As National & Regional Banks Stop Lending, Community Banks Come to the Rescue

According to Federal Deposit Insurance Corporation statistics:

“Nationwide, outstanding loans to small businesses dropped from over $711 billion in the second quarter of 2008 to approximately $652 billion in the second quarter of 2010. The number of credit cards also declined. In 2009, the number of credit cards in circulation dropped to their lowest level in a decade (see “Funding Economic Recovery: Trends in Small Business Lending in Massachusetts“).”

Loans for business Shifts to Community Banks

Loans for business Shifts to Community Banks

As National & Regional Banks Stop Lending, Community Banks Come to the Rescue

However, most of the decline, according to the Massachusetts Bankers Association, came from national and regional lenders. Community banks in Massachusetts, on the other hand, expanded loans by 5.3% in 2008, at the start of the recent economic downturn, and actually increased loans during 2009, at the height of the recession.

Why did community banks, at least in Massachusetts, both maintain and increase their credit lines when out-of-state and national lenders were cutting theirs?

Massachusetts Bankers Association President Dan Forte suggests that the cause may lie with borrowers: borrowers see community banks as local, closer to home, so to speak, and providing better service.

Brian Gottlob of PolEcon Research in New Hampshire, who helped write the Funding Economic Recovery: Trends in Small Business Lending in Massachusetts report, says smaller community banks haven’t been hit with the new regulations that larger bank have (See NPR, wbur.org, “Mass. Community Banks Extend Small Business Lending Despite Economy”). This may have kept lending costs down for community banks.

Recently, the rise of new social media/networking-based web technologies have allowed large numbers of individuals to come together to achieve mutual goals. Peer lending on the web has become one of the newest forms of personalized community based lending. Peer-to-Peer lending, by eliminating the costs of the middleman and reaching out to specific types of borrowers, usually has some of the lowest lending costs in the industry and can therefore offer significantly lower interest rates than the average bank or credit card company.

While the MBA study did not look at peer lenders, because of the lower transactional costs and personalized service, it’s probably a safe bet that peer lending organizations also increased their lending at a time of general contraction.