Small banks are dealing with the ripple effects of two prominent failures last month

Transcript

AYESHA RASCOE, HOST:

The failures of Silicon Valley Bank and Signature Bank have brought the country's small lenders under increased scrutiny. There are a lot of small banks in the U.S. - thousands of them - though that could change, as NPR's Stacey Vanek Smith reports.

STACEY VANEK SMITH, BYLINE: The Bank of Bird-in-Hand opened in Bird-in-Hand, Pa., in 2013. It was the first bank to open after the financial crisis, and it got national attention. After years of bailouts, crises and economic struggle, people thought it was insane to open a bank, but Lori Maley was not worried. She is the CEO of Bird-in-Hand, which is located in the heart of Amish country. And Maley was right - at one point they had lines out the door of customers waiting to open accounts.

LORI MALEY: We had Amish sitting on the floor, sitting everywhere, you know.

SMITH: It's like the opposite of a bank run. It's like people lining up to put their money in a bank.

MALEY: Oh, definitely.

SMITH: Maley says Amish customers have very specific banking needs.

MALEY: They wouldn't be able to go to a regular bank and get a mortgage loan because their property's non-conforming, doesn't have electricity.

SMITH: Bird-in-Hand offers special loans for Amish homes and farms - also some accommodations, like hitching posts and a drive-through for horse-drawn buggies.

MALEY: We actually have an awesome picture of a horse looking in the drive-through window (laughter).

SMITH: Also, because horse travel takes a long time, Bird-in-Hand brings the bank to customers in some more remote areas. It has turned several RVs into mobile banks, complete with a teller window and an ATM. They're called gelt buses - gelt is the old German word for money - and they run on a regular circuit to areas where they know their customers will be.

MALEY: Areas such as the hay sale, the hardware store, the shoe store that the Amish frequent.

SMITH: The strategies have worked. Bird-in-Hand now has six locations, four gelt buses and $1 billion in capital. There are a lot of small banks like Bird-in-Hand all across the country - over 4,000. That's more than any other country on earth. It's more than the entire European Union put together. Why do we have so many banks?

RICHARD SQUIRE: There is some interesting history here.

SMITH: Richard Squire is a professor at Fordham University who specializes in financial and banking law.

SQUIRE: When America was in its earlier days, we had a - kind of a populist suspicion about big banks.

SMITH: So states looked for ways to support and protect local banks.

SQUIRE: A lot of states passed what were called branch banking laws, which made it illegal to operate a bank out of more than one building. It's hard to imagine it now. And so every little town in America had its own local bank.

SMITH: At one point in the 1920s, there were nearly 30,000 banks in the U.S. But all of those little banks posed a big problem for the U.S. economy. They would go bust all the time, and people would lose everything. Bank runs would spread through communities, devastating them.

And small banks still pose a risk, says Squire. He says they do provide crucial services to communities, but they can also be very vulnerable to economic shocks or a local disaster. He thinks the events of the last couple of months have shown this and will mean a lot fewer small banks in the near future.

SQUIRE: There's going to be tremendous market pressure for consolidation.

SMITH: Americans have already pulled nearly $200 billion out of small banks in just the last couple of months. Bird-in-Hand, though, has not been one of them. In fact, CEO Lori Maley says people still come to her all the time asking the bank to come to their town. Last month, the town of Bernville actually threw the Bank of Bird-in-Hand a little celebration after they became one of the regular stops for the gelt bus.

MALEY: We did the ribbon-cutting March 8, and there were two Clydesdale horses pulling a wagon with our bank's name and the pictures on it. They paid for all this. That was their welcome to us, from a community perspective, which is amazing. Never have seen anything like that in my whole life. So it's...

SMITH: This is not how I feel about my bank, let me just say.

MALEY: I know. Isn't it amazing? I mean, honestly...

SMITH: Stacey Vanek Smith, NPR News. Transcript provided by NPR, Copyright NPR.