putting aside the debate over free market theory for the moment, as regards the banking industry the evidence is very clear and compelling: smaller sized banks and credit unions do in fact lend a greater portion of their assets to small businesses. This mainly has to do with the business structure of large vs. small banking institutions. To quote the FDIC's 2012 Community Banking Study:
"Community banks tend to be relationship lenders, characterized by local ownership, local control, and local decision making. By carrying out the traditional banking functions of lending and deposit gathering on a local scale, community banks foster economic growth and help to ensure that the financial resources of the local community are put to work on its behalf. Community banks have always been inextricably connected to entrepreneurship. As of 2011, they held 14 percent of banking industry assets, but 46 percent of the industry’s small loans to farms and businesses."
Analysis of our own data is even more telling: BankLocal data as of 12/31/13 shows that the nation’s four largest banks, JP Morgan Chase, Bank of America, Citibank and Wells Fargo (collectively known as the Big-Four) only loaned 1.9% of their combined assets to small businesses compared to 10.6% for small and medium size banks.
If small businesses and the Main St. economy matter to you, then so should Local Banking.
I'm a supporter of local business for social and heterocultural reasons, but this statistic isn't useful in its current form.
Big businesses will necessarily go to large bank for their financing needs. So small and medium banks are cut out of that market (which I'll bet they'd love a part of!).
Also, 1.9% of a very very large number is not necessarily less than 10.6% of a smaller number.
Furthermore, a better question might be: how many local businesses met their financing needs at each class of bank? Big banks have small branches that do regionally appropriate loans.
But the persuasive angle for me is more about reinvestment. All else being equal, I'd prefer that interest on local loans was reinvested locally.
The first take away is when you deposit money in a smaller bank chances are a much larger portion of your money will be reinvested back into the community in the form of small business loans.
A second, quite interesting, if more speculative takeaway, is what if the Big Four were broken up? What is their 4.8 trillion in assets were controlled by a much larger number of smaller banks? The answer is that the pool of assets available for small business lending would vastly expand. And yes, small businesses are credit starved, particularly so since the 2008 Financial Crisis. Another great benefit of breaking up the largest banks would be reducing the influence of the financial system on our political system which is particularly prone to regulatory capture.
But this is the central point, whether a person is interested in investing locally, or investing in small businesses. I already addressed the issue of investing locally in my top level comment.
>If small businesses and the Main St. economy matter to you, then so should Local Banking.
Free market theory says that there is no reason to prefer small vs large businesses. Which ever is most efficient will win in the market place, and will produce the most total welfare. And if income distribution is a concern, taxation and redistribution is a better way to address this than funding small businesses.
The term Main St. economy is misleading, because both small and large businesses contribute to the economy in exactly the same way. There is no way in which big businesses don't affect or benefit ordinary people.
If I care about the most efficient way to make sure money stays local to my region, dealing with institutions that have a habit of keeping money in a particular region seems the best way to ensure that happens.
Every business is located somewhere. Why would it be better for a person to invest in projects located near themselves, than far away? From the way they phrase it, you'd think that megabanks [sic] throw the money into a black hole, or otherwise use it in some manner other than investing in businesses (which again, must be located somewhere).
The movement to buy/invest locally goes against all of economic theory. Artificial barriers to trade (such as a choice to buy locally) reduce total welfare, and can rarely be justified in terms of income distribution (because the best tradeoff between total welfare and income distribution comes from taxation and redistribution).
In general, if you think that some property of a product is good, then you are implying that you should buy it even when it would otherwise be a less attractive deal. In the language of economics, you would say that property enters your utility/decision function.
http://banklocal.info/locations/va/3174-virginia-beach-va http://banklocal.info/locations/va/827-richmond-va
Seems like if you just search for 'Virginia' Google Places will plop you down in a rural part of the states where there aren't any banks within the default 5 mile radius. If you expand that search area a bit (or select a city) you'll see more options.
Thanks for taking a look!
You don't have to believe efficiency is an important goal (although my post was arguing that it is). But please let us have this word. Arguments should be had on the basis of refuting peoples ideas, not depriving them of the use of any word with a positive connotation.
The quote doesn't actually demonstrate that community banks are better, it just states the benefits they bring. Compare "Y-combinator provides opportunities for startups, simulating the economy" from this it doesn't follow that I should prefer investing my money with Y-combinator to investing it with another similar company, or a VC.
>Now, even if you stay within the bounds of pure neoclassical theory (which it sounds like you ascribe to) it remains the case that maximum utility (net benefit) accrues to localities when there is a preference for the goods and services of small, local-based firms over larger firms. This is mainly due to the local multiplier effect, the tendency of smaller firms to plow back a greater percent of their revenue into the local economy in the form of secondary vendor purchases than larger firms. Smaller firms typically use a local account, a local attorney, a local design firm, etc. In contrast, larger firms are much more likely to utilize larger, more distant firms resulting in money being transferred outside of the community.
This shows that you don't understand neoclassical theory. In neoclassical theory, preferences are intrinsic. You don't create preferences based on so called "multiplier effects", that is doing things backwards.
The entire point of neoclassical economics is to dismantle specious verbal arguments like the one you've given. Neoclassical economics states that you plug in everyone's (intrinsic) utility into a big market mechanism, and it will give you a pareto optimal result.
Now (neo)-Keynsian economics does have multipliers. The (neo)-Keynsian argument is that during a recession (i.e. not all the time) the government should stimulate the economy by targeting money to where it has the greatest multiplier. This isn't an argument for buying locally but it might be an argument for supporting small business. In any case, that job is better left to the government's fiscal stimulus plan, not individual consumers.