It shouldn't be a surprise that big banks are more comfortable dealing with large businesses | Community banking

According to the Washington Post, "White House, GOP face heat after hotel and restaurant chains helped run small business program dry."  From the article:

The federal government gave national hotel and restaurant chains millions of dollars in grants before the $349 billion program ran out of money Thursday, leading to a backlash that prompted one company to give the money back and a Republican senator to say that “millions of dollars are being wasted.”

Thousands of traditional small businesses were unable to get funding from the program before it ran dry. As Congress and the White House near a deal to add an additional $310 billion to the program, some are calling for additional oversight and rule changes to prevent bigger chains from accepting any more money.

Ruth’s Chris Steak House, a chain that has 150 locations and is valued at $250 million, reported receiving $20 million in funding from the small business portion of the economic stimulus legislation called the Paycheck Protection Program. The Potbelly chain of sandwich shops, which has more than 400 locations and a value of $89 million, reported receiving $10 million last week.

As Stacy Mitchell of the Institute for Local Self-Reliance says "The Small Business Administration is set up to help small businesses become big businesses." (She happens to be featured in a NYT article on Amazon, "As Amazon Rises, So Does the Opposition.")

This shouldn't be a surprise.  There's been tons of writing about the impact of community banks on local business ecosystems, and how as these banks have consolidated with larger banks, the focus on small business lending is dissipated.

Similarly, ever since reading the textbook Social Psychology of Organizations and the Kirkpatrick Sale book Human Scale, I've understood that large organizations--and that includes governments--are more comfortable dealing with larger organizations than smaller ones.

That's why it's hard for small organizations to get government contracts, etc.

Besides directing monies to community banks and CDFIs--community development financial institutions--specifically as part of such initiatives, it would be possible for the large banks to develop "banks within the bank" to focus on small businesses.

-- "Let community banks and nonprofit lenders give small businesses emergency coronavirus PPP loans, Pa. congressman says," Philadelphia Inquirer

But that would be pretty hard, and the economies of scale probably aren't there--just like how the big airlines were never successful in creating subsidiaries designed to provide low cost seats to compete with Southwest Airlines and similar companies.

Better to just focus on creating and maintaining a system of smaller, community banks focused on local markets and local businesses.

Community banks in the face of redlining.  There is a section in Death and Life of Great American Cities where Jane Jacobs describes a road trip and being shocked at a particular area of a big city having a thriving business district and residential neighborhood.

When she looked at it more closely, she discovered that the neighborhood retained a community bank committed to making loans in the local community, unlike the larger banks, which were "redlining" such communities and denying loans.

Building a local economy vs. "economic development" and the multiplier effect.  But this kind of lending or business activity, I call the difference between "building a local economy" versus "economic development."

Too often economic development doesn't look more carefully at the community economic "multiplier effect" of economic activity of businesses.  Locally owned  businesses recirculate more money within the community, while businesses elsewhere "repatriate" revenues to their headquarters community, which is also where they tend to hire and utilize ancillary services.

Graphic from Yes Magazine.

Studies on this have been done for local communities and various retail sectors, when it comes to the economic value of chain stores versus locally owned businesses.   The consulting firm Civic Economics has performed these studies around the country.

The National Hardware Retailing Association, the American Booksellers Association, and the American Independent Business Association have commissioned such studies as well.

-- The Multiplier Effect of Local Independent Businesses, AMIBA
-- Study: Shopping Local vs. Amazon Makes Powerful Impact," Hardware Retailing
-- Local First and Economic Impact Studies, American Booksellers Association

Opposition to large tax credits for businesses, like FoxConn in Wisconsin, have to do with this kind of analysis too, over how much of the business activity further generates local economic activity.

Years ago, Aaron Renn wrote about how once Anheuser Busch was acquired by a non-US company, they eventually stopped hiring advertising firms based in St. Louis ("St. Louis and the Consequences of Consolidation," New Geography)

Less diverse loan portfolios can be more risky.  Note that a counter argument is that community banks can be overexposed to risk by focusing too much on a local community so that when times go bad, many of the loans become nonperforming.

This New York Times Magazine article, "Why New Orleans's Black Residents Are Still Underwater After Katrina," discusses Liberty Bank of New Orleans and the extra effort it took to protect its clients post-Katrina.  That's not the kind of effort that a typical "money center" bank will go towards.

But also how at the time the bank's future was uncertain, because much of its lending was centered in the areas of the city most impacted by flooding.

Plenty of community banks have had such problems over the years since I've paid attention, for example South ShoreBank in Chicago ("Chicago's ShoreBank fails, is bought by investors," Chicago Tribune, 2010). I read a book about ShoreBank in the mid-1990s, Community Capitalism: The South Shore Bank's Strategy for Neighborhood Revitalization.

And banks owned by labor unions, African-American and other ethnic focused banks, often run into problems during bad economic times, etc.  (Sometimes, it's abetted by self-dealing.)

State banks. An option is to have a broader customer base, and operate at the scale of a state. North Dakota has a state bank that makes community oriented loans ("The Case for a State-Owned Bank," Governing Magazine).

Rural credit system. Similarly, the USDA helps to fund rural development through the Farm Credit system ("Do You Understand The Farm Credit System?," Successful Farming Magazine).