Years ago I drove out to a fast-growing suburb to have lunch with a banker. I was curious about his recent decision to quit his job as executive vice president of a big downtown institution to start a little bank way out where the edge of the metropolis met plowed ground. It seemed almost an irresponsible move for such a responsible guy.

So, after a few minutes of the usual chitchat, I asked: Why would a guy in his, ahem, early 60s surrender a cushy gig in a big, esteemed bank downtown to operate this little shopping-center bank out here?

I remember he smiled gently – I obviously was unschooled in this matter –and he explained that what he did was fairly common in his industry. He said something like this:

You see, big banks are good at running big things. They’re not good at starting small things. Big banks kind of expect a few of their senior executives to identify good, fast-growing spots in the city and then quit their jobs, pool some money from friends and associates and start their own small bank in those spots. Once the little bank is up and operating and has proved it’s indeed in a good location, then the big but risk-averse bank is quite happy to come along and buy it at a premium. The founders of the little bank enjoy a nice payday.

But what happens if the big bank doesn’t come along and buy you out? I queried.

I remember him saying that would be perfectly fine by him. He’d spend the next eight or 10 years enjoying his role as community banker and being his own boss. Eventually, he’d sell his share of the bank to the younger men and women at his place.

Then he launched into a philosophical postulation about capital allocation, and I lapsed into a momentary MEGO stupor and stabbed at my meal with a fork. I feared he would yammer about something far too grand and detached. Instead, it was something important. It snapped me back to attention. He said something like this:

Big banks are lost out here. They judge loan applicants by computerized credit score. But community bankers? We’re home here. We judge loan applicants by the three C’s – character, collateral and capacity, with character being the most important. We’re in the community. We know who the upstanding people are. And we’ve heard all about the ones who aren’t. This community is entirely made up of small businesses – growing business and family businesses and, yes, stagnant businesses. We’re the ones who allocate capital to the deserving ones and we know the ones to avoid. It’s not that big banks are bad or stupid. It’s just that they’re not set up to make little loans to little businesses. We are.

At that lunch I learned why it made perfect sense for a downtown banker to leave a lofty position. Sure, it was driven by greed – he might get a big payout in a few years. But if not, he would use his knowledge as a lender, coupled with his insight of his community, to help deserving small businesses get the money they need.

It all forms a nice cycle, if you think about it. It has its own sense of purpose and even justice. It’s a system that works but, alas, it’s a system that appears to have been blown apart.

As you see from the article on page 1 of this issue, startup banks are an endangered species. Los Angeles has had exactly zero banks start up in nearly four years. Why? The recession is one reason, sure, but a big reason is the mounting number of regulations. They make banking so expensive that the notion of a single, experienced banker pooling money from friends and associates to start a bank is nearly laughable. A bank needs to be big to break even today.

We have about half the number of banks today that we had 30 years ago. The number of small, community banks has been crushed.

Funny, but it seems to me that the folks who most encourage all the new rules and costs and regulations on banks are the same ones who seem mystified why small businesses are having such a hard time finding a lender.

Charles Crumpley is editor of the Business Journal. He can be reached at [email protected].