Banks play an important role in our every day lives, from safeguarding our hard-earned money to managing non-cash payments. They also play a vital role in our local economy by helping people buy homes and start businesses by extending credit. But where you choose to bank matters, and while banks of every size play an important role in the broader economy, for a place like Cape Cod, small financial institutions are key to the health of our community, which is why the trend of corporate consolidation in the banking industry should be cause for concern.
Data shows that small, local financial institutions charge lower prices for the same services and are more nimble than their large counterparts, as they have far less bureaucracy than larger banks. They also know their communities, which means they lend to more startups and small businesses that a national institution might not take a chance on. And as became evident after the 2008 financial crisis, they are more secure than corporate banks.
Despite all this, corporate concentration has been eating away at the industry and the number of community banks and credit unions has sharply declined from the 1990s when there were close to 12,000 of them to today when there are about 3,000.
Across the country this kind of corporate consolidation can have large implications. Not only can it lead to higher fees for consumers, reduced access to banking services as larger banks shift their focus to their investment portfolios, and increased concerns about risk to the financial system, but for communities like Cape Cod where the economy relies almost entirely on small businesses and their success, the negative impact can be considerable.
In fact, a researcher at MIT showed that the closings of community banks have a prolonged negative impact on credit supply to local small businesses. This is because small banks are more likely to lend to small businesses, while larger banks prefer to make big loans with big payments to the largest U.S. businesses. Although small and mid-size banks hold only 17 percent of industry assets, they supply 46 percent of all bank lending to new and growing businesses, whereas the largest banks – Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo – hold 41 percent of assets but provide just 16 percent of small business lending.
The COVID-19 global pandemic exposed many of the problems with the structure of the current banking system, notably when it came to getting Paycheck Protection Program funding to small businesses. When the Small Business Administration launched PPP with the goal of keeping people in business and on the payroll, the initial round of funds available for the program ran out very quickly, and many small businesses were left out, because big banks were not servicing smaller loans, instead they chose to focus on their larger customers.
However, in communities where local banks have a strong presence, the number of PPP loans made to small businesses greatly surpassed those regions that do not have a strong concentration of community financial institutions.
Barnstable County, which used to be home to a wide array of Cape Cod owned and operated local banks, is now headquarters to only three local banks – Cape Cod 5, The Cooperative Bank of Cape Cod and Seamen’s Bank. Fortunately, these local banks remain viable, sound, and steadfast in their commitment to the local economy and community, and they were exemplary in their efforts to get Cape Cod’s small businesses the financial lifeline they needed to get them through the pandemic.
“We mobilized the entire financial institution to be a part of the [PPP] effort, which was so much more than a commercial lending process,” said Cape Cod 5 co-President, Robert Talerman, “failure wasn’t an option.” Their team worked non-stop to ensure that thousands of local, small businesses would have access to the program and keep money (to the tune of hundreds of millions of dollars) flowing through the economy.
Barbara Smith, Executive Vice President at The Cooperative Bank of Cape Cod, which also helped thousands of businesses that employ over 10,000 people access the program stated “the small businesses couldn’t get the attention of the big banks, as they were busy serving their biggest customers…that philosophy is totally the opposite of the [Cooperative Bank’s] philosophy where it’s not about profits for shareholders, it’s about strengthening the community.”
The harms and instabilities this kind of consolidation creates for local communities are many, as are the reasons behind it. The early days of the many mergers and acquisitions of the banking industry point to small banks not being able to compete on technology and economies of scale (this is no longer the case). However, as co-Director of the Institute for Local Self Reliance, Stacey Mitchell points out, “the extreme level of market concentration and financial consolidation is not the product of inevitable forces. It is the result of deliberate policy decisions beginning in the 1980s that led to lax antitrust enforcement and deregulation of the banking system.”
Prior to the 1980s much of the regulations of banks was guided by the 1933 Glass-Steagall Act, which had been passed because of the Stock Market crash in 1929. To minimize risk and protect federally insured deposits, it prevented banks that accepted deposits from also acting as investment banks under the same roof. It also kept their power in check by restricting a bank’s ability to open branches across state lines, and empowered states to regulate them by limiting their size, essentially keeping their focus on their local community. As a result, between 1940 and 1980 the banking system in the United States remained stable and local banks strong community partners.
But in the 1980s, Congress and federal regulators began slicing away the policies underpinning this system by, for example, lifting caps on interest rates, loosening mortgage rules, and hollowing out state restrictions on geographic expansion via branching and mergers. The 1990s and the aftermath of the 2008 financial crisis saw more policy decisions that enabled large corporations to expand their reach by enabling banks to branch across state lines with no limits, once again allowing commercial and investment banking under one roof and taking away much of the regulatory power from states that had protected small banks for so many years. What’s more, some of these measures created additional regulatory and compliance burdens for community banks, credit unions, and bank startups in the process.
The Independent Community Bankers of America cites consolidation in the industry as a critical issue to address at the federal level noting that the less competition is bad for the consumer and advocate strongly for regulatory relief in order to keep community banks viable stating regulation should be tiered and proportionate to the systemic and consumer risk posed by classes of banks. According to Dorothy Savarese, Chair and CEO of Cape Cod 5 who has testified in front of the Senate on the issue, much progress has been made on both the legislative and regulatory side when it comes to recognizing just how important local banks are to the U.S. economy, and following suit with regulations and oversight. Although it continues to be a “challenge to understand and ‘right-size’ the regulation to be appropriately tailored to the bank,” she is encouraged that the federal government is on board “that they need to work toward a new framework that considers bank size, their market, risk level and business model.”
Other advocacy organizations and policy makers support reinstating the separation between commercial and investment arms in banking institutions, setting deposit caps in states, and holding megabanks accountable to violating consumer protections as a way of reigning in the corporate power being flexed in the banking industry. And many have noted the success and high profits that North Dakota has had by running their own state bank, which supports the higher than average number of community banks within its borders.
To be sure, consumer choice matters when it comes to banking. The more deposits and loans that are made in a community financial institution, the more the bank can reinvest in the community in the form of small business loans, mortgages, employee wages, support for other local businesses, and support for local nonprofits and organizations. But future policy decisions will also matter a great deal if communities like Cape Cod are to maintain and hopefully regrow a strong local banking ecosystem.
This article is part of a year-long investigative series that will explore how corporate concentration has affected various industries across the country and what impact that can and does have on Cape Cod’s local economy.
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