Providing Credit to Local Businesses

by Bob Gerecke

Banking and Helping Main Street not Wall Street

It has been reported that local businesses are having difficulty obtaining the credit they need to finance their expansion or even their irregular cash flow, driving some to close altogether.  Regional banks have been the primary source of loans and credit lines to these businesses, but many regional banks have disappeared, often being swallowed by larger banks which are less interested in serving local businesses. 

The vanishing of regional banks harms the investors in local businesses as well as  potential employees who would have been hired and potential customers who would have been served.  It also increases the concentration of market power into the hands of fewer banks and of fewer businesses of all kinds, thereby concentrating wealth, reducing competition, increasing prices, and sending profits from local operations out of the community to distant stockholders. 

Ensuring that credit is available to local businesses that compete with the big nationwide corporations is in the public interest.

One way to increase the number and vitality of regional banks which lend to local businesses is to break up the largest banks geographically, so that each one becomes a number of regional banks serving different territories.  This should increase the availability of loans and credit lines to local businesses, which will benefit those businesses, their employees, their customers and the general public.

This will not prevent nationwide and global businesses from obtaining the bank services which they need.  It is already common for several banks to partner in a very large deal, and this can continue.  Also, ATM networks, ACH transfers and the internet make it easy to bank remotely when traveling and to move assets between banks.

A second option for supporting local businesses is to authorize credit unions to fully serve businesses as well as individuals.  Credit unions are locally focused, often even more so than regional banks.  An additional advantage would  be that their participation in commercial banking will increase competition with the for-profit banks, to the benefit of customers.

A third option is to establish a state-owned bank.  It can loan directly to local businesses, as well as governments, school districts and homebuyers, and it can guarantee or participate in loans made to them by credit unions and banks.  In its lending policies it can take into account the benefits to the community from the success of a business, and it can favor businesses which act ethically toward employees and customers.  One such bank exists in North Dakota, and other states are considering establishing  their own banks.

These three options are not mutually exclusive.