The U.S. Has More Banks Than Anywhere Else in the World. Here’s Why That’s Important

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The huge network of banks in the U.S. means even small niches of customers can access the services they need. Find out how small banks play a big role in the economy. 

With over 4,100 banks, the U.S. has more banks than any other country in the world, many of them small- and medium-sized institutions. And that huge network forms a crucial part of the financial system. Why? In short, they are part of our communities. They often cater to customers who might not otherwise be able to access financial services. They also offer more consumer-centric services and play a valuable role in the economy.

Unfortunately, those banks are under pressure. The impact of COVID-19, aggressive interest rate hikes, changing technology, and — most recently — the collapse of SVB, Signature Bank, and First Republic, have all added to the strain. As customers withdraw their deposits on fears of further failures, it becomes more difficult for smaller banks to survive. Let’s dive in and find out why they matter.

1. Smaller banks are often more customer centric

The great thing about having thousands of banks is that it means each person is more likely to find a bank account that suits their needs, whatever those may be. There are all kinds of reasons we don’t always fit in life’s boxes. It could be because of where we live, religion, race, lifestyle, work, home situation, or something else entirely. Since systems at bigger banks tend to be skewed toward a particular idea of what’s normal, those smaller banks fill in the gaps and make banking more accessible.

Take the Bank of Bird-in-Hand and its customers, recently interviewed by NPR. The bank offers special loans for Amish homes and farms and has all kinds of facilities that address its customers’ specific needs. Or the Bank of Delight in western Arkansas, interviewed by the Financial Times, which services local logging and farming businesses. The insights these banks have into their customers and their lives means they are uniquely placed to offer loans and financial services. If those banks crumble, so could some of the communities and businesses they support.

2. Small banks are important for the economy

According to Goldman Sachs, small- and medium-sized banks account for around half of commercial and industrial lending in the U.S. In terms of residential real estate, they give out 60% of home loans. And if you’re in the market for a personal loan, know that smaller banks are behind 45% of consumer lending. The Financial Times says small banks finance small businesses that account for nearly half the economic activity in America.

If those banks fail or don’t have the deposits to support the current levels of lending, it has a knock-on effect to American businesses and our personal finances. Loans will be harder to get, we’ll need to pay higher interest rates, and the economy may suffer. Against a backdrop of recession fears, the survival of small banks and the businesses that use them becomes even more important.

3. There’s a danger to allowing big banks to get bigger

In 2008, the failure of banking giant Lehman Brothers put enormous pressure on the banking system and wider economy. We learned a lot about institutions that are too big to fail, and the damage that can be done when one giant tumbles. This is what’s called systemic risk, and there are a number of regulations in place to ensure the Lehman situation does not repeat. Sadly, what SVB has shown us is that even mid-sized banks can cause serious ripples when they fail.

Some argue that economies of scale mean bigger banks are more efficient, while others think monopolies in banking can lead to higher prices for consumers. Essentially, if a handful of banks control most of the industry, it is easier for them to hit consumers with extra banking fees and charge higher rates on borrowing. At the same time, bigger banks are better positioned to offer large ATM and branch networks and reduced fees on international transactions.

Bottom line

If you use one of the thousands of smaller banks that make up the U.S. system, you’re likely already aware of why they matter. Even so, the fears around the banking system may also make you wonder about moving your funds to a bigger bank. It’s understandable, even if you know that FDIC insurance covers up to $250,000 per bank, per customer, per account type. Nobody wants to risk their savings in a bank failure, but if SVB’s contagion continues to slow, America’s remaining small banks may make it through this latest crisis.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Emma Newbery has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

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