The vital fabric of America’s financial system is woven with the threads of its small banks. The emphasis the U.S. places on these institutions isn’t just ceremonial. Their existence, their stability, and their success are essential for the heartbeat of local economies.
Yet, it’s startling how the actions of policymakers consistently seem to bolster the giants while sidelining these smaller institutions. So, let’s clear the fog. Let’s tackle the undeniable fact: America’s small banks are more than just crucial; they’re irreplaceable.
Dismantling the Pillars of Local Economies
Decades of bank deregulation since the 1980s, masked as the path to prosperity, have left in its wake an alarming erosion of small banks. Contrary to the popular narrative, the colossal banks were the culprits behind the global financial crisis, not these local stalwarts.
Yet, it’s the giants who reaped the benefits, further increasing their hold. Between 2002 and 2022, a staggering drop in the number of banks insured by the Federal Deposit Insurance Corporation was witnessed. Was this coincidence? Or an unfortunate outcome of policies masked as progress?
The unofficial stance of the US Treasury has been to rally behind the bigger-is-better mantra. Even before the repeal of the Glass Steagall Act in 1999, which kept commercial and investment banking distinct, there was a push to ease interstate banking restrictions.
All under the illusion of consolidation. This emboldened Wall Street’s perspective, leading some to brazenly question the very relevance of small banks, especially after the downfall of institutions like Silicon Valley Bank.
These moves, quite blatantly, didn’t have the nation’s best interests at heart. Instead of diversifying power and fostering competition, the scales tipped heavily in favor of those already dominating.
Small and mid-sized banks now grapple with larger competitors who possess an unspoken governmental safety net, rendering them more vulnerable.
The ripple effects? Small banks hemorrhaged $120 billion in deposits during the crisis. Scott Hildenbrand, a notable bank analyst, grimly forecasted a drastic shrinkage in the number of U.S. banks in the next decade.
If this trend continues unchecked, vast swathes of America could face “bank deserts”, mirroring the challenges seen in food and healthcare availability.
The Veiled Threat of Shadow Banking
Yet another alarming trend is the rise of non-banks. Regulatory loopholes have siphoned funds into these less-regulated establishments. Non-bank lenders are increasingly helming mortgage origination, sidelining traditional banks.
Behind a veneer of helping smaller banks offload their loans, private credit has been steadily gnawing away at the banking sector’s market share. If the pandemic shed light on anything, it was the lackluster support for small enterprises.
Sure, initiatives like the Paycheck Protection Program were rolled out, but they were plagued with inconsistencies, especially when juxtaposed against the laser-focused bailouts for large corporations.
The outcome? Small businesses bore the brunt, especially those lacking an online presence or the clout to navigate supply chain disruptions.
Naysayers might argue the redundancy of small banks. But here’s the raw truth: these institutions are the lifelines for small to mid-sized businesses, the true job creators in the U.S. Without their tailored loan services, many of these enterprises would flounder, unable to compete in markets dominated by titans.
Post-pandemic, as we witness a surge in start-ups, these very entities will be the vanguards leading us out of potential recessions. And for them to flourish, the preservation and empowerment of small banks isn’t just necessary – it’s non-negotiable.
