Moutusi Sau
Senior Associate, Program Research Analyst, Center for Financial Markets
Moutusi Sau is a senior associate at the Milken Institute's Center for Financial Markets in Washington, D.C. She conducts research and helps execute programmatic activities on Milken Institute projects involving new tools for access to capital, strengthening capital markets in developing countries, and housing finance reform.
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Community Banks: Defying the trend

By: Moutusi Sau
February 10, 2015

Consolidation and regulatory change are reshaping the banking sector. As shown in a chart of the week published in September, the number of banks in the U.S. has declined despite growth in total assets, a trend that highlights the concentration of assets in a few top institutions.

Community banks are doing better than the whole of the industry. Untouched by the consolidation trend, they also are growing in asset size. In addition, they are generating higher interest rate margins than bigger banks.

Community banks are defined by the Federal Deposit Insurance Corp. as banks with assets of $100 million to $10 billion. Growth has been especially strong among smaller community banks. From 1985 to 2013, banks with $100 million to $1 billion in assets grew 27 percent and those with $1 billion to $10 billion increased 4 percent.[1]

This superior performance, in part the result of longer-term lending, continued last year both in loan growth and net interest margins,  according to the FDIC.

As pointed out in our blog post last week, big banks have faced increasing pressure on their interest rate margins in recent years, possibly because of their higher concentration of short-term assets. The steepening yield curve over 2013 was very favorable for institutions that funded at the short-term but invested over medium to long-term. In this climate, community banks benefitted from their high concentration of medium to long-term assets.

Community banks may also have gotten a lift from small businesses. The increased regulation of larger banks since the financial crisis has prompted small businesses to seek new lenders, including community banks. Currently, they provide over 45 percent of the industry’s small-business loans.

They also have had stronger overall loan growth in 2014 compared to the rest of the industry. Loan balances increased by 8 percent over the past year compared to 4.6 percent for the industry overall. As depicted in the chart below, community banks have seen a greater growth in loan balances for the four of the past six quarters.  

Community banks appear to be getting a break from regulatory reforms that were intended to address problems at the big banks, including Dodd-Frank and the Volcker rule. The Federal Reserve and Consumer Financial Protection Bureau recently eased restrictions on lending and acquisitions for smaller banks. And Congress is considering additional relief. Senate Banking Committee Chairman Richard Shelby said today that he wants to advance legislation that will lift the regulatory burden on community banks and credit unions.

“We are long overdue for regulatory relief for small financial institutions,” Shelby said as he opened a hearing on the matter.

A lighter regulatory hand is meant open the door to continued growth for community banks. The question going forward is whether the banks will grow without engaging in risky lending practices that ultimately would harm their customers.

Link to the interactive chart.

[1] Source:

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