Elections & Government
With the collapse of Silicon Valley, Signature, and First Republic banks in recent months, Americans are concerned about an impending systemic failure across the nation’s small-to-medium-sized banks.
Community and regional banks serve an essential function in the banking industry, connecting local and interstate communities with financial institutions tailored to their specific needs.
However, these institutions' market share in the banking sector has declined over the past several years as large banks have grown to unprecedented sizes.
This change affects where Americans deposit their money and receive loans and could have far-reaching repercussions for the banking industry’s strength.
The Federal Reserve defines community banks as those with less than $10 billion in assets and regional banks with total assets between $10 billion and $100 billion. Any bank with combined assets of $100 billion or more is considered a large financial institution.
Community banks serve specific communities, such as a town or county, and tend to be tailored toward the needs of local customers. They are mostly privately owned and serve a vital role in the US financial system at the local level. The ensure that the public can manage their savings, start their businesses, or purchase a home, among other services, where larger financial institutions might not operate.
Regional banks serve a similar role to a larger geographic region, such as a state or multiple states. They have a more comprehensive range of services, more specialized departments, and may be publicly traded.
As of December 2022, there are 4,001 community banks with 27,511 branches and 134 regional banks with 13,109 branches across the US.
There are 31 banks categorized as large financial institutions, with 30,570 branches nationwide.
While regional banks have grown by about 50% over the last two decades, the number of community banks declined by nearly half over the same period.
Many factors have contributed to this steady decline, including mergers and acquisitions, bank failures, and higher regulatory costs.
However, as community banks have steadily declined, the number of large financial institutions has more than tripled in the past two decades. This consolidation of financial assets comes as depositors shift their savings to seemingly more stable banks during periods of financial stress, such as during the COVID-19 pandemic.
As big banks grow, they accumulate a larger market share, while regional and community banks’ relative size has declined.
According to the most recent data, community banks control $3.2 trillion in assets (about $811 million per bank), while regional banks control just under $3.1 trillion in total assets (about $29.7 billion per bank).
For comparison, JPMorgan Chase, the largest bank in the US, held over $3.2 trillion in assets in 2022.
Large financial institutions control over $16 trillion in assets, roughly $500 billion per bank in this category. Large financial institutions dominate the banking industry, managing more than 70% of total assets, compared to 42% in 2003.
This shift occurred between 2005 and 2008, when large financial institutions grew from owning roughly 47% of the industry's assets to 66%
While there is no one explanation behind this occurrence, several policies were in place at the time, leading to the creation of significant financial conglomerates.
For example, repealing the Glass-Steagall Act in 1999 allowed commercial banks to merge with investment firms resulting in large firms today like JPMorgan Chase, which provide both services.
According to a Congressional Research Service report, financial regulators believe this action enabled risky commercial and investment banking activities, making the financial industry more volatile. However, this notion is debated among experts.
While there isn’t an ideal ratio of small, medium, and large banks for the US, some risks are associated with losing community banks while consolidating assets among a few large firms.
For one, community banks tend to outperform larger banks during periods of economic stress, such as the 2008 financial crisis and the COVID-19 pandemic.
Furthermore, small banks often specialize in small business lending and are associated with local community development. Smaller banks tend to have more local autonomy and decision-making compared to branches of large financial institutions. They may also have more substantial commitments to reinvesting in their local communities, particularly in rural areas.
Large banks also have their comparative advantages, including offering a wider range of services, at times for lower prices, more expertise, and more advanced technology, mobile apps, and other innovative tools for financial assistance.
While large financial institutions have more resources and a more comprehensive range of services, losing one of these banks can have heavier repercussions on the economy than the gradual loss of many community banks, as seen after the collapse of Silicon Valley Bank.
To learn more about the US economy, read why bank assets have changed over time, or why the number of US banks is in decline. Get the data directly to your inbox by subscribing to our newsletter.
Other businesses, such as credit unions and savings institutions, also serve a similar role at the community level, albeit in different ways. Credit unions emphasize consumer deposit and loans, while savings institutions focus on real estate financing, along with other services. However, FDIC data shows that these types of institutions are also on the decline, at least in the case of savings institutions.
In proportion to the size of the bank’s assets.
Relative to non-community banks, community banks had higher net interest margins, stronger asset quality, and higher loan growth rates between 2012 and 2019, indicating better business practices.
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