Tuesday, Sept. 10, 2014

New University of New Orleans Study Tracks Decline in U.S. Community Banking

UNO releases a new study analyzing the decline of community banking in the U.S. over the last two decades.UNO releases a new study analyzing the decline of community banking in the U.S. over the last two decades.

The number of community banks in the United States has decreased by 50 percent in the last 20 years, shrinking at a much greater rate than non-community banks, according to a new study of the community banking industry from the University of New Orleans.

The study finds that, in spite of the important role that it plays in the American financial system, the community banking industry has been in decline over the past two decades, although the degree of weakening has been less at the local and regional level than nationally.

"The decline of the community banking industry has significant implications for the efficiency and growth of the real economy, as larger banks may not be able to serve the community banking demographic as efficiently," said M. Kabir Hassan, professor of finance and economics.

Researchers collected banking data from all FDIC-chartered institutions to analyze the community banking industry at the national, regional, state and local levels. They also developed two sets of community banking indexes meant to assess the relative and nominal changes in the strength of the community banking industry.

Here are some of the highlights of the study that analyzed data from 1993-2013:
• Both community and non-community banks saw a reduction in number of FDIC charters; however, the number of community banks decreased by 50 percent, while the number of non-community banks decreased by 19 percent.
• Growth in average net income for non-community banks outpaced that of community banks by 292 percent.
• The average total asset growth for community banks was 220 percent less than that of non-community banks.
• The average return on assets for non-community banks increased 17 percent while the average return on assets for community banks declined 14 percent.

Community banking occupies a valuable place in the economy because smaller community banks comprise a majority of banking institutions in the U.S., and they are responsible for servicing the banking needs of small businesses and rural communities, according to Hassan. Recent trends in regulation, the economic environment and industry practices have led to a significant decline in the amount of FDIC-chartered institutions that qualify as community banks, Hassan said.

In this study, a community bank was defined as an FDIC-chartered institution with total assets of less than $1 billion. The study, entitled "National and Regional Tends in Community Banking," was underwritten, in part, by a donation from New Orleans-based Gulf Coast Bank & Trust Company.

To review the entire study—including statistics for all U.S. community banks, Gulf State community banks, Louisiana community banks and New Orleans community banks—visit http://ssrn.com/abstract=2493726.

 

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