Geography of Good Bank Loans

One way to model the financial meltdown and current economic mess is to look at the failures of distance trust technologies. While big banks require massive bailouts, small banks have thrived. In Crain's today, another such story:

Although he has received phone calls from states outside the TriState's purview — it operates in Pennsylvania, New Jersey and Ohio — Mr. Randall said he won't make loans anywhere that he can't drive to in a day. The reason for avoiding out-of-market growth is to ensure close oversight of its loans and involvement with its clients.

“If it's eight hours away, I'm less likely to get in the car and go for a day visit,” he said.

Every loan application is vetted by the leaders at each of the bank's offices, Mr. Randall said, and they all meet via videoconference twice weekly to discuss which loans to approve.

I'm reminded of parochial and face-to-face driven Silicon Valley. Venture capital has long used the approach that is driving TriState's bank loan business, although over more restrictive terrain:

Sequoia makes its preference for the 20-minute rule almost explicit, telling applicants whose companies are at the “seed stage” (receiving less than $1 million) or “early stage” ($1 million to $10 million) that “it is helpful if the company is close to our offices” because they “require very frequent contact.”

Kleiner Perkins has only one office, the one in Menlo Park. Sequoia has reached out to entrepreneurs more considerately, providing five offices. But only one of the five, the one in Menlo Park, is in the United States. The others are in China (two), India and Israel.

If you have a brilliant idea for the New New Thing and want Sequoia to provide its funds and blessing — using the same golden touch provided not long ago to Google’s founders — you would be much better off in Beijing, where Sequoia has an office, than in Boston, where it does not.

This is what I call the "proximity rule" and big banks are being punished for ignoring it. On the other hand, TriState is limiting business opportunity. Those starved for capital are making cold calls, but to no avail. They are located in the wrong state, beyond the realm of face-to-face trust building. A fortune for the person who can effectively break the proximity rule and increase the reach of financial institutions.