Are community banks important? You bet!

David Manning - director of governmental relations for the Community Bankers Association of Illinois.

In Canada, there are only about 4,400 municipalities. Compare that with 19,000 in the U.S. Interestingly, only six banks serve all of Canada compared to about 9,000 in America. Is there a correlation between the number of banks and the number of municipalities? Absolutely! According to Ben Stein, economist at Pepperdine University, commercial banks have historically played a vital role in the health of communities through their ability to pool local resources and invest capital in infrastructure. Community banks take deposits and recycle the money locally in the form of loans to businesses, farmers and other citizens. Money deposited in a community bank is recycled again and again.

For example, a couple who wants to build a home borrows money from a community bank, money that was deposited by other local residents. The builders, electricians and everyone else involved in building the house, deposit their profits locally — it can be loaned again. Everyone pays local taxes, and the community thrives. The recycling of deposits has an even greater effect when the local bank lends money for new or expanding small businesses. New jobs bring a demand for more goods and services and other businesses thrive. Without local lending, however, a small town can be left high and dry.

There are other important benefits to local banks. Lots of banks means lots of competition. Industry studies show that in states in which a small number of financial institutions hold the majority of deposits consumers pay more for loans and get less interest on their deposits than consumers in states with greater numbers of independently owned banks. We are fortunate in Illinois to have more independently owned community banks than any other state in the nation. In fact, in the last decade, more new bank start-ups have occurred in Illinois than in any other state.

Groups like the Community Bankers Association of Illinois have fought for years to maintain the viability of community banks. Their success is evident. Recently, an out-of-state mega bank gave up on trying to establish a dominant presence in Illinois because it said the market was "too fractured." A more honest statement might have been: "There is too much competition in Illinois. We prefer to enter markets which we can dominate and set prices to maximize profits."

The true strength of the American economy is in its diversity. According to the U.S. Bureau of the Census, 97 percent of all businesses in America employ fewer than 100 people. The vast majority of small businesses get their loans from community banks. The importance of diversity in business and in banking cannot be overemphasized because diversity means the spreading of risk. If a bank fails in a country with only a handful of banks, there is an immediate crisis of major proportions. Diversity helps insulate the American taxpayers from such a crisis.

The enormously successful and diverse American financial system is currently threatened by large financial groups and has powerful support in Congress. The U.S. House of Representatives is debating financial restructuring legislation with components that should cause alarm in every American household. Legislation passed by the House Banking Committee would allow for common ownership among banking, securities, insurance, and commercial firms. In other words, Microsoft, First of America, Edward D. Jones and State Farm could all be part of the same mega-company. The consolidation of financial companies in the U.S. would occur as never before, and independent credit decisions would become a thing of the past. Is this in the best interest of individuals, farmers and small businesses? Absolutely not.

Potential impact? Let's say, for example, that your local bank is sold to a nationwide banking chain that converts the bank to a branch of its out-of-state headquarters (i.e., no local board of directors, loan committee, etc.). A local retailer needs a loan so (s)he goes to the branch. The branch manager contacts the headquarters (local decisions are no longer allowed) which denies the loan because the bank is under common ownership with a national retailing chain which might compete with the local retailer.

Virtually every consumer group, farm organization, senior citizen and small-business group in Washington opposes financial restructuring legislation. Still, some of

The opinions of the guest columnist do not necessarily reflect the views of the Association of Illinois Electric Cooperatives or its members.

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the most powerful politicians are committed to passing legislation which would benefit only the largest financial players in the country. Unless citizens speak out by contacting their Congressmen, America will see the most profoundly sweeping changes to its financial structure in the history of the republic.

The next time you walk around the town square, take the time to admire your local businesses, including your community bank. If you think they are worth keeping, contact your congressman and urge him or her to oppose financial restructuring legislation currently pending in Congress.

DECEMBER 1997 ILLINOIS COUNTRY LIVING 5