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Are Community Banks Here to Stay?

May 7, 2014

For several years now, there have been rising concerns in the financial industry over the constantly declining numbers of community banks.  As per statistics from The Federal Deposit Insurance Corporation (FDIC), from approximately 20,000 banks and thrift charters in 1980, the size of community banking industry has been reduced to 6,812 at the end of 2013. Many industry experts blame the ongoing regulatory burden for the declining number and have further suggested that the consolidation will continue, as small banks will seek to team up to gain scale and to absorb the rising compliance and technology costs. Besides, competition from credit unions is another factor affecting the industry.

Along with the consolidation of banks, the bank branches are also witnessing significant closure across the country.  An SNL Financial analysis reported that over the past year, banks have scaled down by more than 1,500 branches. The oft cited reason is the rise of Internet banking; increasingly customers are going online via computers or mobile devices to meet their banking needs. Coupled with the regulatory burdens and high costs, this provides banks further reason to scale down and consolidate.

According to the latest findings from FDIC however, the industry consolidation fears are overstated and the consolidation will decrease in coming years as the effects of the financial crisis will subside. Eighty percent of bank consolidations since 1985 were due to mergers with other banks, self-liquidation and voluntary closure of bank charters by holding companies that owned several charters and folded them into other banks, the study found. The study also observed that the regulatory burden was not a significant driver of consolidation.  As per their statistics, consolidation has mainly affected the very small banks with assets less than USD 100 million, while banks with assets between USD 100 million to USD 10 billion have grown in size and numbers. Martin Gruenberg, chairman, FDIC, commented that the sector’s resilience and strong focus on personalized services that are overlooked by larger banks will preserve community banks, and they will continue to play a vital role in the financial system of the United States for the foreseeable future.

Although, industry representatives have overall welcomed the research and its positive conclusions, they disagree with the fact that regulatory burden was not a significant driver of consolidation. Today, regulatory compliance is seen as the biggest hurdle towards growth for the community banking industry. According to Independent Community Bankers of America (ICBA), over the last decade, increased regulatory pressures are the major driver for industry consolidation and have affected the growth in new bank charters. This is in line with the findings of a recent Mercatus Center survey which found that the median number of compliance personnel has increased from one to two, and new regulations have affected the way community banks interact with their customers. Further, almost all respondent banks anticipated continued consolidation in the next five years, and one-third of them expected to be part of it.

While the overall industry trend of consolidation may continue, it is unlikely to spell demise for community banks. In many cases community banks not only serve the nation’s diverse financial needs, but they also are an important source of funding for small businesses and a play a key role in the economic development of rural communities. 

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