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Big Banks Fail Rural Businesses

NEW YORK (TheStreet) -- It's not easy for rural small-business owners to get local bank loans, and that's a big problem for them as well as a growing problem for the banks.

It's mostly a byproduct of the consolidation of banks, which put many smaller institutions under the brand of a big regional or mega-bank. A report from the Mercatus Center at George Mason University shows that big banks made up 44% of U.S. bank assets at the end of 2013, compared with 23% in 2000.

That's a big jump in asset margins, and it's a big reason entrepreneurs out in the hinterlands are having so much trouble getting access to critical loans and lines of credit.

Another study, this one from Baylor University, says that since smaller, local banks are squeezed out of the picture, rural business owners have to turn to "faraway, unknown banking officials" to survive, rather than relying on local lenders as in the past.

Faceless bank decision-makers 300 miles away are now responsible, in many cases, for making lending and financing decisions without ever shaking the hand of the small-business owner asking for the loan -- a big step away from the relationship banking that has been a hallmark of smaller financial institutions dating back to before the Revolutionary War, when Ben Franklin could get a local bank loan to launch his own printing business.

Charles Tolbert, the lead researcher on the Baylor white paper (Restructuring of the Financial Industry: The Disappearance of Locally Owned Traditional Financial Services in Rural America) describes relationship banking as lenders "being aware of borrowers' reputation, credit history and trustworthiness in the community."

For small-business owners, the decline is only too real. According to Tolbert, rural business owners now also have to turn to borrowing from relatives, remortgaging homes or borrowing from retirement plans to launch a business or keep a current one afloat.

It also hurts local economies, says Carson Mencken, a professor of sociology in Baylor's College of Arts & Sciences. "The research is important because local businesses and entrepreneurs are increasingly vital for rural employment growth," he explains. "Many rural areas lack job opportunities or have lost them, in part because rural manufacturing jobs have been exported overseas to lower-wage destinations."