When banks are just too big for business

US community banks provide a variety of lessons and a better business model for retail banking, claims a new report from specialist retail banking research firm Lafferty Group. The report, Think local, act local examines banks based “at the heart of their communities”.

The banks highlighted in the report are not mutual institutions, rather they are privately owned banks (typically with less than two hundred shareholders) that have focussed on relationship banking. They tend to have assets of no more than £5m.

Report author, Peter A Soraparu, who is executive vice president and head of the retail banking and commercial banking divisions at American Trust & Savings Bank, examines a unique banking history that has generated “a singular approach to serving the basic and evolving financial needs of entrepreneurs and individuals.” He concludes that over 70 per cent of small business loans in the US are arranged by community banks. To put this in context, community banks account for less than 20 per cent of all banking assets in the US.

In describing the community bank approach the report talks of “two-way affairs that are best managed intimately” involving a “deep understanding of each of the partners’ needs, a burning desire to satisfy those needs and a motivation to move far beyond them.” Compare this with large banks that may boast of cross-selling targets but have little understanding of their customers’ needs. The other side of the customer-centric model is its execution, which is local and experienced, being familiar and dependable.

Think local, act local also concludes that the risks that are typical of a community bank’s business mix are, on the whole, more manageable than the sprawling business units that comprise “too big to fail” universal banks.

Welcoming the new report, Michael Lafferty, chairman of Lafferty Group, highlighted the dangers of the universal banking model. He said “We are all sick and tired of hearing about banks that were apparently too big to fail. The truth is they are too big to change, too big to innovate, too big to notice what was happening to real people and in the end too big to do anything but fail. This report demonstrates that there is an alternative approach that works. The US community bank model provides a rational customer-responsive retail banking scheme that can be replicated around the world.”

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