National and Regional Trends in Community Banking

Abstract

Community banking plays an important role in financial intermediation in the United States, especially in the context of providing financing in smaller, rural markets and for small businesses. However, recent trends in regulation, the economic environment, and industry practices have led to a significant decline in the amount of FDIC-chartered institutions that qualify as community banks. In addition, the share of community-bank-held assets in the United States is declining as well. The decline of the community banking industry has significant implications for the efficiency and growth of the real economy, as larger banks may not be able to serve the community banking demographic as efficiently. In this study, we develop a dataset that allows us to analyze banking data collected from all FDIC-charted institutions and published by the FDIC. We use this data to analyze the community banking industry at the national, regional, state, and local levels. We are able to report the trends, strengths, and weakness of the community banking industry for the past twenty years. In addition, we develop two sets of community banking indexes meant to assess the relative and nominal changes in the strength of the community banking industry. One set of indicators simply measure market share, while others are composite community banking indexes that represent a unique contribution to the analysis of the industry. Finally, we analyze developments in the community banking industry across the tenures of the past three FDIC Chairs, which can provide context and guidance with respect to the perspective of key regulatory officials on community banking issues. Analysis of the data shows that the community banking industry is declining in the United States. However, the regional and local community banking industries, while still declining, have been relatively less affected. Our Community Banking Relative Growth Index (CRGI) shows that community banks have been weakening, relative to non-community banks, but the degree of weakening has been less at the local level. Our Community Bank Momentum Index (CMOM) shows that, on a nominal basis, the community banking industry has experienced nominal growth and that the regional and local banks are driving this trend.