Community banks’ share of U.S. banking assets and lending markets has fallen to around 20 percent today from more than 40 percent in 1994, according to a recent study out of Harvard University’s Mossavar-Rahmani Center for Business & Government.
In "The State and Fate of Community Banking," researchers Marshall Lux and Robert Greene concluded that "inappropriately designed regulation and inadequate regulatory coordination" threaten the future of community banks.
Community banks are troubled by their declining market share in several lending markets, their decline in small business lending volume, and the disproportionate losses being realized by small community banks, according to the paper.
Lux and Greene offer several possible solutions, including:
• Implement more stringent cost-benefit analysis standards to reform the regulatory process
• Change the Consumer Financial Protection Bureau into a commission
• Streamline existing regulations through a bipartisan commission and agency coordination
Although community banks service a disproportionately large amount of key segments of the U.S. commercial bank lending market, their number has fallen by 40 percent since 1994 (There were 6,094 community banks in the second quarter of 2014 compared with 10,329 in the same period in 1994) and their share of U.S. banking assets fell by more than half to 18 percent in 2014 from 41 percent 1994. Small community banks ($1 billion or under) have been particularly affected as their share of banking assets has declined 19 percent.
After Dodd-Frank’s passage in the second quarter of 2010, community banks have lost market share at a doubled rate of 12 percent, compared with 6 percent in the past between Q2 2006 and Q2 2010. Community bank small business lending has also declined 11 percent since Dodd-Frank was put into effect.
Lux is a senior fellow at Kennedy’s Mossavar-Rahmani Center for Business and Government and senior advisor at The Boston Consulting Group, and Greene is a research assistant at the Mossavar-Rahmani Center, discusses the plight of community banking in the United States and the impact of Dodd-Frank on community banks.
The full version of the paper can be found here.
