If Oklahoma follows the national trend, there is likely to be consolidation in Oklahoma’s regional and community banks. At the same time, we would expect some of Oklahoma’s banks to double or triple in size in the coming years. We’re going to consider the reasons behind this and some of the implications.
According to the FDIC, there were 7,657 FDIC insured institutions that reported in Q4 2010, compared to over 10,000 in 2000. We expect that number to continue declining, as it is increasingly tough to start up a new bank and increasing numbers of smaller banks are being swallowed by bigger regional banks. In 2010, 157 FDIC insured banks failed and 197 were acquired or merged. We expect both those number to increase in 2011. During this same period, only 11 new banks were chartered, compared to 190 in 2006.
One upside of this change, is that having strong financial institutions and larger regional banks in Oklahoma increases Oklahoma’s capacity to internally fund Oklahoma deals, compete with larger national banks, as well as increase the scope and availability of services, typically not found in a community or regional bank.
On the downside, new bank financing for many business owners may become more about the numbers and less about the relationship, track record and payment history. It is likely that there would be increasing credit restrictions, so that many of those deals that don’t look so good by the numbers no longer get credit, whereas until now, a personal relationship and track record of successful business ventures, may allow a community banker to extend credit, because he or she has a personal knowledge of the business owner, management team and may be confident and comfortable enough to extend credit.
Is there anything that can be done to preserve more small, regional banks or is this change inevitable? Well, some of the changes come from Washington – the Dodd-Frank Wall Street Reform and Consumer Protection Act is actually making it harder for smaller banks to operate, even though they weren’t the ones that fueled the banking crisis. More regulation and oversight leads to higher costs for banks to operate. For many community banks, a merger or acquisition may be the only way that they can survive. There are also some banking changes from this Act that disproportionately impact community banks. By taking away or reducing certain fees that are the lifeblood of community banks, some would end up losing money by providing certain services that their customers have come to expect.
Now I know that this article isn’t going to garner much sympathy if it suggests that only bankers are going to suffer, but that’s not the case. We need to consider the bigger implications, which extend far downstream. We should be concerned that entrepreneurs in Oklahoma, who drive economic growth in our state, may no longer have easy access to credit. If you want to consider the national numbers: 73% of small businesses seeking capital from a small bank in 2010 were successful in getting credit approval, according to a survey by the National Federation of Independent Business. Compare this credit approval rating of only 48% who sought credit from a large bank and you can see that the huge disparity may be a sign of the future, where Wall Street reforms end up having unintended consequences at our local level, with fewer business owners having access to credit.
Looking on the bright side, the US continues to lead the world in fostering, supporting and financing entrepreneurship, so we should be confident that there will be measures put in place to support small business lending. In fact, the Small Business Lending Fund was set up by the government to allow community banks to borrow money from the US Treasury at very attractive rates. However, it is open to banks far larger than the sub-$1 billion banks that have historically been critical to Oklahoma business lending – it benefits community banks with up to $10 billion in assets, so it likely won’t offer much of a reprieve to a community bank with $200 million in assets.
A positive trend for small business owners is that in some recent acquisitions, larger banks have been adapting their business model to provide more autonomy at the local level, so that they can provide bigger bank resources with a local bank relationship. We’ll just have to wait and see how this plays out and we’ll do our best to keep you informed.
Source: Thank you to CFO.com – a great article on the bigger picture for US banks in a recent article: A Small Problem