Are Community Banks Too Small to Survive?

"Why do giant banks make so few small-business loans? Automation is the short answer. The only way these sprawling institutions can function efficiently is by taking a mass production approach to lending: Plug credit score, income, and appraisal into the computer--out comes the loan. That's why the mortgage business was supposed to be so safe. The economic meltdown of 2007 shows that it's actually very risky.

Small-business loans are not so easily mechanized. Each is a custom job, requiring human judgment to evaluate the risk associated with a particular entrepreneur, a particular business plan, and a particular market. Community banks excel at this. Their lending decisions are made locally, informed by face-to-face relationships with borrowers and an intimate understanding of their hometown economies. Big banks, whose decision-making is long-distance and dictated more by computer models than judgment, are pretty bad at it. So they don't make many small-business loans."

This is the way most people still like to think of banks, as some sort of community bank, based on the model made famous in the movie "It's a Wonderful Life" starring Jimmy Stewart.  A bank that makes loans to its neighbors, building a community that in turn provides more business to the bank, in a mutually beneficial cycle.  This is not the way the megabanks work.
The Bank of North Dakota has several programs devoted to Small Businesses:

Beginning Entrepreneur Loan Guarantee Program

This program assists in business start-up financing by providing a financial institution with a guaranty of 75% to 85% depending upon the loan amount. The maximum amount eligible for guaranty is $200,000. Click the following link to find out more about the Beginning Entrepreneur Loan Guarantee Program.

Ag PACE Program - (Agriculture Partnership in Assisting Community Expansion)

The Ag PACE program provides interest buydown on loans to farmers who are investing in nontraditional agricultural activities to supplement farm income. The program funds are used to reduce the interest rate on loans which have been approved by a local lender and BND. The farmer shall have as his principal occupation, prior to applying for the program, the production of agricultural commodities or livestock.

PACE Program - (Partnership in Assisting Community Expansion)

The PACE Fund assists North Dakota communities in expanding their economic base by providing for new job development.

The PACE program has two major elements: (1) the participation by BND with a local lender in a community based loan, and (2) the participation by the PACE Fund with the local community in reducing the borrower's overall interest rate.

The Flex Pace feature of the PACE program provides interest buy down to borrowers that do not fit into the traditional definition of a PACE qualifying business. Under Flex PACE, the community determines eligibility and accountability standards. Flex PACE allows communities the ability to provide assistance to borrowers with a business focus or need outside of the current requirements of PACE, such as jobs retention, technology creation with no new jobs, retail, smaller tourist businesses and essential community services."

Note the size and eligibility requirements of these programs.  They are all designed to help small businesses and entrepreneurs who would otherwise be hard-pressed or even unable to obtain loans any other way.  In contrast, says the American Small Business League, the increasing majority of loans made by the Small Business Administration are made to large businesses, including Home Depot, GE, Johnson and Johnson, etc:

Recipients of Federal Small Business Contracts by American Small Business League

So, on the one hand there are large banks making small amounts of loans to small businesses, and maybe not even to what most people would consider small businesses at all, and on the other hand, the government is corrupting their small business loan program by lending most of their money to big businesses.  This, despite the fact that "98% of all US firms have less than 100 employees."  What is left to support small business?  Only small, community banks, backstopped by a mid-sized State Bank like the BND.

If every state had a State Bank, they would have a proven counter-cyclical alternative in the next financial crisis, like the one that helped North Dakota go through the last crisis as only one of two states with a surplus, continuing to grow.

And the Public Banking model does not only apply to the states.  A local community, or other recognized and stable entity, can form a public bank too.  The Chickasaw nation has it's own Public Bank, though it is more of a hybrid than the BND, being insured by the FDIC, which the BND is not.
From the banks' website:

"Bank2 is a community bank committed to helping people build better lives. We are proud to be rated a 4-Star Bank by BauerFinancial, the most respected independent body rating financial institutions. Bank2 was also recognized by the ABA Banking Journal as the #1 and #3 community bank in the nation in 2009 and 2010 respectively.

Bank2 is a wholly owned subsidiary of the Chickasaw Banc Holding Company. The Holding Company and thus Bank2 are 100% owned by the Chickasaw Nation. We have received state and national recognition through our efforts in Native America, and we are the #1 source of Native American home loans in the state of Oklahoma."

This is a bank of, by, and for, the people...of the Chickasaw Nation.  There is nothing comparable in the private sector.  Of the 12 Native American banks in the country, 8 of them are located in Oklahoma, including Banc2.
The existence of a public bank serving what is normally considered a poor, minority, community, puts the lie to the charge that the BND is only successful because of all the oil and natural gas in North Dakota.  The Chickasaw Nation has a variety of businesses, few of them related to oil and natural gas.  From the Banc2 website:

Whether it's to provide counter-cyclical protection, investments in the local community and support for it, provide public credit from tax dollars, a Public Bank provides a safe, sane, and sustainable alternative to the Too Big to Fail Banks.  It may also be the only way small, community banks don't become Too Small to Survive.

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