There was a time when small was considered virtuous, at least when you were choosing a bank.
The 11,000 small community banks that served the country in 1980 were known for their personal relationships with small-business and consumer customers who tended to be overlooked by larger banks.
Technology and competition have changed all that.
Large banks are able to take loan applications online from small towns in Nebraska and use credit scoring models to quickly make decisions for those potential customers who previously would have turned to their hometown bank.
The ability of big banks to serve small towns and rural areas gradually wore away regulators’ desire to protect community banks. Barriers to bank growth also began to corrode as government officials decided that concentrated financial power was no longer intrinsically bad and began to allow banks to expand and offer new services.
That trend has put pressure on many community banks, which often accept buyouts from their larger, stronger brethren. There are now fewer than 5,000 small community banks nationwide, including hundreds in Illinois, where branching restrictions kept banks from expanding long after their counterparts in other states were growing through new branches and acquisitions, according to a new study from the Federal Reserve Bank of Chicago.
Although the big bank mergers–BankAmerica and NationsBank as well as Banc One and First Chicago NBD in 1998–attract the most attention, those “megamergers” account for only about 5 percent of U.S. bank mergers since 1980.
Most of the action takes place on a smaller scale. About 55 percent of bank mergers during the past two decades combined two community banks.
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The number of small banks will continue to dwindle, according to the Fed study.
“While it is unlikely that community banks will entirely disappear, their numbers are likely to continue to shrink, and those that survive may not look like traditional community banks,” the study said.
It cites a 2001 working paper by the nation’s largest regulator of banks, the Office of the Comptroller of the Currency, which estimated that by 2007 there will be only about 2,500 small banks.
Many small banks will stay in business by offering specialty products like small-business loans and the kind of personalized investment and trust services for clients who are not being wooed by larger banks.
Deregulation and the declining cost of technology also will allow community banks to offer Internet, insurance and brokerage services that were either illegal or not affordable in the past.
Meanwhile, despite a weary economy and problems with investments and loans, earnings at the 25 largest U.S. banks rose 20 percent to $17.2 billion in the first quarter. That’s a record high, surpassing the $15.8 billion mark set in first quarter 2000, according to the Federal Deposit Insurance Corp.