The banking system is under pressure – particularly community banks, which have for years been the stalwarts of economic and job growth. Now it appears Washington may just want them out of the way.
Following a two-decade decline to less than half their previous number, the future role and existence of community banks is threatened by regulatory willingness to restrict new charters and accelerated pressure on capital and management.
They are suffering weak demand for loans, credit quality difficulties, growing competition, declining spreads and income sources and rising expenses. Most are today unable to operate with sufficient scale to provide the kind of returns that would attract capital. The result leads one to question the future viability of community banks and expect their continuing decline in number and influence.
By way of reference, the banking system of the United States is composed of the five largest banks that control over 50% of the banking assets; a few hundred regional banks; and more than 6,000 community banks, defined as banks holding less than $1 billion in assets.
The typical community bank's focus is on serving local small or entrepreneurial businesses, small agricultural clients and local individuals in rural areas, small cities and defined communities in large cities and urban areas. Community banks account for 92% of all banks, by number, and nearly 30% of total branch locations, yet hold only 11.5% of total banking assets – down from 26% a quarter century ago.
Since 1990 the nation's small businesses have created nearly three quarters of all the new jobs. Today these businesses collectively employ about half the nation's private sector workers. Their efforts produce 50% of nonfarm real GDP.
About 17.6 million of the 23.3 million active businesses operate independently without payroll employees. Of the remainder, there are 4.6 million companies that operate with 100 employees or less. These two groups are the primary target customers of many community banks. However, competition has muscled in.
In the late 1980s the large banks shunned most small businesses as too risky and costly to serve compared to other opportunities. But over this past two decades, advancing technology, centralized operations and the need to find new areas of profitability have altered their view of this extensive market.
Large banks became aggressively engaged in providing better-priced, technology-based and -aided credit and deposit services to small businesses and farms. During the same period many unregulated businesses – shadow banks – have been formed to provide financial services to small businesses, competitive with what banks offer.
One of the primary vehicles of large bank and shadow bank competition in meeting the needs of the smallest of these businesses has been business credit cards. A 2008 survey by the National Small Business Association found that credit cards were now the most common source of financing for America's small-business owners.
As the result of this new competition, growing technology and aggressive regulation many community bank revenue sources have been lost or diminished. These banks have discontinued as too costly, or found reduced demand for numerous noninterest income services. In addition most community banks no longer finance auto dealers, customer cars, or offer consumer or business credit cards. They no longer offer furniture financing plans, or finance business inventory and accounts receivable. In many cases they also collect fewer account service charges, sell fewer checks, and collect fewer loan, return check or overdraft fees. In addition, thanks to competition from money market funds (a subspecies of shadow bank) they no longer benefit from the level of free demand deposits from small-business customers that once amounted to nearly 50% of total business loans.
