Small businesses may be losing a lifeline

The Great Recession produced a startling change in the makeup of America's banks. According to a report from the Federal Reserve Bank of Richmond, from 2007 through 2013 the number of new commercial banks fell by 14 percent. Most of the decline came from community banks, the type of institution most of us think of when we hear the term "traditional bank."
And given the how much small businesses rely on community banks for funding, this shrinkage could have an impact on the formation and survival of small business enterprises.
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Why have bank entries tumbled? The report cites two possible explanations: the fall in bank profits during the Great Recession, and regulatory changes from the Dodd-Frank legislation. The drop in bank profits appears to be the biggest factor, but earnings also fell to similar levels during previous recessions, yet bank formation didn't turn down as much. So, changing regulations may be at work as well.
Which one of these factors turns out to be the primary cause has implications for the banking system's structure in the future. If falling profits are to blame, then bank entries ought to recover as the economy rebounds. But if regulations are holding back entries, the difficulties that creates for small business could be more permanent.