How do we grow from here? Vitality begins back home

What Jamie Dimon, CEO of JP Morgan Chasee, writes in his annual letter to shareholders often gets (and often deserves) a lot of attention. As chairman of the largest bank outside of China, Dimon speaks to and from a rarefied audience including prime ministers, heads of central banks, CEOs of vast global enterprises, “my friend Warren Buffet,” and (almost incidentally) people like me who own a few hundred shares. The air is thin, but the view is commanding.

I also own a few shares of M&T Bank, 35th among U.S. banks and about 1/25th the size of Chase. Headquartered in Buffalo, M&T is one of those regional/superregional banks—outfits like KeyCorp, PNC, and Huntington—that play an outsized role in the parts of the country where they operate, what they’re prone to calling their footprint. If Jamie Dimon speaks ex cathedra—from a bishop’s throne—M&T’s chairman and CEO René Jones is like the priest of a big parish, preaching from a pulpit.

Jones’s 2022 chairman’s letter—his homily, if you will—strikes me as far more important than Dimon’s. M&T operates in upstate New York, Maryland, Delaware, and (after a recent acquisition) in New England. While it serves a few hot, wealthy markets like Boston and Bethesda and Fairfield County, the largest share of its deposits comes from second- and third-tier metropolitan areas like Buffalo, Rochester, Syracuse, Bridgeport, Hartford, Stamford, and Baltimore. The congregation René Jones looks out over is a lot less well dressed than Dimon’s. Jones writes, “Ours may not be the markets that garner attention for their high growth and new migrants from other U.S. regions—but, nonetheless, they comprise 22 percent of the U.S. population and an even greater share (25 percent) of GDP.” They matter.

Apart from discussing the business (which had a strong year), Jones makes two main points: One about the financial wellbeing of the people and businesses M&T serves, another about the wellbeing of the financial system serving them. Both give cause for worry.

The people: M&T looked at the deposit activity of a million and a half customers for 23 months from January 2020 and found two distinct patterns. One group got an average of about $4200 from various forms of Covid relief, but also cut their spending on travel, restaurants, and so on by about $9300—so that their overall deposits rose by $13,500 to just under $45,000. The other group, which started with less than $1000 in the bank, got a bit less in Covid assistance and endured a 40% increase in daily expenses. (Many were frontline workers, unable to stay at home.) For them, Jones says, emerging from the pandemic is awakening to a financial “Groundhog Day,” made worse because they are likely to be more hurt by inflation than those with assets.

That’s a time bomb.

So’s this: The rise of non-bank financial services is starting to cannibalize things bankers do that affect ordinary people in ordinary towns. The share of commercial and consumer lending done by nonbanks has soared. In the last two years, nonbank mortgages have risen 12%, bank-originated mortgages 7%. Similar numbers show up in loans of all kinds, an acceleration of long trends, to the point where there is no category in which banks write a majority of loans. Jones writes, “Today, hedge funds and private equity firms own and ?rent houses, fintechs process payments and partner with small banks to bypass debit interchange restrictions, … large retailers hold billions of customer money on their balance sheets.” Plus there’s crypto.

All this is happening outside the regulatory system that tries to ensure banks’ solvency and the strictures, such as they are, of the Community Reinvestment Act, a much-amended (and occasionally maligned) 1977 law that, among other things, requires banks to invest in communities they take deposits from, rather than siphon money from a struggling town to benefit a growing one. ?

Here, interestingly, bishop and rector are preaching on the same text. Jamie Dimon spends several pages on nonbank financial services in his annual letter. There’s a difference, though. Dimon’s sermon focuses on the competitive disadvantage banks have and implies—though he doesn’t come out and say it—that the solution is to reduce banking regulations. Jones doesn’t much like the regulations either, which is no surprise, but implies that part of the solution might be to apply some of them to nonbanks, too, because regulations that cover just 40% of an industry will fail in their aims. He adds, “Some may see CRA as a burden; at M&T, we see it as an essential part of who we are and what we do.” Serving these markets is a strategic choice for M&T, not just a regulatory burden or an onerous act of corporate social responsibility. Making social impact strategic is, as Michael E. Porter and Mark R. Kramer point out, is how to make it work.

I am the last, or nearly the last, person to have an “It’s a Wonderful Life” view of banks, even community banks. Nor do I believe calumnies unfairly thrown at private equity. Certainly Jones is self-interested; he wants to play on a course landscaped to benefit M&T. But as Eurasia Group’s Ian Bremmer says, “The United States today remains by far the best country in the world to be an entrepreneur … but increasingly the worst among rich countries if you don’t have access to capital.” That especially applies to financially vulnerable individuals and to the small and mid-sized businesses that are and must remain the beating heart of these regions. Midsized companies have well documented disadvantages dealing with financial markets. These days private-equity investors in markets like these are most likely looking for roll-ups—opportunities to combine smallish companies in construction or landscaping or trucking or franchising. There’s a huge cultural gap between the cufflinked MBAs who do these deals and the founder/entrepreneurs whose businesses they buy. There is also an economic effect that can open dangerous rifts in communities. These deals may bring a big check to the owner who sells, but the long-term effect is to swap out owners for employees—the kind of thing that happens when local retailers succumb to chains. It’s not just a loss of equity; it’s a loss of agency.

As usual, writers and artists have shown us what happens. ?They show how Bedford Falls, home of George Bailey of “It’s a Wonderful Life,” would have become Pottersville, a dystopian Hadestown, had Bailey not lived. They show us the contrast between the world of John O’Hara’s Appointment in Samarra (1934), set in a fictionalized city near Wilkes Barre, Pennsylvania, with the world of “Mare of Easttown,” the 2021 HBO series set in a fictional town in Pennsylvania’s Delaware County, a bit more than an hour’s drive from O’Hara’s made-up Gibbsville. Not a happy place, Gibbsville, at least not for doomed Julian English: But a self-sufficient place, a place that looked like it could control its destiny, that could send kids to college in big cities and expect them to come back. Easttown, by contrast, is a place to leave. One theme of the Brookings Institution’s 25-year-old Metro research program is that second-string cities and regions need a strong core of midsized companies that can attract and create capital and that produce goods and services the region can export, thus bringing in money from outside—from Boston and Bethesda—rather than having the money flow in the other direction.

I don’t have policy ideas about this, though there clearly are policies that could modernize requirements for community support and spread the obligation and opportunity appropriately across a financial-services universe that was unimaginable in the Seventies; clearly, too, there are short-term actions that could defuse the time bomb ticking for financially distressed families and long-term actions that could lead to fewer such bombs being set. (Those don’t all need to be political; it’s good to see more juice in the labor-union movement.)

There is also enlightened self-interest by bankers and businesspeople generally. In his M&T Bank annual letter, René Jones writes “We plan, in other words, to be the bank that remains in communities that others have abandoned.” He describes in replicable detail how the bank is doing that. Can it work? Since March 11, 2020, the date the World Health Organization declared that Covid-19 was a pandemic, M&T stock is up 53%, which, as you can see, compares well to that of some rivals. ?