Inflation’s disparate impact

I am convinced community banks feel the impact of inflation more than big banks. Inflation means upward pressure on interest rates, and community banks generally need to increase the interest rates they pay on CDs and savings accounts more rapidly than the largest banks because people still feel larger banks are safer than smaller banks. No matter what regulatory changes occur, most people still believe too-big-to-fail is real. 

Recession brought on by higher interest rates might mean asset quality problems for banks, but there again, I think community banks suffer more than the largest banks. Community banks still make six-figure loans; I mean the real kind where a lender evaluates the potential borrower’s situation and tries to come up with a reasonable credit solution that works for both parties. I think you’d be hard pressed to get one of the nation’s largest banks to make a half-million-dollar small business loan that wasn’t made with a HELOC or credit card. 

A growing number of fintechs are active in that six-figure loan space; their venture capital backing allows them to make unsecured loans at competitive rates — at least for now. And they don’t operate under the regulatory scrutiny that banks face. That’s some stiff competition!

A case can be made, however, that the toughest competitor of them all for the community bank is the federal government. Elected officials and policymakers are interested in stimulating economic growth and promoting employment, sometimes in specific places among specific groups of people. The fastest way to do that is through the nation’s largest banks. Policymakers use CRA, HMDA rules and claims of disparate impact to encourage Citi, BofA, Wells Fargo and JP Morgan to funnel resources according to political interests. 

It is a relatively efficient tactic and the community bank in rural America really has no role in it. In other words, policymakers have incentives to keep the big banks going strong; smaller banks essentially are on their own. Keep in mind that the cost of a pair of compliance officers at a $100 million community bank could easily be 25 percent of the bank’s net income. At a mega bank, the cost of a few new compliance officers doesn’t even warrant a footnote in the quarterly earnings report.

You’ve been through this before — it’s just been a while since inflation was a thing. You will get through this regardless of what interest rates do because your customers rely on you. None of the competition does “personal” very well. That’s your strength. Focus on what makes you unique to maintain your prospects for success.