Right now, and likely for a while longer, there’s a lot of stuff coming out about challenges in the U.S. banking system. Sometimes it’s difficult to sort through the range of comments, from the smart to the stupid. But if you’ll give me five minutes, we’ll find some clarity so you can not only make better banking decisions for yourself and your business, but also for our country.
Watching a segment of a business news program recently, the conversation was about the impact on the banking system from the dramatic collapses of two very large San Francisco banks, Silicon Valley Bank (SVB) and Signature Bank. One of the guests, a celebrity “financial expert,” made this statement about the future of banking: “America no longer needs 3,000 regional banks, since most of us do our banking online.”
This stupid comment pulled off the hat trick: ignorant, inaccurate, and dangerous. On its face, the statement is factually incorrect – no American bank sector corresponds to the number he used. It’s ignorant from a marketplace standpoint because it assumes all banking is done online. And in the Digital Age, when inaccuracy and ignorance come out of the mouth of a so-called expert in a single comment, it can become dangerous.
So, let’s establish some clarity and avoid the danger by thinking of America’s three commercial bank sectors in the context of the classic rocks-in-a-jar metaphor. You may remember that the assignment is to completely fill a large vessel using only the rocks and sand provided, leaving no empty spaces. We’ve learned that the only way to accomplish this task is to put the biggest rocks in first, the smaller ones next, and finally, pour in the only resource you have that can completely fill all the voids. The sand.
Since the first American bank charter was signed by President Washington in 1791, here’s how our banking system has evolved to successfully fill up the vessel we call the U.S. marketplace.
Big rocks = Big Banks: J.P. Morgan, Chase, Citi, Bank of America, et al. There are about a dozen of these based in the United States, but like Wall Street, their business footprint is global. These banks are so big that when everything turns to mush, like in 2008 and 2023, the federal government turns to them for help. And as we first discovered in 2008, the other name for a money-center bank is “Too Big to Fail.”
Big Banks are publicly traded, and the closer you are to Wall Street, like that celebrity expert, the more devoted you are to them. But remember, like big rocks, Big Banks leave huge gaps in the marketplace vessel. Translation: they don’t conform to Main Street.
The smaller rocks in our assignment are regional banks, of which there are just over two dozen (Federal Reserve). As the term implies, regionals have multi-state footprints. The following three are representative of the category: Zions Bank with a west and southwest U.S. footprint; Key Bank, mostly northeast and northwest; Regions Bank, primarily situated in the south and midwest. Like Big Banks, regional banks are publicly traded.
Regional banks play an important role and vital purpose in the U.S. marketplace by filling in around Big Banks with more granular services. For example, but certainly not limited to: businesses needing a more sophisticated and larger credit relationship ($millions) and consumers who only need checking/debit accounts, credit cards, and maybe a car loan.
No question, regional banks are important to America. But just as even small rocks don’t conform to a vessel, regional banks don’t fill in all the banking gaps in the marketplace, notably many of the Main Street parts.
Independent Community Banks
Last, and by definition least – but by no means insignificant – are independent community banks. Numbering 4,353, hometown banks represent 97% of all banks (FDIC 2022) and cover 100% of fly-over America. More than any other sector, community banks deliver banking services to Main Street America: working folks, small businesses, and farmers. The 99%.
With footprints typically defined by the counties they serve (not states), these banks are locally owned and managed by the stakeholders of the communities they helped build generations before anyone ever heard of an iPhone. Half of community banks are headquartered in rural counties with less than 50,000 population (FDIC), and one report showed over 600 U.S. counties are represented only by a single financial institution – a community bank. That’s the equivalent of 10 states. That’s American banking sand.
Community banks serve up a special sauce that you only find at the most granular level of banking: Your local phone call is answered by a real local person; a local person answers your questions and handles problems; loan requests are evaluated by real people looking at your proposal, instead of believing an algorithm-created “credit score” spit out of a computer; loan officers deliver relationship banking and, if you’ll let them, become your business’s best friend.
Community banks show up even during a crisis. In the 2008 financial crisis aftermath, only community banks made small business loans. I checked. And during the pandemic, community banks were the PPP processing heroes. I watched. And one more thing: FDIC insures your deposits in a community bank exactly the same as a big or regional bank. Any questions?
Finally, don’t compare SVB and Signature to any of these three bank segments. Those two “woke” banks were de facto investment banks that we now know lacked the regulatory oversight your bank gets. Indeed, you can’t swing a cat inside a community bank in any given week without hitting an auditor from a federal, state, and/or industry regulator, or the bank’s own auditing consultants. Safe.
How did the U.S. become the strongest financial country in the world by essentially inventing entrepreneurship? One huge reason is the uniquely American community bank sector. If you’re a small business owner, an essential part of your survival strategy is to be close to a community bank. I know this because a community bank has been my business’s best friend for over 30 years. Strong.
Community banks are the essential sand in the U.S. marketplace vessel. In a recent small business poll we conducted, 86% of respondents said they did business with a community bank, including 80% of that group who did business only with a community bank. Smart.
Write this on a rock … Final clarity: The marketplace vessel has never been cracked by the sand. The rocks can’t say that.