The following is an excerpt from Louis Hernandez, Jr.’s latest book, Saving the American Dream: Main Street’s Last Stand, which can be purchased here.
WHY COMMUNITY-BASED FINANCIAL INSTITUTIONS MATTER
Community-based financial institutions are America’s “Main Street” financial institutions. They consist of banks and credit unions that are relatively small in size (under $10 billion in assets) and do most of their business in the communities in which they are located. In the case of credit unions, they may even be restricted to serving only a certain group of people within a highly specific geography. In general, community-based financial institutions focus on offering essential financial services (such as basic checking and savings accounts, mortgages, and personal, small business and commercial real-estate loans). They derive their strength from the close, long-term relationships they maintain with the people in their communities and the deep knowledge they possess about their local economies.
Nearly all community-based financial institutions began as firms that were locally owned, staffed and operated. They make lending decisions locally, based on personal knowledge of their customers and members. They invest in their communities not only through lending, but also by playing an active role in community affairs and supporting the organizations that benefit the neighborhoods where they do business.
In a very real sense, community banks and credit unions help to support the American Dream by helping people to reinvest in their own communities. Their role is memorably depicted in the 1946 Frank Capra movie, It’s a Wonderful Life, when the film’s main character, George Bailey (played by Jimmy Stewart) explains to a mob of angry townspeople making a run on their local bank why the bank can’t return their money:
The money’s not here. Well, your money’s in Joe’s house…that’s right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?
Despite their small size and humble origins, community-based financial institutions are a potent force in the U.S. economy. They represent 92% of all banks in America. Taken as a group, they would be the largest financial institution in the country. While they hold only about 24% of U.S. bank assets, community-based financial institutions provide 58% of all loans to small businesses – in other words, they disproportionately support the firms that constitute 99.7% of all employer firms in America and accounted for 65 percent of the 15 million net new jobs created between 1993 and 2009.