The Good Economist September 2016 - Page 2

The State of Community Banking: Decline or Opportunism


Are community banks in the midst of a severe decline or are industry lobbyist are seizing this as an opportunity to rollback critical protections? The state of community banking in the United States is inciting a raging debate. Both sides offer argument with considerable merit and, given the importance of community banks to local economies, the conversation is worth your attention.

Community banks, which are generally defined as banks with $10 billion or less in total assets that engage in highly localized banking activities, have a critical role in keeping local economies vibrant. The nation’s financial system is predominantly made up of community banks. The FDIC characterized 93 percent of the nation’s approximately 6,400 depositor institutions as community banks in the first quarter of 2015. And in nearly a fifth of counties across the nation, community banks are the only banking presence. This greater proximity to customers allows community banks to engage in relationship-based lending, which uses personal knowledge of a borrower to assess credit risk. Establishing close ties with the borrower allows community banks to respond with greater agility to lending requests than their national competitors. Relationship lending is critical for small businesses whose finances and prospects may be relatively less transparent than larger firms. Community banks have become a key provider of credit to small businesses, with 44 percent of outstanding small loans to businesses coming from community banks. Given their importance, many point to the recent struggles of community banks as a cause for concern.

Many argue the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the most comprehensive financial regulatory reform of the twenty-first century, is imposing crippling regulatory burdens on community banks. These financial institutions were forced to significantly increase overhead - such as staff, training, and time - to comply with Dodd-Frank. While their larger counterparts were able to easily absorb increased compliance cost, community banks, with fewer assets to spread compliance cost, have struggled. This precipitated a massive consolidation within the industry. Since July 2010, 1708 community banks have permanently shut their doors. In the last 14 months alone, four banks with a large presence in southeastern Pennsylvania - Integrity, Susquehanna, Metro, and National Penn - have all been acquired

-market banks.

has gone without a startup lender. With so many mergers and no new bank formations, it could be only a matter of time before some customers and communities have their banking options limited.


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