Congress has produced a 2,400-page genuflection at the altar of financial reform, a regulatory package that critics say grants “too big to fail” status to the biggest financial institutions in the country. That same legislative effort, capitalizing on consumer anger over perceived manipulation of financial markets, poses a bigger threat to the stability of banks that didn’t cause the problem in the first place, regional bankers insist.
And those are the community and regional banks that make the Kansas City economy and that of other cities click.
Now, there’s more evidence to support arguments that smaller-scale banks may indeed bear the unintended consequences of federal efforts at regulatory reform. A recent study by the Federal Reserve Bank’s 10th District branch in Kansas City has concluded that community banks, as opposed to their mega-bank brethren, pushed on through the financial crisis and continued to make sound loans.
Larger-scale banks are talking these days about the need to get “back to basics” by embracing relationship banking, and putting a new focus on the needs of their business clients and customers. The Fed’s study, though, suggests that smaller banks that have relationship banking at their very core are the ones still doing the lending in a market hamstrung by restrictive credit standards.
“Community banks, generally speaking, by definition are banks that are focused on their immediate community, relying on relationship banking as a basic business model,” said Lisa Schroeder, vice president for supervision and risk management at the Federal Reserve Bank in Kansas City “From our perspective, these are almost definitional issues when you look at smaller banks. I think the better question is, is relationship banking a good thing, or a better thing, and what’s the real value of relationship banking?”
The Fed, she said, earlier this year had conducted a study of outstanding loans reported by banks throughout the financial crisis, to see whether smaller banks did a better job of maintaining their lending than bigger banks. The data confirmed that smaller banks did, indeed, have a more active lending profile, she said.
“You can see the correlation, but we would be speculating on the cause,” Schroeder said. “If you look at the percentage change in the loans reported outstanding at banks below $250 million in assets, it actually shows a small increase, whereas all the banks over that threshold showed a decline.
“Another metric is, if you look at distribution, what percentage of small banks increased lending, and it was over half,” she said. “For larger banks, it was substantially below half. So both on a measure of average change, smaller banks fared better, and with how many in those size groupings increased lending, small banks again fared better.”
Generally, she said, the results suggested that a relationship banking model might have been an asset through troubled times for a smaller bank. With a deeper understanding of the businesses it was working with, she said, a smaller bank might have been in better position to sort out how to work with a borrower.
And for business owners lamenting a new lending environment with tightened credit standards, that might provide some guidance.
“People make different decisions based on what’s important to them” when borrowing money for their business needs, Schroeder said. “A business has to look at the whole package of what’s important. Some businesses, I’m sure they’re smaller, generally speaking, might attach value to working with a lender they believe really understands their business in-depth, and would be here to help me when problems develop.”
But What is ‘Big’?
Any comparison between large and small banks must take into account the varying definitions of large and small banks. The two biggest in this region dwarf most of the competition in Missouri and Kansas: Commerce Bancshares with $18 billion in assets, and UMB Financial Corp. with $10 billion. Only a dozen other banks in the Kansas City region cross the $1 billion threshold.
But consider this: Even among the largest 100 banks in the nation, Commerce is tied for 32nd, and UMB for 60th. The top four on that list—Bank of America, J.P. Morgan Chase, Citigroup and Wells Fargo—accounted for $7.4 trillion of the $10.5 trillion in assets held by the 100 largest U.S. banks last year, or more than 70 percent of the total.
And for the 69 banks ranked 32–100 on that list, the average asset size is $9.9 billion, almost exactly the size of UMB. By definition then, even our local heavyweights are closer in scale to community banks than they are to the giants of banking on a national scale. And they’re working hard to maintain that small-banking approach, even within their Top 100 frameworks.
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