Martin Neil Baily and Nicholas Montalbano of Brookings recently published a paper on the role of community banks in local economic development and small business lending. The authors find that despite concerns about the long-term survival of community banks due a decline in the number of banks and increased Dodd-Frank regulations, they continue to recover from the financial crisis and are in fact out-performing the Big Four banks in several key measures.
The paper leverages the FDIC community bank definition which was first established in the groundbreaking 2012 FDIC Community Bank Research Study to evaluate the financial performance of community banks . Unfortunately the authors conclude that the significant decline in the number of very small banks has had a limited impact, because these banks represent such a “tiny part” of the sector. What the authors fail to recognize is the significant role that small community banks play in the communities in which they operate.
It is great to see research on community banking to help develop a better understanding of the industry. Overall the paper is worth the read, but keep in mind that the loss of a small community bank, while insignificant to the broader financial sector, is a tremendous loss to the community which it serves. The paper may be found here: The community banks: The evolution of the financial sector, Part III