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Tuesday, May 12, 2009

Community Banks Deserve Credit

I've said it before, and I'll say it again: one of the best ways to avoid another credit disaster is to keep credit sensible and local. When you're borrowing and lending your neighbors' money at a local bank, you feel a lot more obligation to use that money wisely. It may not be as exciting as high-wire hedge funds and other Wall Street chicanery that treats banking as extreme sport, but it also makes for stable community development.

The New York Times finds reason to agree:

It’s unlikely that any group of professionals is happier to highlight the dullness of their work than small-town bankers.

At a recent conference held here by the Indiana Bankers Association, attendees said it over and over: our business is plodding and boring and we would not have it any other way.

“Banking should not be exciting,” said Clay W. Ewing, president of retail financial services at German American Bancorp, a community bank in Jasper. “If banking gets exciting, there is something wrong with it.”

It is an ethos squarely at odds with the risk-addicted style of megabanks, like Citigroup and Bank of America, that trafficked in the subprime mortgages and complex financial products that helped drive the country into the grimmest recession in decades.

...To spend time with these Indiana community bankers is to step into an alternate universe, where everything sounds a little strange because it makes perfect sense. You hear things like, “If you don’t understand the risk you’re taking, don’t take it.” And, “We want to be around for decades, so we’re not focused on the next quarter.”

Forget “too big to fail.” These banks consider themselves too small to risk embarrassment. They are run by people who grew up in the towns where they work, and their main fear is getting into a financial jam that will shame them in the eyes of their neighbors [David Segal, "We're Dull, Small Banks Say, But Have Profits," New York Times, 2009.05.11].

Remember, it's not your local banker getting bailout money. Of the 58 banks that have failed nationwide since the beginning of 2008 (33 of them in just the last four months), the vast majority appear to be small local players, while the big losers get more handouts from Washington.

There's still enough competition among the big players that the Obama Administration probably can't aim its new tougher antitrust line to the big bloated banks. But maybe the banking system reboot should take a serious look at telling the fatcats who took bailout money that it's time to slim down and split back up into the kind of smaller banks that keep their connection to the people and communities they serve. Keeping things local isn't all hippie green Luddism. Sometimes it's just good sensible financial practice.


  1. Right on, Cory. As soon as my CD at a major bank matures, I plan to reinvest it in a small-town bank. There's a good site called bankrate.com that can help us all find the most secure local institutions. Let's reward good behavior -- and protect ourselves in the process.

  2. Great Western seems exactly the kind of bank you're talking about, but local rates fluctuate so you may have to go elsewhere. Another good site is: http://www.money-rates.com/ that identifies decent rates at smaller banks. Bauer Financial is also helpful to get a rating on the strength of a bank.

  3. Don't forget about investing in your local Credit Unions, chartered to serve specific groups or members. They tend to pay higher rates on CD's and offer lower rates on auto loans. Credit Unions control their expenses very well and have not made headlines due to lousy portfolios. They are local and keep the local money circullating.


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