What America’s small banks do that big ones don’t

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cANANDAIGUA AND Manhattan’s Chinatown is about as different from each other as two places in the same state can be. One is a small town in the bucolic Finger Lakes region, where almost everyone is white English-speaking. Chinatown packs nearly ten times as many residents, many of them foreign-born and Chinese, into a much smaller space. What binds them, and many small towns and neighborhoods across America, is financial services: both host community banks that respond to local needs.

Some see such institutions, generally defined as less than $10bn in assets, as ineffective historical relics. They account for up to 97% of the total number of American banks, but less than 14% of assets and deposits. Some may wonder about their future, if more banks are caught in the crisis that started with Silicon Valley Bank. For many small businesses and farms, however, these banks are a vital source of credit.

Their detractors get one thing right: the sheer number of American banks – more than 4,100 at the end of last year, compared to 325 in Britain and about 80 in Canada – is a historical artifact. . Early Americans’ skepticism about federalism translated into skepticism about big banks and a national banking system. Alexander Hamilton established a form of central bank in 1791; it lasted just 20 years, as did its successor, which closed in 1836. The 19th century was full of banking crises. As many as 1,600 banks issued their own banknotes.

The government attempted to stabilize the American financial system with the Federal Reserve Act of 1914, which gave America its first central bank in nearly a century. But banks tended to be small and local. It was not until 1994 that they were allowed to open branches outside the state in which they were registered or in which they had their headquarters.

Having so many banks makes America more isolated among developed countries, but by historical standards the current number is low: in 1921 America had more than 30,000 banks, and as late as 1984 there were almost 15,000. Bank failures, particularly during the savings-and-loan debacle of the 1980s and the 2007-09 financial crisis, as well as mergers have reduced numbers ever since. On May 1st the last failure, First Republic, was taken by America’s largest bank, JPMorgan Chase.

Many of the surviving banks serve small towns and rural communities. National Bank & Trust of Canada (CNB), for example, with 25 branches over a 65-mile area in upstate New York. They offer most of the services – mortgages, business loans, wealth management – that a larger bank provides, but with a stronger focus on the community they serve.

Charles Vita, the bank’s chief loan officer, says that he or someone from his team visits the site of every business loan they provide. Karen Serinis, who is in charge CNBWorks in retail banking, noting that the loan committee meets twice a week, in person, and that loans are “not just a piece of paper going to Buffalo or New York where they just look at the numbers. We go to talk to the owner… Our customers have the opportunity to sell their character and their dream, because the decision maker hears it.”

This approach is not unique to him CNB. According to a report by the Federal Deposit Insurance Corporation, a regulator, community banks account for 36% of small business loans, and 31% of farm sector debt, despite accounting for significantly more less than one-sixth of America’s total banking assets and less. than a fifth of the loans. They tend to rely more than larger commercial banks on interest for their income (rather than income from investment banking, wealth management and service fees). That has tended to mean less stability of earnings, and more pressure on earnings when rates fall: the other problem facing central sector lenders today.

Other community banks serve specific populations. Thomas Sung, an immigration attorney who came to New York from Shanghai, started Abacus Bank in 1984 to provide residential and commercial real estate loans to new immigrants. It has branches in the Chinese neighborhoods of Manhattan, Brooklyn and Queens, as well as one in New Jersey and Philadelphia.

Mr Sung’s daughter Jill now runs the bank. Community banks are often run by families. CNB has had just five presidents since its founding in 1887; Frank Hamlin, who currently fills the position, is the founder’s great-great-great-grandson.

At Abacus, Jill Sung says many of her customers prefer old-fashioned banking services, such as safe deposit boxes and passbook savings, which big banks are reducing or no longer offer. more reliable. Many new immigrants buy multi-family homes as an investment; larger banks often see them as higher risk, but, says Ms Sung, “we don’t price our customers because that’s what people want to buy here.” intensive work experience, explained Mr. Sung, but it is part of their mission: “We spend so much time subsidizing banking operations in ways that a normal bank that is just focused on making money.”

CNB and Abacus both said they were not significantly affected by the fallout from the Silicon Valley Bank and Signature Bank failures. Mr. Hamlin says his customers were much more anxious during the pandemic: one wanted to come in and withdraw $2m from his account in cash; Mr. Hamlin settled it down to $500,000 and home delivery with a Brinks truck. Of the billions that have moved from smaller banks to the behemoths, it’s unclear how much has come from true community banks. Perhaps a bigger threat than investment outflows is the exodus of commercial real estate loans on their books, although it’s also unclear whether rural areas and small towns are at risk from the shift to remote work. commercial buildings in large cities.

If any one community bank fails, it would be too small to be a systemic risk. But research shows that when a larger bank acquires a smaller one, loans to small businesses in the area are served by the target reduction. Trouble in the sector would make things difficult for homeowners, farmers and small businesses across America.

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