The example of US community banking
With more than 4,000 entities, community banking remains central to financing the productive US economy and continues to be an example of good practices. Its roots in the local communities where it operates continue to give it a fundamental competitive advantage over large banks.
It is estimated that in the United States, community banks are responsible for 60% of small business lending, over 80% of agricultural lending and 43% of Internet lending.
These banks tend to operate in a small geographic area and, unlike the large financial institutions, remain focused on the core functions of banking: deposit-taking and the provision of mortgages, loans and lines of credit to businesses.
Being smaller, community banks cannot offer the product range or branch networks of large banks. On the other hand, because of their deep knowledge of the local community, they are able to lend to businesses and individuals who sometimes do not meet the impersonal rating criteria of the big banks. In addition, community banks also tend to offer better interest rates on deposits than the big banks, as a study by DepositAccounts shows.
Close and agile banking
It is clear that the close relationship of community bank employees with customers is a competitive advantage for community banks. Jamie Dimon, CEO of JPMorgan Chase, himself acknowledged the advantage of the proximity of these small banks to the communities they serve, since “their senior corporate officers live in the same neighbourhoods as their customers”. As a result, according to the head of the largest bank in the United States, “they are able to forge deep and lasting relationships” and bring “a deep understanding of the local economy and culture”, which allows them to “offer specialised, high-level banking services”.
Another advantage of community banking is agility. According to the Independent Community Bankers of America, community banks tend to make lending decisions faster than large regional or national banks. This is not surprising considering that decisions are made locally in the case of the former, while larger institutions often have to convene approval committees whose members are far away and completely unfamiliar with the applicants.
These factors result in higher customer satisfaction for community banking. According to a survey, 76 % of small businesses that received a loan from these institutions were satisfied with their overall experience, while this percentage drops to 62 % for large banks.
Deeply rooted in the territory
The fact that community banks are rooted in their environment means that they reinvest a large part of their profits in the community, contributing to the growth of small businesses and the creation of local jobs. Deep down, they realise that they only thrive when their customers and communities thrive.
Unlike large financial institutions, the managers of community banks do not have to be guided by the interests of large shareholders thousands of miles away. And this makes a fundamental difference. As the US Federal Deposit Insurance Corporation (FDIC) points out, it allows community banks to “weigh the interests of shareholders, customers, employees and the local community differently than would a larger institution with closer ties to the capital markets”.
A forced decline?
Regulatory changes favourable to large banks and mergers have significantly reduced the number of community banks in recent decades. In 2021, there were 4,490 community banks insured by the FDIC, down from 7,442 in 2008 and 14,323 at the end of 1988.
Despite this decline, US community banking remains an example of good practice in the financing of the productive economy. As Ben Bernanke, then chairman of the US Federal Reserve, acknowledged a few years ago, “community banks play a critical role in sustaining the vitality and growth of their local economies”.
It should not be forgotten that the proven ability of community banks to raise short-term deposits to finance longer-term investments is essential in any economy. And, as an article by the Fundación de las Cajas de Ahorros (Funcas) points out, community banks can continue to be “disruptors of larger banks, either as allies of fintech companies or through their own innovations”.
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