WASHINGTON - That the industry's largest players keep getting bigger is not news, but research due out today from the Federal Deposit Insurance Corp. puts that conventional wisdom in stark relief.
The FDIC found the 25 largest banks stole deposit share from both community and regional banks in every one of four types of markets: urban, large metro suburban, small metro, and rural.
For instance, in urban areas the top 25 controlled 61.6% of the deposits at yearend, more than double their share in 1985. Meanwhile regional banks' share shrank to 29.4%, from 54.5%, and community banks lost more than half their share, to 9%.
In large suburban areas, the top 25 had 41% of the deposits at yearend, up from 8.6% in 1985. The shares of both community and regional banks fell roughly 16 percentage points each, to 22% and 37%, respectively.
"The numbers do not lie. The large banks are eating the lunch of smaller institutions, but that's not the whole story," Fred Carns, a deputy director in the FDIC's division of insurance and research, said in an interview Monday.
"Community bank performance has been quite good, and they continue to be very important lenders to some key sectors, like small-business and agriculture. But the pie has grown so much, and it's the big banks that have taken that growth."
As part of the Future of Banking series, the FDIC is releasing three papers today - all focused on community banks. One covers the history of community banking, its current performance, and its prospects. A second examines the declining number of banking companies and concludes that the trend is slowing. The third focuses on the impact of rural depopulation, with a particular eye on the Great Plains states.
The goal of the series is to spark debate, which could lead to policy changes, about the industry's prospects. For instance, the concentration of assets in large banks has prompted the agency to consider changes to the way it determines insurance premiums.
FDIC Chairman Donald Powell has floated the idea of a two-tier system of both premiums and regulation. He is expected to return to the topic in a speech scheduled for Wednesday.
From 1985 through 2003 the ranks of community banks and thrifts were thinned nearly 50%, to 7,337. By 2013, the FDIC forecasts, the number of insured institutions will range from 6,480 to 7,167, or 17.4% to 8.6% fewer than today's 7,842.
Breaking the industry down into four asset-size categories, the FDIC said only the $10 billion-plus segment is expected to expand in the next 10 years. The FDIC expects this largest-bank category to increase to 95 institutions by 2013, from 71 today.
Meanwhile, the number of banks with less than $100 million of assets is expected to decline by 43.4%, to 1,483.
Still, the rate of decline in the number of banking organizations is slowing and is expected to slow further, the FDIC said.
"We project that the long decline ... may even grind to a halt within the next five to 10 years," the FDIC said.
A flip side to the consolidation story is the explosion in banks being formed. Since 1992, 1,250 banks have been created, and the FDIC said 1,100 of these are still operating independently. Only four have failed, the agency said.
The biggest challenges facing community banks, the FDIC said, are finding and retaining qualified employees, competing with credit unions and larger banks, and shouldering the cost of government regulation.
In its paper on rural depopulation, the FDIC found 779 of the nation's 3,141 counties shrank between the 1970 and the 2000 censuses. At yearend there were 1,451 community banks, with $132 billion of assets, headquartered in rural communities with declining populations, the FDIC said.
Most of these counties are in four areas: the Great Plains states, the upper Midwest, middle southern states, and Appalachia.
The Great Plains states, east of the Rockies and west of the Mississippi River, are the most vulnerable. Forty-six percent of the banks headquartered there are in counties with declining populations.
One of the biggest reasons, the FDIC said, is technological advances that have allowed farmers to do more work with fewer people. A second key factor, the agency said, is the "Wal-Mart effect": People moving to counties that have giant retailers' franchise stores.
Community banks in the shrinking counties face problems on both sides of the balance sheet, in gathering deposits and lending.
"We foresee increasing consolidation in depopulating rural areas, potentially dramatically altering the number of institutions over the next 20 years," according to the paper on rural areas.
"Community bank consolidation in these areas has yet to outpace that elsewhere in the nation, but two factors are reaching a critical juncture," the FDIC said. First, the "large pocket of very elderly in rural depopulating counties threatens to significantly weaken community bank funding bases." Second, "the lack of succession plans due to the absence of younger, capable bank managers in some areas could leave many retiring bank owners with no option but to sell."
While strategic options are limited for banks in these counties, two possibilities are branching into more economically vibrant areas and cutting costs, the FDIC said.
The FDIC's first Future of Banking study, released in late March, covered the evolution of the U.S. credit markets and the role commercial banks play. The next study will focus on small-dollar payments systems.
