|How Community Banks Are Fueling Local Economies|
|By Jeff Schmitz, EVP/COO, Citywide Banks (Originally published in the Denver Business Journal, September 2013)|
As we collectively reflect back to what is now known as the great recession, we marvel at the loss and misfortune that affected millions of people across the United States and the world. Nearly every business in Denver has been challenged to move forward in this economy. For locally focused community banks, the recovery has been complicated by a blurred distinction between their business model and the roles of the large national money center banks. Through their deeper relationships with customers, better understanding of the dynamics of local markets, and localized decision making, community banks are critical vehicles to move local economies forward.
Many taxpayers have forgotten that the community bank takes local deposits and conservatively lends them out to local borrowers. This is a very traditional banking model. Every day you will see ownership and senior executives meeting with local business owners to ensure the bank is lending money prudently for the benefit of the bank, its depositors, and of course the business owner. A successful small business climate can create more local jobs and generate more local taxes for the state. The bank earns a fair spread on that money, which is necessary to provide the infrastructure for the bank’s stability, security, and fraud protection for our depositors. This success is also a catalyst for more local community outreach with higher contributions to locally focused proven nonprofits.
The narrative that has been forgotten is that banks don’t want to foreclose on your house. They want you to live a productive happy life, save money, and borrow more money. Local community banks thrive only when its customers and the surrounding community thrives. Furthermore, banks that are forced to collect collateral from defaulted borrowers typically lose money. Legal fees, maintenance costs, collection expenses, and higher FDIC insurance premiums all eat into the property’s value that was recovered. Additionally, foreclosed properties drive down values of neighboring properties and become a drag on the entire community. Foreclosure is the last thing any banker, depositor or community member wants.
Another reality that was lost in the morass of the great recession is that community banks are not designed to loan money to high risk projects or startup companies. The risk is too high and the reward is too low. Since the funding sources for community banks are typically limited to depositors within the local community, any change in that philosophy could be a detriment to the banks’ stability. Large money center banks, which spread risk across depositors over multiple states and countries, have a different risk threshold and should not be viewed in the same vein as your local community banks.
Community banks operate on a simple business model of helping the local community thrive. A strong community banking industry creates competition in pricing and service expectations in every community across the United States.
Community banking fuels small businesses in Colorado and across the USA. Therefore, the next time you see your community banker, go ahead and thank them for what they do for your community!
Check out other articles in this special section celebrating Citywide Banks 50th Anniversary, originally published in the Denver Business Journal.
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