One common response to the US’s regional-bank stress is that the country simply has too many banks.
That argument, which implies that failures or buyouts of smaller banks won’t matter, definitely used to be true. But it is easy for even the sharpest overseas writers and analysts to forget the US’s large size and diffuse population, which make for a difficult comparison with G7 peers.
The US did have a stunning number of banks decades ago, mostly because laws prevented them from operating across state lines. There were nearly 14,500 banks in 1984, according to the St Louis Fed’s blog. To compare, in 1985 the UK had 355 banks and 167 building-society mortgage lenders.
Since then, about 10,000 US banks have closed or been taken over, while the US’s population has grown by roughly a third.
The rise of interstate banking should prompt mergers and closures, of course. But Congress removed most restrictions on interstate banking almost 20 years ago, according to the Richmond Fed, and the declines have been consistent ever since:
The number of bank branches continued to climb after that deregulation, somewhat predictably. (At risk of stating the obvious, branch numbers don’t include bank headquarters, where Americans did most of their financial business in the days of It’s a Wonderful Life. Branches only started outnumbering banks in the 1960s.)
So is the US still over-banked by branch? Well, maybe not anymore. The number of bank branches has declined every year since 2009, according to the FDIC.
And for small businesses, service at a large-bank branch probably doesn’t measure up to a smaller local bank, Goldman Sachs economists argued earlier this week. From their note:
Economic research suggests that part of the reason that small banks disproportionately lend to small businesses in the first place is because their closer geographic proximity to individual small businesses gives them an informational advantage in gauging the riskiness of those businesses.
In many counties across the US, there is no nearby alternative to smaller banks . . . there is no GSIB branch in roughly two-thirds of counties, making up 10% of US GDP . . . for those same counties, the closest GSIB branch is roughly 40 miles away, compared to 3 miles away for other counties.
Small businesses — those that employ fewer than 100 people, in Goldman’s categorisation — seem to have a pretty clear preference for smaller banks anyway. While most of them work with banks that have more than $10bn in assets, they tend to prefer the banks fall below that threshold, GS found:
Nearly 70 per cent of those businesses’ commercial and industrial loans come from banks that fall below the $250bn asset cut-off for a bank to be regulated as a globally systemically important institution, or G-SIB.
And “the link is much stronger outside of large cities: in over half of US counties, non-GSIB banks provide 90% of loans to small businesses,” the bank finds.
The general takeaway? Small businesses probably can’t obtain credit from large banks on the same terms that a regional bank could provide. This is partly because they are riskier borrowers as a general rule:
And also for the ordinary reasons GS cited above. A bank located down the street from two cafés is probably best placed to know which is more creditworthy, meaning geographical proximity can ease access to credit. In fact, a majority of small businesses get their loans from a bank within 10 miles, GS says:
Sceptical readers may argue that small companies have been a shrinking share of economic output and wage growth in recent decades, making them less important for economic growth. But companies with fewer than 100 workers still “employ 35% of the private sector workforce and produce 25% of gross output,” the Goldman Sachs economists found.
Small businesses are also more likely to be in the centre of the country or rural areas. This chart from Barclays lays it out nicely:
Remember how diffuse the US’s population is? Its northern neighbour may provide a helpful contrast. Canada has closer to 1.1mn people for each domestic bank, and close to 500,000 for all banks (including subsidiaries of foreign banks). But while it is large, Canada is largely uninhabited, meaning its people are concentrated in city centers along the US border.
A quick note on politics (sorry): Readers who are big civil-liberties advocates may find that Canada demonstrates a different downside to financial-system concentration. The country’s government was able to shut down a highly disruptive trucker blockade only by using emergency powers to freeze bank accounts of protesters, who had become a cause célèbre in some conservative corners. In the US, there is a fairly clear political lean among states without much large-bank presence, Goldman Sachs found:
What this really means is when we talk about the US, we should think about it as a large and diverse union, whose political cohesion comes into question periodically.
In other words, the best comparison may be the European Union.
The 27 countries in the eurozone had 5,263 banks at the end of 2021, while the US had 4,237. That makes one bank for every ~80,000 people in the US, compared to every ~85,000 people in the EU.
So the US is slightly more “banked” than the EU. But not by much. Commentators may want to be cautious, therefore, when encouraging regulators to brush off the risk of future small- or regional-bank failures.
Source: Economy - ft.com
