roles. The biggest companies can absorb adverse circumstances; smaller companies sometimes can’t. Computerized banking has made branch banking and interstate banking possible, but it has also created competition between bankers that didn’t exist before. For example, suppose you have two banks in adjacent counties owned by two friends. The two friends are probably close enough physically to have lunch occasionally, and if they have a different set of customers, there’s no conflict of interest. But now, suppose that one or both open a new branch in the other banker’s county. If they get together for lunch, they can’t talk about banking anymore because they are competitors as well as friends. Out-of-state ownership creates a similar scenario. Different regions in the U.S. have different risks. A small banker can diversify by trading risks with bankers in other geographical areas, but big banks can handle the problem by buying risk instead of trading it. It makes sense for an effective banking system to provide resources for as many people as possible. What doesn’t make sense is directing all the help to the top instead of the bottom. Even though the internet has made it easy for people to bank online, that doesn’t mean internet banking always meets customer needs. In particular, small towns with community banks thrive; small towns without them don’t. There is no substitute for a face-to-face business relationship with someone who decides to help you because they know you, not because a computer algorithm identified you as a safe bet. People at big banks understand the importance of the community bank system, but preserving it is another matter. Where community banks focus on relationships, big banks focus on transactions that use credit scores and models. Since it costs as much to write a big loan as a small one, and big loans generate more interest, big banks focus on the big loans. They also focus more on income from fees and investments than interest from loans. Another problem is that big banks can centralize their operations far away from their customers. Although a big bank can focus on relationships, that’s a hard focus to maintain from a distance. It’s easy to forget about serving people you’ve never met. Also, banking systems must grow to survive and maintain economies of scale. When an interstate bank decides to expand, they don’t buy branches that belong to big banks. Instead, they buy the local community bank even though they know it’s needed. An abstract need to support community banks is not as important to them as the immediate need to please a boss by helping an already large banking system grow even larger. In contrast, it’s much easier for a community bank to pay attention to relationships because the people who work there are often personally invested in their community. There is no substitute for a face-to-face business relationship with someone who decides to help you because they know you, not because a computer algorithm identified you as a safe bet. 12 The CommunityBanker
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