Consolidation in the banking sector has been a steady trend for nearly thirty years, with smaller banks disappearing and large banks becoming too big to fail, but the Federal Deposit Insurance Corporation (FDIC) argues that community banks have actually been very resilient as a group, growing in number throughout this period of heavy mergers and acquisitions.
“Institutions with assets between $100 million and $10 billion—most of which can be considered community banks—have increased in both number and in total assets since 1985,” write FDIC economists Benjamin R. Backup and Richard A. Brown.
Banks with between $100 million and $1 billion in assets grew 7% and banks with assets between $1 billion and $10 billion grew 5% between 1985 and 2013 while total assets across each category increased 27% and 4% respectively over the same period. This is during a span when the total number of banking charters fell nearly in half.
FDIC defines community banks by the role they play
If $10 billion sounds like a lot for a community bank, it’s because the FDIC doesn’t just use assets to determine what’s a community bank or a transactional bank. “Community banks are more accurately described in terms of how and where they conduct business. Community banks tend to focus on providing essential banking services in their local communities,” write Backup and Brown.
So even when small, community banks merge and become larger the FDIC leaves them in the same category as long as they continue to do the majority of their business (accepting deposits, giving loans) locally. By this measure, more than 90% of FDIC-insured institutions are community banks, a percentage that has climbed over the decades.
Consolidation has impacted smallest and largest banks
That doesn’t mean that the story of banking consolidation is wrong, but it has happened at the extremes of the spectrum, leaving community banks in the middle unaffected in aggregate. The number of small banks – those with less than $100 million in assets – has dropped sharply over the years. Consolidation has also effected the largest banks, those with more than $10 billion, who have seen total assets across the category skyrocket.
The fact that community banks have survived the financial sector’s harshest periods (the late 1980s into the early 1990s and the recent financial crisis, when charter attrition rates were at their highest) should give regulators confidence that while systemically important financial institutions (SIFIs) need to be regulated so that they can’t crash the entire economy, the community banks that service many individuals are more robust.