Where did the banks go?

I read Shoe Dog, Phil Knights‘ memoir on how and why he built Nike quite a while ago but always recommend it. Those were the days when the only way to raise capital to grow your business was the local bank.

Remember when banks supported the local business community with bank loans. You would come in, take a seat, shake the banker’s hand, chit-chat, fill in the blanks of the loan and off you would go. Now it appears that the only thing the local bank does it set up accounts, give credit cards, get cash and deposit cash and on occasion has a notary on hand. When did all of that change?

Banks got into better businesses with large loans. Higher risk, higher reward. Mom and Pop just were not great bets anymore. So where do people go who have solid businesses that support their family and the 10 people or more that work in the office? What happens when the owner clearly needs a loan to get to the next level because the opportunity is there?

I get a few decks like that a week. I try to give some advice on where to possibly find some capital such as your own customers, people under your tent. Our economy was built on small family businesses. How and who will continue to support their needs for capital to grow?

Our Government does give small business loans but for that, they take your house as collateral. How can that possibly make any sense for anyone? So, is this an opportunity for more community banks to return?

Comments (Archived):

  1. awaldstein

    One of my favorite business books!If you really want to look at government and small businesses, you might follow what is going on with the EU wine tariffs and how that will eliminate thousands of small businesses cross the country.Many of them with personally collateralized loans of course.If you don’t know about it. http://arnoldwaldstein.com/

    1. Gotham Gal

      Did not know. Makes no sense to me

      1. awaldstein

        Its really insane and been involved.Read the links to Eric Asimov and Jenny from Jenny & Francois posts. Both excellent.The link to my wine post lays out the details.Unimaginable honestly as 70% of stock in the shops cross the country is from the EU and the entire supply chain up and down would basically collapse.The worse case is really a bad one.

        1. JLM

          .Not hard to understand.The French imposed a 3% digital tax on the revenue of tech companies with more than 750MM Euros (revenue) — which puts a bullseye on Google, Apple, Facebook, and Amazon — seems patently unfair and targeted.The USA responded with a promise of 100% tariffs on a bag of goods including France’s #2 export, wine. [Some contend that wine is #3 behind French luxury goods, but luxury goods is often subdivided. The bottom line is it is an industry that is big in France.]France sends 20% of all French wine to the USA — $1.1B last year.The US is on perfectly sound ground as it relies upon a WTO ruling against the EU in a case on French subsidy of Airbus aircraft. The US is entitled to levy $7.5B in offsetting tariffs as compensation for the French offense. This is really where the US right to tariffs sprung from.The digital tax was France throwing salt into the open wound in retaliation before we retaliated.The US is the largest drinker of wine in the world.France is betting the USA will not impose these tariffs. Bad bet.The US didn’t start this fight and, ultimately, American consumption of French wine will dip. There will be pain along the way for American businesses engaged in French wine importation and distribution.US wine makers will have no problem making up the volume of wine, but they are not French wines.JLMwww.themusingsofthebigredca…

          1. jason wright

            Doesn’t Boeing (and the rest) receive a form of subsidy in the form of the size of the DOD/ Pentagon annual budget? France has chosen to spend its tax revenues on modern public transport and health care systems. The US has not. The US spends like there’s no tomorrow on hardware that is either used, or that gathers dust and in time becomes obsolete, which is the great danger, the pressure to use before it becomes obsolete as a justification for the size of the annual budget and its continuation in perpetuity. What is the US actually defending?

          2. JLM

            .Not sure what you’re saying. All DOD procurement is competitive, so while there are always longstanding programs for aircraft, it is only military aircraft.The beef with the French (Airbus) is over domestic passenger aircraft and sales to foreign airlines wherein the French government has subsidized Airbus to spur domestic employment.The US complained to the WTO and the WTO investigated, ruling in favor of the US complaint, awarding the US authority to impose $7.5B in tariffs against France.The US underwrites the defense of the world in a grossly disproportionate way. The US, as an example, has the largest air force in the world in the US Air Force and the second largest air force in the world in the US Navy.The US ability to project force over the horizon is the underpinning of European safety — through NATO, but also free shipping lanes in places like the Strait of Hormuz and Somalia.The US is defending the free world and would like our allies to do a bit more. We would be content if the allies just did what they agreed to do.The NATO agreement — an attack on one is an attack on all — requires the allies to spend 2% of GDP on defense and damn few allies do that while continuing to enjoy the umbrella of American might.Meanwhile, Germany — which is not spending 2% of GDP on defense — is buying natural gas from the Russians and spurning American natural gas though this is improving.I trained with some German armored divisions in the 1970s and they were damn good. In the 1990s, the West Germans absorbed the 300K man East German Army which was decent. The Germans disbanded most of it.This is a perfect example of European freeloading on the American taxpayer.JLMwww.themusingsofthebigredca…

          3. jason wright

            I’m wondering what percentage of Boeing’s revenue is from military procurement and what percentage is from civil? Ditto Airbus.The US government is a Boeing customer in the guise of its defence budget. It appears to be behaving here also as a lobbyist against a Boeing competitor in the civil market. Is this a conflict of interest? Is this fair to Airbus?The US complains about European levels of defence spending as it seeks to undermine a European defence contractor’s economics. It’s a pincer movement, certainly coming from lobbyists in the employ of US defence contractors who want to dominate the market.

    2. jason wright

      “Only the very largest of the players in these sectors will survive if this goes through.”Are these largest players campaigning against the proposed tariffs, or do they see advantage?

      1. awaldstein

        there is no advantage to anyone.the market will not bear a 100% price increaseonly those with cash or credit could survive but that has nothing to do with finding a market for the doubled price product.

        1. pelicano

          There should be an avenue for customers to obtain loans and make do with whatever businesses they are into and pay instrumentally as it were before now and that will reduce unemployment in the societies

    3. JLM

      .The French wine tariffs are a disaster, but the problem is the tariff beef with France involves aircraft — France’s #1 export — while wine is France’s #2 export.The French went after one of our top exports — digital everything. They imposed unequal, unfair taxes that excluded smaller domestic firms. It was targeted.The French will not be hurt because the US is a manageable part of their overall wine export program.Americans, who are importing French wine, will be clobbered and will have to fill shelf space with other wines. From a classic economic perspective, one is tempted to say this will be simple shelf space turnover — French wine squeezes down, Australian/New Zealand/Texas wines expand.But, wine is not a commodity like lumber (see the Canadian Softwoods Lumber Tariff which has worked like a champ for US lumber producers and consumers).France is playing chicken on this one. They think the US won’t go forward with these tariffs. They are wrong.Conversely, the French cannot allow their airplane industry anywhere near free market competition because they would get smoked.This will end ugly.JLMwww.themusingsofthebigredca…

  2. Pointsandfigures

    This question is one of the reasons I started blogging. Where did the small banks go? Ask Dodd-Frank. The level of regulation forced upon them by the federal government caused them to combine, get bought by larger banks or go out of business. They could not afford that level of regulation. We are left with big megabanks which cannot cater to small business. It’s opened the door to boutique lending companies-you might call them payday loans for businesses!Economist John Cochrane has written a lot about this and did a podcast: https://www.econtalk.org/jo… It’s not just banking-but insurance, oil companies and other industries. We need more competition in America.The other thing that people don’t talk about or understand is the level of difficulty for small banks to innovate. There are four bank code providers in the US that are seen as “stable” in the eyes of a regulator. Suppose I am a startup targeting banks and want to integrate into that code. It can be a very long process. The code providers set up walled gardens just like Apple, Google etc.Now, suppose I am a small bank and see a new code provider that is light, cloud based and super innovative. I want to switch from FIS or FISERV or John Henry to the new innovative entrepreneurial code that I believe will allow me to service my customers better and compete. Mr. Regulator comes in for a bank audit and asks me what code I am using…I respond a new code that allows me to service customers better. Mr. Regulator opens up all the doors, the hood, the trunk and really starts to nose around. Even if I am doing everything correctly, it’s costly. Besides that, I will have to run the old code provider for at least 12 months alongside the new code provider in order to make sure my transition is seamless. As a bank, I can’t shut down. I have to be open 24/7Totally agree with you that we need small banks. In a lot of communities (think rural and urban) those community bankers were a lifeline of capital to great mom and pop businesses which created a lot of opportunity in the community. Plus, having a role model like a white collar banker in those communities paid dividends too.

  3. Semil Shah

    As one might expect, there are startups popping up — one example would be Apple Pie Capital https://www.applepiecapital

    1. Gotham Gal

      heavy capital.

    2. JLM

      .APC is a franchise lender which is looking to the franchisor — McDonalds, et al — to exercise the discipline to ensure a franchise will work, plus since it is branded, their downside is compartmentalized.This is not banking.There have always been specialty lenders who knew their market — aircraft, boat, vehicle lenders. They are not bankers.In many ways, they are sucking the cream off the top from the community banks who would formerly have done that work.JLMwww.themusingsofthebigredca…

    3. Romantic song lyrics

      Its really<https: http://www.songlyrics-place.com=“” 2020=”” 01=”” let-me-down-slowly-alec-benjamin-lyrice-place.html=”” b=””> insane and been involved.Read the links to Eric Asimov and Jenny from Jenny & Francois posts. Both excellent.The link to my wine post lays out the details.Unimaginable honestly as 70% of stock in the shops cross the country is from the EU and the entire supply chain up and down would basically collapse.The worse case is really a bad one. https://media1.giphy.com/me…Click here

  4. JLM

    .You’re a little late to the party. There hasn’t been community banking in the US since the S & L crisis wherein the FSLIC, the RTC (Resolution Trust Corp) decimated the ranks of S & Ls and banks.1043 of 3234 S & Ls failed.FSLIC closed down 296RTC shuttered 747There were tons of shotgun marriages amongst the survivors.The Fed Reserve drove interest rates to 12% to control inflation.Then, we had the derivatives/mortgage crisis of 2008. No inflation meant that loans were impossible to pencil out.Pile in Dowd-Frank which required alternative sources of repayment — if you could affirmatively prove you didn’t need a loan, then you could get one.Dowd-Frank inserted a level of regulation that simply could not be met with “mark to market” rules that required a mortgage to be evaluated at 2:00 PM on a Thursday for an asset with a 50 year life.Then, the biggie — INTEREST RATES. Interest rates went so low, it seemed like Utopia for borrowers. The problem was banks couldn’t make money with those low rates even when their ACF (average cost of funds) was less than 1%.Along came guys like Quiken who made their loans through your computer while you had your PJs on. The banks could not drag all that real estate along and got clobbered.The country has never recovered from that debacle. The big banks can do it on process efficiency and volume, plus they securitize and sell off the portfolio, thereby retaining the servicing income.The SBA does not make loans. The SBA provides an 85% loan guaranty to local banks that make the loans. Local lenders have to be certified — easy for Wells Fargo to do, harder for the little banks.SBA loans do NOT require the pledge of one’s home as collateral. Mortgage law prohibits the use of a homestead to secure a business loan. In addition, all mortgage docs prohibit a second lien.Local banks can’t compete on basic services either and insurance companies, brokerage houses provide the same services.It is hard out there for a pimp or a local bank.Back in the day, I was part of a syndicate that formed a bank, an S & L, and a holding company. It was a good business, but today, it is a bloody disaster.It is not coming back. Ever.One is tempted to say that stooges like Dowd, Frank, Biden caused this, but there were plenty of dumbasses who killed off local community banking.JLMwww.themusingsofthebigredca…

  5. Tom Labus

    Do bank lines of credit still exist?

    1. Gotham Gal

      Not with ease.

    2. JLM

      .Sure. If you have $2MM on deposit, they will grant you a cash-secured LOC of $1MM.The thing is to do business with places like the Private Wealth Management shops of the big banks like Wells Fargo. Serious note.JLMwww.themusingsofthebigredca…

      1. LE

        This is exactly what is going on at a condo association. $500,000 line of credit but the condo association needs to keep the same amount on deposit (approx numbers). The members (mostly old timers) don’t understand.Back in the 80’s I remember getting all sorts of machinery loans w/o personal collateral (at 14% to 16% iirc also leases very common).The condo association (in a down market) just changed the rules so that anyone who buys after 1/1/2020 needs to own for 2 years before renting. It’s hilarious! They think they are some hot NYC or West Coast property and that is good for values. So I wouldn’t put it beyond them to not be doing this in a way that doesn’t require that amount on deposit.For example let’s say the line of credit is at X% (high %) and NOT secured by an equal amount on deposit. Assuming it’s a good building (and it is actually) hard to believe a private lender (or an individual) wouldn’t offer a LOC w/o that requirement. I say ‘probably’ because it’s something that I would consider doing. The security is good and most likely only a super small chance of being needed. Pay me X% and if you need the money I will give it to you for an additional X%.Probably an opportunity there for someone but hard to believe it’s not being done (but if it is they don’t know where to look and that is why it’s an opportunity, right?).

        1. JLM

          .What banks hate about common ownership is not having a single individual who they can count on.Knowing how and where to borrow money is a critical skill in real estate. Always has been.JLMwww.themusingsofthebigredca…

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  7. Company search

    The issue is one of the reasons I started blogging. Where have the small banks been going? Asking for Dodd-Frank. The federal government’s level of regulation forced them to merge, be purchased by larger banks, or go out of business. They had not been able to afford that level of regulation. We are faced with massive megabanks that can’t appeal to small businesses. The door to boutique loans has opened

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