Community Banking: Human Scale Economics

Community Banking: Human Scale Economics

By: Student Intern, Eileen Gao

Even before I started earning an allowance, my dad brought me to the local credit union as a fifth grader to open my first bank account. Most of my friends soon followed, so I gave little thought to what a credit union was and the specific benefits of banking locally. I recently asked my parents why they chose the local credit union over national, well known institutions and they simply said the local credit union was the most convenient because they have a location less than five minutes from our house.

Although the local credit union is commonly used by my friends and family, this type of institution has been decreasing in the United States. In the 1990s, lawmakers passed policies that enabled banks to form conglomerates and engage in riskier speculation, resulting in mega banks that left community banks struggling to compete. The 2008 financial crisis worsened this blow because the federal government concentrated its resources to ensure the biggest banks survived while providing the complete opposite treatment to smaller banks. Hundreds of small banks just failed while more were acquired making the big banks even bigger. The Institute on Local Self-Reliance reports that one in four local banks have closed since 2008. Consequently, today, megabanks control 59% of the market. The COVID-19 pandemic has put additional pressure on small banks, who not only rely on in-person relationships more due to being less high-tech than mega banks, but also lend more heavily to small businesses. Therefore, the devastating impacts of COVID-19 on small businesses are also being felt by these local banks.

Losing small banking institutions such as credit unions can have huge consequences on the local community because not only do individuals typically pay higher fees at big banks, but also small businesses will struggle more to acquire necessary investments. Although local banks comprise about one-fourth of total banks, they supply approximately 60% of lending to small businesses. Additionally, local banks also place a greater emphasis on relationship banking which gives them an increased understanding of the local economy, resulting in less risky lending to small businesses. Moreover, local banks often are non-profit institutions such as credit unions, meaning they prioritize providing value to their customers rather than maximizing their profit for stockholders. Therefore, local bank lending, largely through its investment in small businesses, is crucial to increasing community wealth, increasing job opportunities, and improving community well-being. A study by the Federal Reserve confirms the importance of local banks, stating that a local bank’s failure results in less job growth, declines in average household income, and poverty increases.

Given this compelling evidence of the importance of local banks largely through its activities investing locally, I wanted to further research how I and others can start banking and investing locally. Choosing a local bank is the simplest step: the website Bank Local provides information on whether the bank has significant small business lending and also whether it is a co-op among other information.  For a map of all the banks in the Detroit area see this link. Investing locally requires significantly more research; however, it also has a significantly greater positive benefit to your community!

Crowdfunding MI is a great introduction and source of information about both donation-based crowdfunding and investment-based crowdfunding in Michigan, the latter which is less accessible but Michigan Invests Locally Exemption (MILE) law passed in 2013 has made it easier. Locavesting is another great place to learn more about the community investing space through its resources and news articles. To learn more about this topic, I also chatted with Romy Kochan, a Southeast Michigan expert on impact investing, and she heavily emphasized how just putting 1-5% of the funds you invest in Wall Street instead into your local community can make a huge impact. She recommended community development financial institutions (CDFIs) and community investment funds as a great place to start with these efforts. If there are no community investment funds in your community, Romy’s organization Gingras Global can help establish that! She has also worked to help individuals invest locally in other cool ways—for example, she helped an individual invest a few thousand dollars from their IRA to fund the transportation of goats from a farm to receive goatscaping. Speaking of IRAs, Michael Shuman, an economist specialized in community economics, who recently released a book called Put Your Money Where Your Life Is: How to Invest Locally Using Self-Directed IRAs and Solo 401(k)s and regularly posts related information on his blog about using your retirement funds to invest locally. Although this overview only scratches the surface of community investing, I hope it interests you enough to take a look into it!

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