FDIC Reports Small Bank Ranks Shrinking
Consolidation trends driven by economics and regulatory burden apparently are driving down the numbers of small banks just as they have the ranks of credit unions in recent decades.
Nearly mirroring credit union numbers, the ranks of U.S. banks dropped from approximately 20,000 in 1980 to 6,812 at the end of 2013, with most of that decline attributed to the consolidation of institutions with assets less than $100 million, according to a study released Wednesday by the FDIC.
The number of banks with assets between $100 million and $1 billion increased 7% between 1985 and 2013, while the number of banks with assets between $1 billion and $10 billion increased by 5 %, the report said.
“While the magnitude of economies of scale among community banks was found to vary according to lending specialization, most of the cost benefits from scale appear to be achieved for community banks with as little as $100 million in assets,” the report stated. “What this implies is that while economies of scale may help to explain the large declines that have occurred over time in the number of banks with assets less than $100 million, they do not appear to have had nearly the same effect on banks bigger than $100 million.”
The FDIC study concluded that the rate of consolidation is likely to subside in coming years and that consolidation has impacted the community banking sector much less than commonly believed.
According to the FDIC report, a total of 2,580 federally insured banks and thrifts failed between 1985 and 2013, with failures accounting for approximately 17% of total charter
attrition during that time, the report said.
The total number of FDIC-insured institutions declined by 62% from 1985 to 2013, but the number of FDIC-insured community banks increased from 87% to 93% during that time, the report said.
The study noted that almost two-thirds of community banks that failed or closed voluntarily during the past decade were acquired by another community bank.
Of the 2,579 community bank charters acquired between 2003 and 2013, 65 % were acquired by other community banks, according to the report.
On the other hand, the study noted that many big banks got much bigger.
The total assets of institutions with assets greater than $10 billion grew from $1.1 trillion (28%) in 1985 to $11.9 trillion (81%) in 2013, the study said.
The 10 largest financial institutions now hold more than 50% of total industry assets - a jump from less than 20 % in 1990, the report said.
Although the community bank share of industry assets dropped from 37% in 1985 to 14 % in 2013, those numbers should not cause alarm, according to the report.
“Despite the concerns of some that a period of heightened consolidation could diminish the prospects of community banks, there are several reasons to think that these concerns may be significantly overstated,” the report stated.
In response to the report, the Independent Community Bankers of America released a statement hailing the community banking industry as resilient with a bright future.
“This FDIC study reiterates that community banks continue to grow, adapt and evolve and debunks the misguided rumors that banks must hold $1B in assets to survive,” the ICBA said. “Indeed, most community banks are in fact thriving, despite significant headwinds brought on by the aftereffects of the financial crisis, such as increased regulatory burden and compressed interest margins.”
The statement added, “Nevertheless, it cannot be overlooked that consolidation sheds much-needed light on the current regulatory environment that community banks face and the continued need for tiered regulation.
“The recent financial crisis showed us firsthand how financial concentration in a handful of megabanks can produce devastating consequences for our nation’s economy, which ultimately led to even more financial consolidation.”