Mega Banks vs. Community Banks - Essay Example

They play a crucial role in development of economy across length and breadth of the US. They remain very important in small-business sector and agricultural lending. The paper aims to explore the contrasting roles played by Community banks and large banks in the national economy and the regulatory burden that “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010” is likely to put on them impacting their performance in the national economy. Small Business Lending Small businesses account for a huge share of total economic output and employment.

Small business with fewer than 500 employees, account for more than 50 percent of private sector employment and output. Community banks are better placed in making loans to small businesses. Small bank officials can review the small business loan applications taking local perspectives and the nature of business. That is usually not possible for large banks as they do not have so much autonomy at local levels and it is not feasible for the large banks to review the myriads of small business applications that closely.

Another advantage with community banks to deal with small business loans is that often it is required to maintain a close relationship with the borrower. It is possible for community banks to closely monitor the borrower, sitting locally, over the course of the loan; the bank needs to maintain a close knit long-term relationship with the firm. Large banks find it inefficient and unfeasible to maintain such close relationship with small businesses. Large banks will rely on phone and mail to communicate with small clients in contrast to community banks who will often have face-to-face meetings.

That is to say community banks have their own niche area to cater to where large banks do not have access (Keeton, 2004 p.24) Loans on Nonresidential Real Estate by Community Banks Community banks drive advantage in extending loans backed by nonresidential real estate and they account for over 60 percent of all loans of $100,000 or less and over 40 percent of all nonresidential real estate loans of $1 million or less. Community banks earn higher rates of return on small business loans than large banks (Keeton, 2004 p.26) Farm Lending By virtue of having located at the rural areas, Community banks are important farm lenders.

They account for 65 percent of all farm real estate loans; particularly, smaller the amount of loan more are the chances of that being extended by community banks. Large banks are not interested in serving such small farm loans. Community banks are more risk takers while lending to small businesses in contrast to large banks that depend upon neat credit history of the client (Keeton, 2004 p.26). Retail Deposit Services Community banks are more eager to provide personalized services to depositors of moderate to low wealth holders; the reason being that community banks are more dependent on small depositors for their funds requirement where large banks are not found to chase small depositors (Keeton, 2004 p.27). Profitability Earnings on average assets for last 7 years with reference to large and community banks have been reported in the following table.

Banks 2006 2007 2008 2009 2010 2011 March-2012 Over $ 50 billion 1.41 0.92 0.18 -0.07 0.77 0.94 1.06 Under $10 billion 1.26 1.06 0.05 -0.29 0.16 0.66 0.96 Source: