Importance of Community Banks

Joe Reid is a different kind of banker. In fact I’ve never met another like him. I profiled him in my September 18, 2006 blog (available in our archives) when I first started studying Capitol Bancorp in detail. Capitol just opened their 51st stand-alone community bank last week in Palm Desert, CA. Each bank is locally run with a local governance board, management and shareholders.

Reid sees the need for community banks as critical to a community as he explained, “Access to capital is the key to U. S. growth but the power of credit is becoming more concentrated into fewer and fewer hands. The best example of this is Bank of America which has 9% of the country’s deposit base. A month ago they unleashed their lobbying efforts to strike down the federal decree that you can’t buy banks to go over a 10% level, although you can grow above the 10% level with organic growth.”

Reid went on to explain to the assembled directors of several of the banks, “This concentration of power has been bad for the development of small and new businesses. When the decision making is taken from the community small business suffers, according to an SBA study. The advantage that each of our banks has is that you are making the lending decisions locally and each of you have a stake in your town.”

Key Six in BoomtownUSA is To Maintain Local Control with the importance of local financial institutions being a critical part of that local control. Bankers talk about the 5 Cs of Lending of: cash flow, collateral, capital, conditions and character. The first four of those are fairly easy to measure and a banker in an ivory tower can quantify those items fairly easy.

But how do you quantify character? Character is often the critical element in the success or failure of a new business. And is why local community banks are so important.