They might have another business or a farm to run on the side. They often know their customers personally. Many of their decisions are made to benefit the entire community. Also, they often counsel potential customers about what to do to achieve their goals. When COVID-19 came along, the entire country shut down. Community banks stepped up to the challenge of helping customers. Even though the network of community banks was smaller than it had been decades earlier, it was still large enough to help with the rollout of government money through the Paycheck Protection Program (PPP). Small lenders outperformed large lenders in round one; 60% of PPP loans came from lenders with less than $1 billion in assets. (Big lenders caught up in round two.) But that help came at a price: a negative effect on liquidity. Community banks ended up with a lot of money that wasn’t earning interest. Lower net interest margins mean reduced net earnings. In turn, the banks ended up with less money than they would have had otherwise to support their communities. The fact that banks were hurt for helping out their communities was certainly not intentional. Everyone was scrambling at the time. Nevertheless, it’s important to make sure community banks do a better job from now on as they advocate for themselves. What happens when the network of community banks across the country becomes too small to be effective? People will leave rural America for big cities because they won’t have enough reason to stay where they are. If we don’t want that to happen, it is time to start working to protect the community banks that are still here. Maybe it’s time to study what North Dakota has done relative to community banks. The Bank of North Dakota supports community lenders in a way that happens nowhere else. As a result, North Dakota led the nation by having a higher market share of deposits and PPP loans relative to population size than any other state. North Dakota has protected its community banks, and when the pandemic came along, those banks responded more effectively than other states with fewer community banks. What can community bankers do to safeguard their banks? It used to be that bankers passed their banks on to their families. When bankers struggle to stay in business, their children move into other businesses. That is why Job No. 1 has to be returning community banks to profitability. Community bankers can also help themselves by using important strategies such as succession planning. That way, when the day comes to hand off control of a bank to someone else, the bank can be transferred to a new owner with the same priorities and motives as the previous owner. Bankers can also help each other survive by joining associations and participating in programs that allow them to work more effectively. As a group, bankers can also lobby on a government level to protect their interests. For example, big banks should split off the investment side of their businesses. Federal and state governments could cap the market share size of deposits that banks can have in states. The government could focus on reducing regulatory complexity and applying the same rules to any organization that starts acting like a bank. “Shadow banks” operate like banks but don’t play by the same rules, even though their assets are substantially larger than the banking industry’s assets ($52 trillion versus $17 trillion). That’s not fair. Capping deposits would give customers in states like New York and California more choices; according to Abello, JP Morgan Chase had a 32% market share in New York. Three banks in California (Bank of America, Wells Fargo and JPMorgan Chase) had a 50% market share. No other banks had anything comparable. Finally, another change that would help community banks is making it easier for communities to start new banks. The FDIC approves new banks, but the number of new banks has been small or nonexistent every year since 2010. Legislation has harmed community banks. It’s time to change the playing field by pooling resources within the industry and advocating with lawmakers. 13 Pub. 12 2023 Issue 1
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