The Future of Banking in America - Community Banks: Their Recent Past, Current Performance, and Future Prospects

Abstract

The U.S. banking system has long had a multitude of small institutions. This characteristic of the industry has been shaped by a number of factors. The dual banking system—that is, the coexistence (since the end of the Civil War) of both federal and state chartering—has fostered the creation of small banks, and this effect was reinforced by chartering regulations at both the national and state levels that were frequently permissive. In addition, the fear of concentration, as well as efforts to keep local markets free of outside competition, led many states to impose longstanding limits on branching, and this legacy of unit banking helped swell the numbers of small banks, particularly in the Midwest. The lack, until fairly recently, of the technology necessary for creating very large banking organizations was another factor contributing to the multiplicity of small banks. Of course, during the last quarter of the twentieth century the requisite technological advances occurred at the same time that legal impediments to branching were being gradually removed. Thus, for the last decade of the century in particular, the industry saw a great deal of consolidation, much of it involving community banks, whose * The authors are all with the Division of Insurance and Research of the Federal Deposit Insurance Corporation: Tim Critchfield is a senior financial analyst; Tyler Davis, a research assistant; Lee