The number of banks in the U.S. has fallen to a record low this year, with most of the closed institutions consisting of community lenders. With profits harder to come by in financial services and bankers complaining about the burdens of increased regulation, more small lenders are expected to close. This could take a toll on small businesses, which rely on these banks as their primary source of funds.
According to the Federal Deposit Insurance Corp., the number of federally insured financial institutions fell to to 6,891 as of the end of September. That’s the lowest it has been since 1934, when federal regulators began tracking the number. In the past 30 years, more than 10,000 banks have closed because of mergers, consolidations or failures. The overwhelming majority of those closures were small banks, or those with less than $100 million in assets.
“Small banks are the most important source of loans for small businesses,” said Rohit Arora, CEO of Biz2Credit, which matches up businesses and lenders. Research by the company shows that since the end of the recession, small banks have approved three to four times more small business loans every month than big banks have.
Small banks make their money from what many think of as traditional banking -- the spread between the interest they pay to depositors and the interest borrowers pay for loans. However, the Federal Reserve’s monetary policy since the 2008 financial crisis of keeping interest near zero has cut that difference paper-thin.
Banks big and small also face higher costs to comply with regulations passed under the 2010 Dodd-Frank financial reform law. Some banks have had to quadruple the number of staff dedicated to dealing with these and other regulations, like those requiring increased security to ward off cyber-attacks. Such costs are much easier for large banks, like Citibank (C) or Bank of America (BAC), to absorb.
Seeking relief from these regulations, small bank executives testified at congressional hearings this week in support of a bill that would exempt smaller lenders from some of these new rules.
“Community banks must have regulation that is calibrated to their size, lower-risk profile and traditional business model,” said B. Doyle Mitchell Jr., a third-generation community banker and CEO of Industrial Bank in Washington, D.C.
Mitchell, speaking before the House Small Business
Subcommittee on Investigations, Oversight and Regulations, also said regulatory
compliance “takes an inordinate amount of time away from what we should be
Although Dodd-Frank has yet to go fully into effect,
Mitchell said his employees were already seeing an increased workload from
doing things like making sure mortgage applications meet the requirements set by the Consumer Financial Protection Bureau. That bureau was created under Dodd-Frank to protect consumers from the kind of rampant predatory lending and other abusive financial practices that led up to the housing crash.
Banks of all sizes are also being hit by a change in
consumer habits from in-person banking to doing transactions online and by ATM. That shift also has been hard for small banks, which have fewer technology resources, to adapt to.
“More customers are using technology for deposits and the like, reducing the need for and profit from branches – especially with Dodd-Frank cap on banking fees,” said Arora. “Last week I was speaking with a senior executive for a big bank who told me 60 percent of their branches are unprofitable.”