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Community Banks, Consolidation, and Regulatory Burdens

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The Federal Deposit Insurance Corporation has produced valuable research on community banks, but more research is needed to address an issue of great concern for small banks--growing regulatory burdens. At the end of 2012, the FDIC released a helpful community banking study that explored the characteristics and practices of community banks. And yesterday, the agency issued a report on community bank charter attrition, which offers valuable insights into the nature and drivers of bank consolidation. The message of the most recent report is clear--despite years of consolidation activity, community banks are here to stay. That is good news, because the diversity of the U.S. financial system--including its large number of community banks--is critical to its ability to serve the nation's diverse financial needs. The study's optimistic assessment of the future, however, largely ignores one key issue--the effects of regulatory burdens on small banks.

According to the report, the number of bank and thrift charters was 6,812 at the end of 2013, compared to approximately 20,000 in 1980. The report acknowledges that small bank consolidation has been paired with big bank asset accumulation, a marked trend that a recent set of Mercatus Center charts illustrates.The FDIC report explains that most of the consolidation activity is concentrated in banks below $100 million. Some of the decline is attributable to mergers within a single banking organization with multiple charters. Another portion of the decline is due to "voluntary inter-company mergers," which often involve one community bank acquiring another. Past consolidation was driven in significant part by the relaxation of branching restrictions. Bank failures have also contributed to consolidation. Looking forward, the authors expect fewer failures and more new bank charters.

Based on their findings, the report's authors conclude that "the projected decline of the community banking sector has been significantly overstated." They correctly point out that community banks are important to small businesses and rural communities. They further point to the relative stability of community banks between $100 million and $10 billion, and argue that economies of scale "do not appear to be working against the majority of community banks." The report mentions regulations as a positive factor; they can prevent bank failures. It does not look at the degree to which regulatory costs drive consolidation, a factor that should temper their optimistic projections. In a recent Mercatus Center survey, small banks told us that compliance costs have gone up in the wake of Dodd-Frank, the median number of compliance personnel has increased from one to two, and new regulations have affected the way community banks interact with their customers. Moreover, almost all of the surveyed banks anticipate continued consolidation in the next five years, and a quarter of them expect to be part of it. To the extent that regulatory cost considerations are driving purportedly voluntary bank consolidation, regulators owe it to small banks and their customers to think carefully about ways to reduce regulatory burdens.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.