Monday, May 4, 2015

UNO Issues New Study on Community Banking Decline

Weakening Community Banking Industry Poses Potential Problem for U.S. and Local Economies

Representatives from the University of New Orleans and Gulf Coast Bank & Trust Company revealed a new study on the decline of the U.S. community banking industry before a group of more than 20 industry stakeholders today. 

The group convened at the Hilton Baton Rouge Capitol Center and was joined by U.S. Senator David Vitter of Louisiana, who chairs the Senate Small Business & Entrepreneurship Committee. Senator Vitter shared his personal insight regarding industry regulations and gathered feedback from attendees.

"Community banks have been getting the short end of the stick in the financial sector and it's only gotten worse since the financial crisis and megabank bailouts," Senator Vitter said. "Community banks are champions of entrepreneurialism and supporting small businesses, which are a major source of jobs in Louisiana and across our country. The megabanks often turn down loans for borrowers who do not meet a specific set of requirements, but community banks build and expand relationships that spur business growth and job creation."

The UNO study entitled “National and Regional Trends in Community Banking,” which was conducted by a team of UNO researchers led by Kabir Hassan, professor of economics and finance, and funded by a grant from Gulf Coast Bank & Trust Company, utilized banking data from all FDIC-chartered institutions nationwide to assess the relative and nominal changes in the strength of the community banking industry. The study revealed that community banks are rapidly on the decline, despite being responsible for nearly half of small loans made to farms and businesses and serving one out of every five counties in the U.S. The U.S. community banking industry has experienced a 50 percent decrease over the last 20 years, which carries significant implications for the efficiency and growth of the economy.

Following are several key points from the study (comprised using data from 1993-2014):

  • The number of community bank charters has decreased by 53.32 percent, while the number of non-community banks has decreased 17.60 percent.
  • The average return on assets for community banks declined 7.69 percent, while that of non-community banks actually increased 9.96 percent.
  • The 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.

According to the study, changes in economic and regulatory environments within the banking industry over the past several decades have contributed to an increasing amount of banking consolidation, which has shifted the landscape of financial intermediation in the U.S. away from traditional community banks towards larger banks. The changes have also resulted in a decline in the amount of FDIC-chartered institutions that qualify as community banks. Economic conditions like low interest rates have also altered the banking environment in a way that favors larger financial institutions.

“Although a trend toward consolidation is typical in most industries, larger banks are inherently unable to efficiently meet all the needs of the community banking demographic,” Hassan said. “By their nature, community banks are ‘relationship’ banks. They tend to be locally-owned and their deposits tend to be reinvested locally as well.”

Although non-community banks make fees by servicing the loans, they have less incentive to provide the screening necessary to insure the loan will be repaid. Larger banks have relied increasingly on “transactional” banking, whereby loans are often repackaged and sold to other financial institutions and investors in the form of derivative products. These types of activities have been linked to the recent global financial crisis. Comparatively, when a community bank makes a loan, it tends to keep it on its books for the duration of the loan.

All three recent FDIC Chairs have expressed concerns over the shrinking community banking industry, but the decline in market share continues. More recently, the FDIC has provided research and support for community banks, to aid in their adapting to changes in the industry.

“The decline in community banking is a troubling trend for the economy as a whole, but particularly for small businesses,” said Guy Williams, CEO of Gulf Coast Bank & Trust Company. “It is imperative that industry regulations take into account the vital role of community banks in the U.S. economy so that we can get back on the right track.”

Industry stakeholders in attendance at the presentation were encouraged to write personal letters to lawmakers regarding the vital role of community banks and the importance of regulation reform in the banking industry.

Editor’s note: In this study, a community bank was defined as an FDIC-chartered institution with total assets of less than $1 billion.

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National and Regional Trends in Community Banking