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Community banks urged to crowdfund
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Community banks urged to crowdfund

News Desk
News Desk
January 31st, 2023
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Few will argue that a strong small business sector is a key component of America’s economic revival, yet the current economic climate is far from conducive to success.

A key impediment is the difficulty in obtaining funding to start or expand a small business. Those companies without certain sales milestones or who do not have sufficient collateral  are unlikely to have much success walking into the local bank.

Sadly the local bankers know this. In the past the community banker knew many of the clients personally. Generations of the family had banked at the same place. Their families may have known each other through community or church involvement or they may have even been neighbors.

9. Is today’s housing market still hurt by this?

Data from the FDIC indicates that smaller financial institutions, typically community banks, are the most common sources of lending for home building acquisition, development and construction (AD&C) loans.

However, according to the household component of the April 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices (released by the Federal Reserve Board), banks eased their lending standards for auto loans and credit cards. At the same time, a net share of bank officers reported having observed rising demand for auto loans and credit cards.

In contrast, a net share of bank officers reported that their bank had tightened lending standards on prime residential mortgages and a net share reported having observed a decline in demand for prime residential mortgages. So, yes, I believe the housing market still suffers today.

While smaller community banks have been the most common source for lending for home building acquisition, development and construction loans, there is not sufficient volume to “move the needle.

10. Your paper discusses how community banks have to maintain certain levels of reserves. Larger banks supposedly have to do this, but have more avenues at their disposal to keep those levels lower due to the exclusion of certain product classes. Is this too a double standard?

You can make that call. Suffice it to say, there are structural balance sheet differences given even just the size difference between large and small institutions.

11. What specific solutions does crowdfunding offer community banks? Should they facilitate loans/partner with someone a la Prosper and Lending Club, or should they develop a portal or work with someone along the lines of Kickstarter or Indiegogo?

These complex questions demand in-depth explanations, which is why we’ve chosen to address the topic through a series of white papers rather than a single piece.

This way we’re able to provide community bankers with the level of detail and understanding they need to make informed decisions and communicate these decisions to other people.

The second paper will be available shortly and the third will be published by the end of the month. Please also visit our website to sign up for notices regarding future publications at www.breakawayfunding.com/forbankers.

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