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Community Banks may be the Answer for Small Business Banking

Bank Regulation has Changed the way Large Banks Operate

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The discussion about small business banking, recently, has been focused on community banks, those smaller banks in your city or town that aren't part of the larger branches of the national or international banks. Lending, during the Great Recession, basically dried up if your business was a customer of the large banks. Because of the credit crisis, it was not readily available at your local community bank either.

Over the past years, small businesses have gravitated toward the larger banks due to the perception that they could get more services from them. Many of the smaller banks have either failed, merged or been sold. In a presentation to the FDIC Community Banking Conference in February of 2012, it was shown that all of the net decline in banks since 1985 has been in small, community banks. Banks with assets under $100 million dropped from 13,631 banks in 1985 to 2,625 in 2010, a fairly shocking decline.

That trend may be changing. Small businesses are now finding that, during the recovery from the recession, money is more available from their local community banks.

Deregulation and Banking in the U.S. after 1980

A community bank is what was originally just called just a "bank" before the Depository Institutions and Monetary Control Act of 1980. This was legislation that made the most profound changes to banking that had been made since the 1930s. In short, it allowed banks to compete with each other, to merge and acquire each other, to establish branches across county and state lines, and to charge and offer competitive interest rates. That is only a portion of the changes the Act made to the U.S. banking system. As 30 plus years have passed, this piece of legislation and other related legislation that has followed fundamentally changed the way banking is done in the U.S.

Our banking system became a conglomeration of huge multinational banks that perform both investment and commercial banking tasks. Large regional banks also formed. There were a few smaller, community banks left in local communities.

Investment banking involves a myriad of services to large business firms such as underwriting issues of stock, facilitating mergers and acquisitions, and raising debt capital for companies using bond issues.

These large banks also perform commercial banking services. They accept deposits from businesses, make loans to businesses, and provide a variety of other services such as letters of credit and foreign exchange. Before the 1980 Monetary Control Act, commercial banks could not perform investment banking services and vice versa. The Glass-Steagall Act prevented the mixing of commercial and investment bank services because the legislators who passed it felt it meant banks would take too much risk with depositors' money through investing. That came to fruition as one cause of the Wall Street Crash of 2008.

Bank Regulation and Community Banking

Since the Great Recession, small businesses on Main Street are still having trouble getting loans from large banks on Wall Street. The credit crisis has eased but has not passed and the Federal Reserve predicts that it will be some time, measured in years, before it passes completely. Large banks find that it is just as easy to make a $50 million loan as it is to make a $50,000 loan and probably less hassle than working with small business, so they are more inclined to deal with large business than small business financing. That's where community banks can step in.

Community banks, for the most part, still stick to the "old" definition of what a bank is; that is, they are still only commercial banks who accept deposits and use their depositors money to make loans. They may make some investments but they are extremely conservative and risk averse and exercise the prudent person rule with their depositor's money. This is why the conversation regarding small business financing in the U.S. has recently turned toward community banks. They are perfectly positioned to help small business climb out of the results of the Great Recession as their business loan portfolios improve.

If you are a small business owner and need help getting your business financing bank on track now that we see to be in an honest-to-goodness recovery, talk to your local small banker. You may want to think about moving your business there as you may find that they can help you more than a larger banker than is now really positioned to take care of a different type of clientele.

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