Movement Underway to Shift Money from Large Banks to Community Banks

While the largest lenders tend to draw the most interest from collection firms, there could be more business from community banks if a current campaign by the Huffington Post proves to be successful.

The Huffington Post campaign, supporting MoveYourMoney.info,  is encouraging consumers to move their business out of Goldman Sachs, Morgan Stanley, JP Morgan/Chase, Citibank, Bank of America and Wells Fargo “all of which took billions in taxpayer money and have cut lending to businesses by $100 billion,” according to the publication, which appeals primarily to a liberal audience.

However, publication founder Ariana Huffington writes the idea is “Neither Left nor Right -- it's populism at its best. Consider it a withdrawal tax on the big banks for the negative service they provide by consistently ignoring the public interest. It's time for Americans to move their money out of these reckless behemoths. And you don't have to worry, there is zero risk: deposit insurance is just as good at small banks -- and unlike the big banks they don't provide the toxic dividend of derivatives trading in a heads-they-win, tails-we-lose fashion.”

The idea has attracted interest via social media: Facebook users became fans of the project -- over 7,000 in seven days -- and started sharing their stories through the Move Your Money fanpage as well as the Huffington Post page.

However, it would take a large shift of business from large to smaller financial institutions to make much of a difference. The handful of financial institutions the campaign is targeting control more than 50 percent of U.S. financial institution assets.

Even so, trade groups representing the financial institutions most likely to benefit from such a campaign have responded favorably.

“The bank executives who make the decisions on how to use the earnings from your money, whether it be to pay management bonuses or to invest in sub-prime mortgages, will probably know little about you or your community,” wrote Berdell Knowles, Jr., economic development consultant with the Community Development Bankers Association in a follow-up blog. “However, consumers who choose community banks are bringing their economic power to bear on their own local economy. According to Jeannine Jacokes, CDBA chief executive and policy advisor, ‘Community banks and community development banks, as the name implies, have a mandate to specifically serve and invest in their own community.’ As someone who has worked across all spectrums of the financial services industry over the past 14 years, in both global and community banking, I believe every citizen in every community has an obligation to support his/her community bank, and to make sure the bank fulfills its mission in their community.”

According to Knowles, a community bank might be in a better position to evaluate a borrower's creditworthiness when there are extenuating circumstances with a familiar customer. In some cases, bank officers may be personally familiar with a borrower's history, his community, and the economics of a deal that may mitigate bank risk. And finally, community banks have access to capital designated for specific economic development activity that global banks may not, like the 3 percent TARP funds for Small Business Lending the Treasury Department announced its plans to offer to banks with under $1 billion in assets.

According to the Dan Mica, CEO of the Credit Union National Association (CUNA), “consumers are already voting with their wallets in favor of credit unions.” CUNA data show credit unions are on pace to post 2 percent membership growth in 2009--"the fastest rate we have seen since 2001 and double the rate of U.S. population growth," Mica wrote in his blog.

Moving to credit union "makes perfect sense," he wrote, citing credit unions' structure and service orientation, their better rates and lower fees, and the amount consumers have saved by using credit unions--$9.2 million, or $104 per member and $198 per family.

“In today's turbulent economy, credit unions' cooperative business model has renewed relevance for American consumers,” Mica added. He referred to a statement from Rep. Barney Frank (D-Mass.), who said that if other financial institutions behaved like credit unions and small community banks, the mortgage meltdown would never have happened.

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