Why Local Banks Are Crucial to Your Community's Coronavirus Recovery
When large portions of the U.S. economy began to shut down in response to the novel coronavirus, Congress responded fairly quickly by passing an aid package intended for small businesses. The Paycheck Protection Program (PPP) offered forgivable loans to help shuttered establishments meet payroll and pay rent. The program was overwhelmed and its $349 billion in initial funding was exhausted in only 14 days.
Now we have the first data on where the loans went: who managed to get one, and who didn’t. And a new report from the Institute for Local Self-Reliance (ILSR) is shining the spotlight on a crucial insight. Whether a small business was able to access federal aid in time may have hinged on an underappreciated factor: how strong their community’s local banking sector is.
The Vital Importance of Community Lending
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The ILSR report analyzes the number of PPP loans per 100,000 residents in all 50 states, and compares it to the strength of each state’s local banking sector, measured by the dollar amount per 100,000 residents of deposits in such banks, and finds a strong relationship. (Local banks are defined as banks that are headquartered in the state and have under $5 billion in assets.)
In states with a robust community banking sector, significantly more PPP loans were made, suggesting that such states are positioned to do a better job of avoiding economic damage from pandemic-related shutdowns.
Why is this the case? The report explains what it is about community banks that’s so essential in this crisis:
To some extent, these failures are a reflection of how little the megabanks pay attention to small businesses generally. In normal times, they don’t do much small business lending, in part because they aren’t very good at it. It’s a problem of scale. Unlike local banks, which are immersed in their communities and have a rich trove of “soft” information to draw from in assessing the likelihood that an entrepreneur will succeed in a particular market, big banks are operating at a scale that leaves them largely blind to information that can’t be quantified.[13] As a result, megabanks have higher default rates and make comparatively few of these loans.[14] The contrast is striking: Community banks provide 40 percent of small business lending, despite having only a 13 percent market share. Meanwhile, the top four banks — Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo — control 41 percent of banking assets but supply just 16 percent of small business lending.[15]
“We often talk about how megabanks are too big to fail. But the bigger problem is that megabanks are too big to succeed at the very things we most need the financial sector to do.”
We often talk about the story of American small business in the past few decades as a story of centralization and consolidation: countless small towns, and urban and suburban neighborhoods alike, have seen their local economic ecosystems hollowed out as national chains supplant mom-and-pop stores and restaurants. But less attention has been paid to similar trends in the banking sector. The current crisis is making clear that lenders need to be part of a long overdue collective push to re-localize our economies.
The ILSR report describes the extent and some of the causes of this troubling trend:
This is part of a long-running pattern of marginalizing community banks as a matter of federal policy. In the aftermath of the 2008 financial crisis, Congress bailed out the megabanks, in spite of their track-record of fraud, and yet allowed hundreds of local banks hurt by the ensuing recession to fail. At the same time, regulatory reforms did little to reduce the market power of big banks, while also imposing new compliance burdens on small financial institutions.[20]
As a result, over the last decade, the number of community banks nationwide has fallen by more than one-third, from 7,621 to 4,833. More than 35 percent of counties no longer have any community banks, up from 24 percent in 2009, we found. Counties with a higher share of African American residents were more likely to see community banks shutter during this period.[21] That may be one of the factors contributing to emerging evidence of stark racial disparities in PPP lending.[22]
You can go here to read the full report, by Stacy Mitchell.
Cover image via the ISLR report.
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