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The Last Real Banker? 67
char acteristics of the local market, for example—rather than rely
on a single computer- generated credit score like the big banks do.
That level of personal knowledge and consideration helps explain
why the loan portfolios of small banks under $1 billion outperform
those of their bigger rivals. 2
The same could be said for the nation’s nearly 8,000 credit
unions, which, as member- owned not- for-profi ts, are managed for
and by their member- customers.
These community-based fi nancial institutions have been the
chief ally of small business. Loans to small business make up 27
percent of the overall loan portfolios of banks with less than $500
million in assets, compared to just 5 percent for banks with more
than $50 billion in total assets. 3 While fi nancial institutions of all
sizes cut back lending in the aftermath of the subprime meltdown,
none did so as drastically as the large banks. Community banks
and credit unions offered the only lifeline for many borrowers.
Overall, community banks increased their total loans by
about 2 percent, compared to a 6 percent decline for larger banks.
Small business lending dipped by 3 percent at com munity
banks, com pared to 21 percent for larger banks. 4 Credit unions,
meanwhile, increased their small business lending by 10 percent
in 2009. 5 (The amount credit unions can lend to small business
is capped by federal law at 12.25 percent of their total assets.
Credit unions argue that raising the limit to 27.5 percent for wellcapitalized
institutions, as some congressional members favor,
could spur $10 billion in new small business lending, at no cost to
the government).
“It is said that a community with a local bank can better
control its destiny,” Thomas Hoenig, the outspoken head of the
Kansas City Federal Reserve, noted at a hearing of the House
Subcommittee on Oversight and Investigations in late August
2010. “Local deposits provide funds for local loans. Community
banks are often locally owned and managed—through several
generations of family ownership. This vested interest in the success
of their local communities is a powerful incentive to support
local initiatives. It is the very ‘skin in the game’ incentive that regulators
are trying to reintroduce into the largest banks.”