Download Community banks are essential to the American

Community Banks:
Strengthening the American Economy,
One Community at a Time
Executive Summary
Community banks are essential to the American economy. These
institutions, generally defined as having under $10 billion in assets, act as
primary lenders to the small businesses, farms and real estate
transactions that create jobs and fuel prosperity for millions of Americans.
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These small institutions provide the low-cost banking, community support
and financial education that larger institutions might not.
Deeply embedded in the areas they serve, community banks serve as
economic lifelines for their local economies during periods of financial
stress, most recently during the Great Recession of 2008-2009. Vital
contributors to the nation’s economic resilience, their strength and stability
have an almost incalculable impact on the lives of millions of Americans.
In this white paper, we examine the unique role of community banks in the
U.S.; their critical importance to small businesses, especially during
recessions; and the burdens that the Dodd-Frank Act and other regulations
are placing on their institutional strength and survival. Finally, we consider
how community banks will be able to continue driving growth in the
American economy going forward.
How Community Banks
Support the U.S. Economy
The U.S. banking system is comprised of several
Community banks, on the other hand, have
very large banks as well as many relatively small
focused more on relationship banking, basing their
community banks. This banking structure emerged
decisions on personal knowledge of customers’
from a legal framework that, in the past, restricted
creditworthiness and a keen understanding of
banks’ abilities to diversify geographically. The
business conditions in the communities they serve.
institutional structure of our system, in turn,
Indeed, most community banks are chartered to
reflected a longstanding concern in the U.S. about
serve their communities, providing services to local
the risks of concentrating banking power in a few
residents that range from financial education for
very large institutions located far from the
the unbanked to community redevelopment loans.
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customers they serve.
In this way, the bifurcated banking system has
The bifurcated framework of the U.S. banking
served the needs of a diverse U.S. economy
system has encouraged large banks to become
composed of businesses of all sizes and
complex organizations engaged in a wide range of
consumers with varied needs. Large and small
activities. They provide a variety of services to their
banks together create the backbone of our
customers, generally relying on hard financial
complex economy – they are both vital to our
information, computer models and centralized
ongoing strength and stability.
decision-making as the basis for conducting
business.
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The Relationship Between
Community Banks and
Small Businesses
The activities of community banks stand in sharp
contrast to those of the very large banks. During
the second quarter of 2014, the FDIC recognized
6,163 community banks, representing 93 percent
of all FDIC-insured institutions, that were
responsible for assets totaling $2.0 trillion, or just
Known as “America’s favorite lenders,” community
13 percent of industry assets. However, these
banks play a central role in financing and
community banks accounted for 45 percent of
strengthening local economies by making loans
small business loans.
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that support farms, residential and commercial
real estate activities, and small businesses. These
Examined another way, the big banks that control
services are especially important in rural areas,
87 percent of all the money in the banking system
where community banks account for 58 percent of
only account for 55 percent of small business
all banking offices and 49 percent of all deposits.
loans. As suggested by these numbers, big banks
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don’t carry their weight when it comes to small
business lending. Their business models focus
more on completing profitable transactions than
Community banks account for
on developing long-term relationships with small
58%
of all banking offices
49%
of all deposits
business clients. Local enterprises know that the
community bank will reliably provide access to the
capital they need to grow their businesses and hire
more workers.
Big banks control
87%
of all the money in
the banking system
While community banks account for a smaller
portion of urban banking activity, they play an
important role in smaller metro areas. In metro
AND
areas with less than one million people, for
example, community banks operate 31 percent of
all banking offices and control 23 percent of all
deposits.
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only account for
55%
of small business
loans
Community banks were
lifelines to small businesses
during and after the crisis.
What Role Did Community
Banks Play in the 2008
Financial Crisis?
Instead, community banks were lifelines to small
businesses during and after the crisis, offering
loans at the local level when lending restrictions
were tightening. Between 2008 and 2010,
community banks’ share of outstanding small
business loan balances jumped nearly 2 percent,
The financial crisis of 2007-2008, followed by the
but megabanks’ (with more than $100B in assets)
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Great Recession, was the worst economic disaster
share decreased by nearly 2.5 percent.
since the Great Depression of 1929. The crisis was
down further, in 2010, the smallest community
largely caused by the risky practices of mortgage
banks—those with less than $1B in assets—held 38
lenders and the packaging of bad loans by Wall
percent of small business loan balances, while
Street firms.
megabanks held just 27 percent of such loan
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Drilling
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balances. While the too-big-to-fail megabanks
Community banks, however, were not implicated in
pulled back on their lending in many parts of the
and did not contribute to the causes of the
country, community banks continued providing
financial crisis. They were not involved in
much-needed credit to keep their local economies
widespread subprime lending. They did not take
afloat.
part in the securitization of subprime residential
mortgages, nor did they use derivatives to engage
As Governor Daniel Tarullo of the Federal Reserve
in risky speculation to maximize return.
Board noted in a 2009 speech, the importance of
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traditional financial services – like those provided
by community banks – “tends to increase” in times
Share of Bank Small Business
Loans Outstanding
by Organization Asset Size
6/30/2008
40.0%
35.0%
34.7%
6/30/2009
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of crisis. In fact, many community banks fared
well, by comparison, during the crisis because of
their personalized, relationship-based business
12/31/2010
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model.
35.5% 36.2%
29.4%
30.0%
27.4% 27.0%
25.0%
19.6%
20.0%
20.2% 20.0%
16.3% 16.8% 16.8%
15.0%
10.0%
5.0%
0.0%
Less than $1B
$1B-$10B
$10B-$100B
More than $100B
When inflexible
regulatory pressures,
rather than consumer
preferences, lead to
consolidation, risks to
the banking system
inevitably rise.
Dodd-Frank and its Effects on
Community Banks
The laws and regulations taken to address the
The effects of the new regulatory burdens on
financial crisis and meant for large banks had
community banks have been severe and include a
unintended consequences for community banks.
growing number of mergers, acquisitions and
Most significantly, in January 2010, Congress
closings. The number of community banks (those
passed the Dodd-Frank Wall Street Reform and
with less than $10 billion in assets) shrank 14
Consumer Protection Act.
percent between Dodd-Frank’s passage in 2010
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and late 2014. Compliance and staffing costs have
The twin goals of Dodd-Frank were to ensure the
exploded during that time, placing additional
stability of the financial system and to protect
stresses on small banks. The Banking Compliance
consumers from reckless actions undertaken by
Index showed that the average community bank in
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too-big-to-fail banks. Yet community banks are, by
the fourth quarter of 2016 required 2.16 additional
definition, too small to destabilize the financial
full-time employees just to manage the regulatory
system. In addition, the business model employed
changes and enforcements introduced in that
by community banks has served to protect
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quarter alone.
consumers. For example, community banks have
far different incentives in underwriting loans than
Similarly, a 2013 survey revealed that more than a
mortgage originators like Countrywide or huge
quarter of small banks anticipated engaging in a
institutions like Citibank. Their success – indeed,
merger or acquisition in the near future, which
their survival – depends on the repayment of the
would further reduce the number of small banks.
loans on their books and the continued goodwill
When inflexible regulatory pressures, rather than
and loyalty of their customers.
consumer preferences, lead to consolidation, risks
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to the banking system inevitably rise.
Where Community Banks
Stand Today
The tide of consolidation among community banks
continues unabated. In 2016 alone, there were 62
fewer community banks in the second quarter of
the year than in first quarter, with two bank
failures. Community banks also continue to incur
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significant compliance costs that place them at a
further competitive disadvantage to large banks.
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The Stakes for Community
Banks, and the Nation
And small businesses and individuals that do not
fit neatly into standardized financial modeling, or
who live outside of the metropolitan areas served
We must reexamine the assumption that bigger,
by larger banks, are likely finding it more difficult to
more standardized banks benefit consumers. Until
obtain credit.
we do so, we will continue to undermine the
customization that is one of the signature
62
Q1
strengths of the community banking model.
fewer community
banks in the 2nd
quarter of 2016,
with 2 bank failures.
Countless small business owners and employees
thrive because their local financial institutions are
as rooted in the community as they are.
Q2
If the number of community banks continues to
shrink, through failures and mergers, we will see
an increased consolidation and continued growth
These issues matter because the Americans who
of too-big-to-fail banks. If that occurs, the risks are
most count on the local presence of these
clear: since recessions are cyclical, today’s strong
institutions are the ones most likely to pay the
economy will eventually slide into a downturn. It is
price for their consolidation today, and in the next
only a matter of time before some version of the
recession. However, much of this consolidation has
Great Recession repeats itself. When that occurs,
been confined to banks with less than $100 million
the engines of small business will need reliable
in assets. Community banks with assets between
financing to keep their regional economies running
$100 million and $10 billion are actually outpacing
until a national recovery can be engineered.
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their giant competitors.
But if the nation at that time has a limited number
Just looking at the second quarter of 2016, local
of local banks embedded in and responsive to their
financial institutions made $300.7 billion in small
communities, those businesses will have fewer
loans to businesses, up $3.9 billion (1.3 percent)
sources to turn to for financing and support.
from the first quarter. Community banks continue
Forcing large institutions to bear the costs of the
to hold 45 percent of small loans to businesses: in
risks that they create, while taking steps to reduce
Q2 2016, for example, they increased their small
the burden of regulation on community banks, are
loans to businesses by $9.5 billion, or 3.2 percent,
measures that would help ensure the continued
a robust improvement over the 2.8 percent growth
viability of the community banking model. And
at non-community banks.
they are steps that should be considered well in
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advance of the next recession.
Looking Forward
We live in a world where institutions like Amazon.com and Citibank
dominate the market by exploiting economies of scale that local
businesses can never hope to approach. But that doesn’t mean our
communities are better and stronger as a result. People live and work
locally. They create families, buy homes and start businesses locally. For
local communities to thrive, they need the support and resources that only
local banks can provide.
Small banks today face the threat of consolidation and failure just when
Americans need them to be accessible, efficient and responsive. For these
institutions to remain relevant, community bankers must double down on
their commitment to supporting the communities they serve. And political
leaders need to recognize that dismantling small banks places consumers,
small businesses and the overall economy at significant risk.
The health of our local economies is the health of the nation, and small
banks are essential elements to any plan for a prosperous future. We need
these vital institutions to be strong and we need them local.
References
1
https://www.fdic.gov/bank/analytical/qbp/2016jun/qbp.pdf
2
https://www.kansascityfed.org/Publicat/econrev/Pdf/2q03keet.pdf
3
http://citeweb.info/20030393384
4
https://www.kansascityfed.org/publicat/econrev/Pdf/2q03hoen.pdf
5
Ibid
6
http://www.sbc.senate.gov/public/?a=Files.Serve&File_id=66534743-2c4d-4ee8-9af2-6aec737dc7d8
7
Ibid
8
http://www.heritage.org/research/reports/2008/04/the-subprime-mortgage-market-collapse-a-primer-onthe-causes-and-possible-solutions
9
http://www.oba.com/usr_uploads/doddfrankimpact.pdf
10
ICBA analysis of Call Report data obtained from the FFIEC and FDIC Statistics on Depository Institutions.
11
Ibid
12
https://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm
13
https://www.americanbanker.com/opinion/fasb-chief-is-dead-wrong-on-small-banks-role-in-crisis
14
https://www.whitehouse.gov/economy/middle-class/dodd-frank-wall-street-reform
15
https://www.mercatus.org/publication/small-banks-numbers-2000-2014
16
http://info.continuity.net/bci
17
https://www.mercatus.org/publication/how-are-small-banks-faring-under-dodd-frank
18
https://www.fdic.gov/bank/analytical/qbp/2016jun/qbpcb.html
19
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2302392
20
https://www.whitehouse.gov/sites/default/files/page/files/20160810_cea_community_banks.pdf
21
https://www.fdic.gov/bank/analytical/qbp/2016jun/qbp.pdf
22
Ibid