Regular readers in this forum might remember a short entry this spring discussing former BB&T chief John Allison‘s book. Allison documented the federal government’s efforts to force BB&T and other banks to comply with regulations designed to inflict a uniformity on the nation’s banks that Allison considered unwise.
That federal effort will make even less sense after you’ve read this article from the latest Bloomberg Businessweek.
Small banks in rural areas do a better job of what is generally considered Banking 101: underwriting home mortgages and loans to farms and small businesses. According to the FDIC, in every five-year period since 1991, a lower percentage of loans from community banks has gone bad. Richard Brown, the FDIC’s chief economist, says small banks have a competitive advantage with “nonquantitative” (sometimes called “soft”) information—knowledge of their customers and the local economy.
At the Bank of Montgomery, Hale points to what economists call social capital, where small, tightknit communities provide controls on the banks. “You can’t be greedy,” he says. “You can’t be devious. Because I gotta go home every day and see my two neighbors.” Both have mortgages with his bank; all three families attend the same Catholic church and school. “If I take advantage of them with some subprime loan, I gotta sit next to them,” he says. Two of his bank’s branches are in towns with fewer than 500 people. Treat a customer poorly, he says, “and there aren’t a lot more people to choose from.”
