interviewed and the drivers of our national economy, are increasingly turning to community banks that will take the time to truly understand their needs.

Today, banking leaders meet in Arlington, Virginia to discuss “The Future of Community Banking” – a conference sponsored by the Federal Deposit Insurance Corporation (FDIC).

Chris Whalen, Senior Managing Director at Tangent Capital Partners, wasted no time in drawing the disparities between large banks and community banks.  In one of the morning’s first panels, he explained that big banks are not nearly as efficient as they pretend to be. He explains that, “There are no economies of scale in banking—you either know your customer or you don’t,” and this is why we’re starting to see a resurgence of community banks. Community banks lend money to people they know, retain that credit on the balance sheet and are able to manage the credit going forward in time, reducing the risk for both the lender and borrower.

In an era of tight credit and limited access to capital for inner city business owners, this is music to our ears. The fact that the federal government is meeting with community banks to address their needs (multiple community bank spokesmen have discussed how increased regulatory burdens have hindered their ability to lend more efficiently) is a positive step toward helping small business owners across the United States. Stronger and more active community banks will encourage small business growth and job creation in a time where the economy remains in flux.

To see the agenda or watch the panel sessions from today’s FDIC event, click here. 

BY Amanda Maher on February 16th, 2012

TAGS: small business | jobs | business | entrepreneur | capital | federal policy | banking | fdic