The Small Bank–Small Business Cascade
America is exceptional for many reasons, not the least of which is the way our pioneer DNA morphed into entrepreneurship. But all DNA has to be nourished, and the food of entrepreneurship is capital.
As America’s pioneers claimed Manifest Destiny they simultaneously created businesses and markets, which were funded at first by sweat, blood and personal capital of the pioneer/entrepreneurs themselves. As businesses and markets grew, additional capital was needed, which was provided by another American invention: locally owned banks. Today we call them independent community banks (ICB).
There are a number of reasons America became the world economic leader. But no factor was more important than the financial, legal, regulatory and trust environment that fostered relationships between ICBs and small businesses. These two Main Street sectors formed a symbiosis that simply does not exist anywhere else on planet Earth. Indeed, without this symbiotic relationship, the twin pillars of the American Dream – home and business ownership – would not have been possible, nor would the financial foundation of American exceptionalism.
Alas, this unique relationship may be in peril. But not because of anything the two primary partners have done. The financial crisis of 2008 shined a bright light on the behavior of large financial institutions, which had become too complex to regulate, too big to manage and, according to the government, too big to fail. But as the federal government and regulators attacked this crisis, ICBs have becoming collateral damage as the new regulatory regime does not differentiate enough between big banks and small ones.
It’s troubling enough to learn that existing ICBs are finding it difficult to manage under the new regulatory pressures, but that’s not the worst of it. Prior to 2008, when an ICB closed or was acquired by a larger bank, the marketplace would produce a new ICB to fill the newly vacated relationship-banking niche. But the following stats foretell an alarming trend.
According to the Independent Community Bankers of America (ICBA), there are 1,119 fewer ICBs today than in 2007. Only 96 new ICBs were chartered from 2008 to 2010, and since 2011, there have been no new ICB charters. Not one in 18 months! And if industry experts are correct, the net number of ICBs will continue to drop, ultimately to a dangerous level.
There are many causes of this alarming trend, but presently the biggest offenders are the one-size-fits-all “solutions” being imposed by overreacting politicians, overreaching regulations and overzealous regulators.
In nature, when one member of a symbiotic relationship is diminished, the other is usually harmed too. Fewer independent community banks will result in a weakened small business sector. I call this trend The Small Bank–Small Business Cascade, and it must be stopped.
Small businesses are not only the backbone of the U.S. economy, they’re also the seedlings of future big businesses and the personification of the American Dream.
Write this on a rock … America, beware The Small Bank–Small Business Cascade.
Jim Blasingame is creator and host of the Small Business Advocate Show. Copyright 2012, author retains ownership. All Rights Reserved.
