Time to leave your big bank?

Community banks are fast emerging as the unsung heroes of the US economic recovery, following the fall-from-grace experienced by their big money-center bank brethren. Is the time right for more consumers and small businesses to take a hard look at their relationship with big banks in favor of community banks?

Community banks as a sector of the banking business have seemed always to have their priorities straight: Putting the interests of their customers first, reinvesting in the communities where they live and do business, and avoiding high-risk investments / business practices like derivatives and currency / commodity trading. They also seem able to sidestep most bank regulatory entanglements. 

Turns out these smaller banks are now are looking like both a sound investment and a critical part of the economic recovery. The Wall Street Journal cited these trends in a a recent article “Good Banks Come in Small Packages.” The smaller banks now hold a majority of the commercial real estate loans. They also have boosted key lending like C&I (commercial & industrial loans). Earnings results for smaller banks are robust as well.

There are some obvious reasons that the community banking sectors is on the rise, including:

1.    Community banks offer a better value to customers: Most locally owned banks deliver the same range of services from checking accounts to debit and credit cards at a much lower cost than big banks. They often offer, on average, better interest rates on savings and better terms on credit cards and other loans.

2.    Community banks invest in growing local economies: Small businesses, which have been at the forefront of the economic recovery and have created the majority of new jobs depend heavily on small banks for financing. Although small and mid-sized banks control less than ¼ of all bank assets, they make more than half of the volume of small business loans.

3.    Bank with an institution that shares a commitment to your community: The fortunes of local banks are intimately tied intimately to the fortunes of their local communities. The more the community prospers, the more local banks benefit. Big banks generally are generally not tied to their places where they operate. Indeed, they often use a community’s deposits to make investments in other regions, on Wall Street or to help pay big regulatory violation fines.

4.    Support productive investments, not gambling: Community banks are in the business of turning deposits into loans and other productive investments. Meanwhile big money center banks devote lots of their resources to speculative trading and other Wall Street bets that may (or may not) generate big profits for the bank, but provide precious little economic or social value to it customers or communities where they do business.

5.    Local decision making: Community banks make loan approvals and other significant decisions on a local basis. They often using personal knowledge of the businesses or individuals to help provide qualitative insights into the lending decision, approving loans that a big bank, using computer generated models and less personal evaluative criteria might reject.

The Independent Community Bankers of America trade association provides an excellent overview of itself and the advantages of community banks and overview community bank facts at Independent Community Banks of America overview.

A final and somewhat blinding glimpse of the obvious is around the issue of honesty and integrity. Big banks continue to make headlines by pleading guilty to a seemingly endless stream of criminal and anti-trust violations for activities such as price rigging foreign currencies, mortgage related charges and tax evasion and manipulating interest rates.

A study by the Boston Consulting Group determined that legal claims against the world’s leading banks have reached $178 billion since the financial crisis. The study concluded that big banks have now come to accept big fines as another cost of doing business.

Despite these massive legal charges, banks recently have returned to profitability for the first time since the financial crisis. Any wonder their fees and rate charges have skyrocketed?

Seems that nearly any way you look at it, community banks are the smart choice for personal and small business banking, and will continue to help empower success and growth for the US economy into the foreseeable future.