The Small Business Finance System Is Collapsing
There are fewer than 5,000 banks in the United States, down from 14,000 in the 1990s. When Silicon Valley bank collapsed, people became aware of the limit of federal deposit insurance — $250,000 per account – and moved even more of their money from small banks to banks that were perceived as too big to fail. Deposits at the 25 largest lenders rose $67 billion in the week of the collapse, while deposits shrank by a record $120 billion everywhere else. The outflows stabilized shortly, but the bottom line is this:
It was already hard to be a small bank. It just got harder.
Further consolidation of the banking system poses a danger to the United States economy. Right now, the country is experiencing an unexpected boom in business formation. But the next phase of that initial boom – growth – will require capital. I doubt the shrinking U.S. banking system is in a position to deliver it.
Some 60% of loans to small businesses are made by banks within 10 miles of the borrower and about 75% of loans are made by banks within 25 miles of the borrower, according to a Goldman Sachs research note. Economists at the investment bank are worried about whether small businesses will be able to access credit through larger banks. Small businesses in rural states, which have fewer big-bank branches, will be left even further afield.
But the availability of credit is not the only concern. When Seth Levine and I were writing The New Builders, it was clear that the common thread in many successful small business stories was a caring community banker.
In building startups, intention and emotional support matter. If you start a local bank, chances are it’s because you want businesses in your community to succeed: this community, these businesses, these people. Peter Drucker famously said, “Culture eats strategy for lunch.” Geography, culture and intention don’t show up on spreadsheets, but they matter most of all.