Consider using a community-focused bank (Part II)
If you want to make an impact through your banking, don’t rule out the smaller ones.
In a previous post, we wrote that if you want more of your money working for communities, you consider using a smaller bank.
In this follow-up blog post, we take a closer look at the range of ways in which banks make community investments.
How different banks make different community investments
Community investments are loans to businesses (small and large), loans to farms (small and large), loans for housing and construction, financing for public works (like roads and bridges and parks), and loans for households (like loans to buy a car or pay for college).
Community investments are generally diversified, so you won’t find a bank putting 97% of the money in the bank into any one community activity, like small business loans. Rather, you’ll see banks putting a fraction of money into small business loans, and some into housing loans, and some into public works financing, and so forth.
The share of money banks invest in communities
Below is a chart of how banks in the US in different community activities, from those that do the least (those in the bottom 1 percentile) to those that do the most (those in the 99th percentile.)
To summarize:
99% of banks in the US put anywhere between 0% and 75% of money into housing loans
0% to 68% of money into business loans
0% to 60% of money into farm loans
0% to 38% of money into public works financing
0% to 17% of money into construction loans.
These ranges exist for a few reasons: (1) banks are structured to finance different things, (2) that may be influenced by local market demands (banks in rural areas are more likely to do farm lending than those in urban areas, for example), and (3) lending activities reflect the priorities of the bank’s leadership.
The size of the bank can be your starting point to understand what the bank is structured to do.
The range of small business lending
A small business loan is defined as a loan to a business for $1 million or less. Across the bank industry, banks put anywhere between 0% to 38% of the money in the bank into small business loans.
The smaller the bank, the more likely it is, on average, to be specialized in financing small business.
The average share of money in the bank that banks of different sizes put into small business loans
The smallest banks -- those with less than $250 million in the bank -- put on average 14% of the money in the bank into small business loans.
The largest banks -- those with more than $1 trillion in the bank -- put on average 1% of the money in the bank into small business loans.
What does this mean for you and your bank account?
This means that if you put your money in a bank account with a smaller bank rather than a larger bank, you on average may create 14 times more community funding for small businesses with your money.
How?
A good way to think about this is how a bank uses $10,000, for example.
According to the chart above, a bank with less than $250 million in the bank is, on average, going to invest 14% of that $10,000 into small business loans. A larger bank — one with more than $1 trillion in the bank — will only invest 1% into making small business loans.
So if you put $10,000 in a bank account with a smaller bank, the bank may put 14% of it into small businesses, while the largest banks may only put 1% of it into small business loans.
This may sound surprising at first -- large banks have so much money, you’ll say… even 1% of a large bank’s money is a lot of money, you’ll rationalize… and you’d be right. 1% of a trillion dollars is more than 14% of $250 million. But that doesn’t change the fact that there are bank accounts available to you where your money would be creating 14 times more financing for small business, in result of your banking decision.
Large business lending
A large business loan is defined as a loan to a business for more than $1 million. Across the bank industry, banks put anywhere between 0% to 51% of total dollars in the bank into large business loans.
While the smallest banks lead the bank industry in their focus to finance small business, mid-sized banks with with $1 billion to $50 billion in the bank lead the industry, on average, in their focus to finance large business loans.
The average share of money in the bank that banks of different sizes put into large business loans
If you put $10,000 in a bank account with a mid-sized bank, the bank may on average put 24% of it into large business loans, while the smallest banks may on average put 6% of it or less into loans for large business.
If you’re looking for a large business loan, or are interested in supporting banks making large business loans, you might want to check out mid-sized banks.
Banks financing small farms
Loans to small farms are defined as farm loans under $500,000. 98% of banks put anywhere between 0% to 41% of the money in the bank into making loans for small farms.
Just like they lead the bank industry for their focus in making small business loans, small banks also lead the industry, on average, for their focus in small farm lending.
The average share of money in the bank that banks of different sizes invest into small farm lending
The smallest banks in the US allocate, on average, 9% of the money in the bank for small farm lending. The largest banks in the US on average allocate less than 1% of the money in the bank for small farm lending.
When you bank your money with a small bank versus a large bank, up to 9x more of your money, on average, can support small farms.
Banks financing large farms
Loans to large farms are defined as farm loans for more than $500,000. 98% of banks put anywhere between 0% to 34% of money in the bank into loans for large farms.
Surprisingly, it is the smallest banks, on average, which lead the bank industry in small farm lending, that also lead the bank industry in making large farm loans.
The average share of money in the bank that banks of different sizes put into large farm loans
One reason smallest banks lead larger banks in their large farm lending focus may be that smaller banks are more likely to be headquartered in rural areas versus larger banks and, as outlined above, the local market in which the bank is headquartered contributes to the focus of the bank.
Banks financing housing
Housing loans are defined as loans for residential properties. 98% of banks put anywhere between 0% to 75% of the money in the bank into home lending.
Smaller banks are more focused on financing home ownership than the largest banks in the country.
The average share of money in the bank that banks of different sizes put into lending for housing
When thinking about supporting banks that focus on financing home ownership, another relevant data point worth considering is if the bank keeps the home loans on its books, or sells the loan. Banks that make home loans and hold them, versus banks that make home loans and sell them, can be thought of as having a longer-term relationship with its borrowers, and hence a longer-term stake in the value of the communities in which their borrowers live.
Banks financing public works
Public works financing is loans and securities for local government to fund schools, water & sewer systems, roads, airports, rapid transit, athletic stadiums, and general cash flow needs. 98% of banks put anywhere between 0% to 38% of the money in the bank into financing for public works.
The smaller the bank, the more likely it is, on average, to finance public works.
The average share of money in the bank that banks of different sizes put into public works financing
On the whole, the overall trend of bank financing for public works parallels that of small business and farm lending: the share of dollars in the bank dedicated to public works steadily increases as bank size decreases.
The smallest banks, an average, put 8% of the money in the bank into public works, while banks with more than $50 billion put on average 1% to 2% toward public works.
Banks financing construction
Construction loans are defined as loans for land development, and other land loans. 98% of banks put anywhere between 0% to 17% of money in the bank into making loans for construction.
Banks in the $500 million - $1 billion range lead the industry in focus for financing construction loans, and the smallest banks are on average 4x more likely to finance construction lending than the largest banks.
The average share of money in the bank that banks of different sizes put into construction loans
Finally, let’s look at household lending.
Banks financing households
Household loans are defined as automobile loans and other consumer loans, including student loans and loans for personal expenditures like medical expenses and appliances. 98% of banks put anywhere between 0% to 23% of the money in the bank into lending to households.
The larger banks — though not the biggest of banks — tend to lead the market in financing loans for household use at 3x the rate of the smallest banks.
The average share of money in the bank that banks of different sizes put into lending for households
In summary
Most banks do a bit of every type of financing.
More than 90% of banks put the majority of their dollars into financing communities. The largest banks tend not to.
The smallest banks in the US, on average, lead the banking industry in their focus for financing small businesses, small and large farms, and public works (schools, bridges, roads, and other cash needs for local governments).
Mid-sized banks in the US, on average, are the most likely to fund large business loans, housing, and construction.
The largest banks in the US, on average, do not lead the bank industry on any community investment category when looked at as a percent of total dollars in the bank.