Community Banks Are In Danger of Extinction

EDITOR'S NOTE: The latest traditional business that is under fire and in danger of extinction in 2021 is the local, community bank, according to the Fed's Michelle Bowman. The Fed board member says that regulations and low profits are the reason only 44 new community banks have been chartered in the last decade. While these banks have "better intelligence about local credit needs" and offer "more tailored lending strategies," big, automated megabanks are driving them out of business. The smaller banks can't weather the over-regulation, low-interest rates, and high capital requirements like banking conglomerates can. This is a major issue for all Americans, but especially ones in rural areas. When fintech firms and digital conglomerates like Facebook, Amazon, and Walmart join the lending mix as permitted by the FDIC's final rule effective as of April 1, 2021, small banks will become even more inadequate. These corporations will not be held by the same liquidity standards as all US banks (as they're lenders, not institutions taking financial deposits) and will provide significant competition to banks. But they will also have more access to your transactional data. In short, Big Brother just got even bigger.

Regulation and low profits threaten the US community banking sector, Michelle Bowman, a member of the Federal Reserve Board, said. 

Speaking to a community bankers’ symposium at the Federal Reserve Bank of Chicago, Bowman noted that only 44 new banks had been chartered in the last decade. 

Bowman said that local banks were vital sources of credit both for rural areas and for businesses owned by members of ethnic minorities in cities. She noted that they were responsible for about three-fifths of Paycheck Protection Program loans during the pandemic.  

Bowman said that these banks tended to have better intelligence about local credit needs. Their “qualitative” analysis allowed for more tailored lending strategies than the “automated models” used by larger banks. 

The Fed board member said that community banks suffered from overregulation. The current regulatory and supervisory framework was “ill-suited for a lower risk profile and activities that are less complex than those of larger institutions”, she said. This made it difficult for small chartered banks to compete with less-regulated non-bank financial institutions. 

Bowman also cited low interest rates and high capital requirements as obstacles for smaller institutions. 

Bowman was vice-president of the Farmers and Drovers Bank in Council Grove, Kansas between 2010 and 2017. After that, she was Kansas’s state bank commissioner between January 2017 and November 2018, when she joined the Fed board. 

A recent paper published by the Federal Reserve Bank of Cleveland found that the number of US banks fell by nearly 40% between 2000 and 2020, from 6,326 to 3,985. However, US residents suffered little or no decline in their geographical distance from bank branches. 

Until the late twentieth century, small institutions dominated the US financial sector. This was partly due to laws restricting how many branches banks could have, reflecting a more general distrust of finance in the rural US.

Originally posted on Central Banking.