Newspaper article The Christian Science Monitor

As Big Banks Falter, Community Banks Do Fine

Newspaper article The Christian Science Monitor

As Big Banks Falter, Community Banks Do Fine

Article excerpt

Despite dire headlines about the credit crunch and the shaky state of financial giants like Citigroup, the vast majority of banks in the United States are doing well.

In fact, many are actually thriving and still making loans to help to grow local businesses and keep families in their homes.

Think of it as a modern-day version of "It's a Wonderful Life" - the 1940s movie in which local banker George Bailey gives up his own dreams to save his hometown from greedy businessman Mr. Potter.

Today, there are more than 7,000 community banks that are small, community oriented, and determined to keep their assets local.

They're the Main Street banks, which, unlike those on Wall Street, did not invest in risky mortgage-backed securities or complex derivatives. And so their balance sheets remain relatively healthy.

While they account for less than 10 percent of America's total banking assets, their traditional, values-based approach contains plenty of lessons for their larger Wall Street counterparts, some analysts say.

Some also question the wisdom of allowing a few big banks to control large percentages of the US banking sector.

"Mr. Potter must be spinning somewhere in his celluloid grave," says John Steele Gordon, a business and financial historian in North Salem, N.Y. "The community banks are doing well because they were willing to adhere to sound banking principles. They didn't get caught up in the Wall Street craze and were less driven to keep those quarterly earnings going up and up and up."

Yet the community banks are interested in making a profit. Like the Connecticut River Community Bank, which had its best year ever in 2008, most do it in the traditional way: They focus on their "net interest margin" - the difference between the interest earned from loans and investments they make, and the money paid out to depositors.

But there's another component as well, says William Attridge, president of the Wethersfield, Conn.-based bank: Most community bankers know their customers.

"We're lending to small businesses, and in small businesses the individual is a significant part of that," he says. "There's a character component: That means we might make loans that possibly someone else wouldn't if they just looked at the financials, because we know the individual well and what their resources and talents are. On the other hand, there are probably some [loans] that look good on paper that we wouldn't make."

During the Great Depression, there were more than 30,000 banks in the US, and most of them were small. The majority of banks that failed were small, while the few bigger banks that existed weathered the economic turmoil better.

Today, the flip side is happening. Four large banks were responsible for half of the $26 billion in losses reported by the banking industry during the fourth quarter of 2008, according to the Federal Deposit Insurance Corp. …

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