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When banking becomes like Jenga, you need a sure, steady hand — and lots of luck

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When banking becomes like Jenga, you need a sure, steady hand — and lots of luck

By: Steve Sadler, CEO, Allegiancy

July 07, 2015

The Currency of Savvy: A blog series from Allegiancy CEO Steve Sadler, featuring practical, provocative thoughts on business, economics, education and government policy. And what ever else is on his mind.


In the popular game of Jenga, little wooden blocks are stacked up to make a tower and then players take turns pulling out blocks one at a time, stacking them back on top, until eventually the tower collapses. It’s a game that combines nerves, analysis and steadiness of hand.

Each player is forced to make decisions that affect the outcome of the game as the tower’s structural strength weakens with each successful removal of a block. Ultimately, the poor sap who pulls the stick out that brings down the tower loses. You don’t want to be that guy.

The game reminds me of the current relationship between the banking industry and American business ownership and entrepreneurship.

Jenga is all about managing risk, or really avoiding risk. It’s about making the safe play. The winner is the guy with the steadiest hand who can stay out of trouble, forcing someone else to pull the block that crashes the tower.

It’s so like today’s bankers. Banks are being run on a model of risk aversion inside a regulatory framework that brutally penalizes any kind of loss. The goal is to make the regulators happy and to stay out of trouble, in effect being in the compliance business as opposed to the banking business. This is commonly known as a “loser’s game” where the surest way to win is not to play.

The real losers in today’s banking Jenga are entrepreneurs and business owners, the ones out there taking risk. In the current banking climate, it’s extremely difficult to get access to capital because the bankers know that any risk they might take will be severely scrutinized and heaven help the loan officer whose client suffers a setback!

I know this first-hand because despite a proven track record of my company’s profitability, of millions of dollars in deposits and a long-term relationship with a local bank, I was recently turned down for a working capital line of credit. I’m positive I’m not alone.

Over the past three decades, the U.S. banking industry has seen a wave of consolidation. According to a paper by the Federal Reserve Bank of Boston, the number of U.S. banks has dropped from 14,500 in the mid-1980s to 5,600 today.

The reasons for the decline in banking numbers are many and varied: failures during an economic crisis; consolidation spurred by the relaxation of state branching and national interstate banking restrictions; the voluntary mergers between unaffiliated banks.

But since 2009, voluntary mergers have been the primary reason for the decline, according to the paper. So why merge? “Mergers allow banks to achieve economies of scale, enhance revenues and cut costs through operational efficiencies, and diversify by expanding business lines or geographic reach,” the authors write. “Bank mergers can result in more efficient banks and a sounder banking system and thus benefit the economy, as long as banking markets remain competitive and communities’ access to banking services and credit is not diminished.”

It’s a nice idea, this notion of banking mergers being a good thing. But what I’ve noticed is that when my little community bank was merged with a larger regional bank two years ago, things changed for me and my company. The bank executive I knew and worked with — we lived in the same community even — retired because he was no longer in the banking business. He was in the compliance business. When I congratulated him on getting out, he said, “We have more compliance personnel than loan officers.” This indicates that the costs made it impossible to run a profitable bank that lends to real people and truly serves the community. Another one bites the dust!

And suddenly my company’s access to capital through our bank shrunk. To zero. Not only did the bank turn us down for a working capital line of credit, they asked us to refinance one property with another bank and even suggested the acquiring bank was going to review my personal home equity loan. They say it is “more efficient” — maybe for the regulators, but certainly not for anyone else.

Quite simply, you cannot capitalize a growing company in the U.S. with a bank. Banks don’t want the risk, unless business owners have a big personal net worth and are willing to essentially sign over their house, spouse and kids. Which leaves most entrepreneurs pretty much out in the cold. It’s Exhibit A in why we’re seeing in this country an enormous decline in entrepreneurial activity.

As a business owner, if I want access to capital my options are suddenly very limited. I don’t want to look to private equity firms because their conditions and demands are so onerous. Not every company is able to safely and realistically generate 30% returns, you know. Private equity firms want to beat you over the head and take your stock and control the lion’s share of your profits. Although I might be getting an infusion of capital, that’s not helping my company in the long run — or even the short run.

There are non-bank lenders, offering interest rates of 18 percent to 25 percent. They also want personal guarantees. No thanks. That is just too much. It is easier not to grow, to pass up good opportunities and not hire those new staff people. We are profitable and stable, who needs all that hassle?

So where does a business owner whose company is on the verge of doing great things such as growing revenue and profits, hiring workers, giving solid returns to investors and boosting the economy — companies like Allegiancy — go for capital?

Here’s a hint: This is where it’s time for entrepreneurs and business owners to think outside the box. One of the hallmarks of American business and entrepreneurship is innovation and ingenuity. Rather than seeing a closed door at your community bank, open a different one.

Opportunity is at hand for Allegiancy via the new Reg A crowdfunding rules adopted earlier this year. We can bypass the non-bank lenders and private equity markets and go directly to investors to raise capital through the crowdfunding model.

We fully intend on doing that. Suddenly it puts us in charge of the financing game and allows us to grow our business, eye new opportunities and innovate in our industry. Entrepreneurs win, investors win, the economy grows and America gets stronger.

We’re confident at Allegiancy. Our analysis is sure. We have a steady hand.

We fully intend to win the game.

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