After my recent shift over from a more capital markets focused career to community banking, I have sometimes been asked by friends and colleagues ‘why’? The soft answer centers on an appreciation of what community banking does in the many markets that are less well served by the large financial institutions. The more direct and numbers driven answer is “economic impact.” While it’s easy for many in finance to imagine running an asset management business or hedge fund as a career apex, I think that if you start breaking down the direct impact of various business models on the real economy, there are few other businesses as important to the economy as community banks.
Community banks play a crucial role in the U.S. economy, particularly in supporting small businesses, which are the backbone of employment growth. These banks, typically smaller and locally focused, offer personalized services that larger financial institutions often cannot match. Unlike larger banks, community banks often have a deeper understanding of local markets and can make lending decisions based on personal knowledge of their customers. This localized approach fosters trust and long-term relationships, which are vital for economic stability and growth.
The statistics back this up: Small businesses accounted for over 70% of net new jobs created since 2019 according to a study by the U.S. Treasury [1] and community banks are the preferred financial partners for many of these businesses due to their personalized service and willingness to lend to smaller enterprises that might be overlooked by larger banks. Community banks provide nearly 50% of all small business loans in the U.S., despite holding only about 13% of total banking assets. This disproportionate support underscores community banking’s importance in fostering entrepreneurship and local economic development. I would argue that some part of what differentiates the U.S. economy from the structurally slower growth in Europe is a more robust banking system that caters to startups and entrepreneurs though a community banking driven model.
Further reinforcing this point: The annual study of small business credit by the Federal Reserve continues to show a durable and significant preference by small businesses for community banks over both credit unions and large banks[2]. The study highlighted that community banks are better able to form strong relationships with small businesses, particularly those that are informationally opaque. This preference is due to the personalized service and local market knowledge that community banks offer, which larger institutions often cannot match despite their scale advantages and massive technology spend.
Despite their clear importance, the number of community banks in the U.S. has been declining dramatically. Just during my career, the number of banks in the U.S. has declined from over 12,000 to roughly 4,000 today, largely driven by disappearing community banks. Factors contributing to this include increased regulatory burdens, competition from larger banks, as well as the expanded powers and mandates of the credit unions which seem to be accelerating. While I agree that large banks and credit unions have their place, I also believe this trend of squeezing out community banks from both sides of the spectrum could pose a significant threat to the growth of the U.S. economy over the long-term.
Community banks are vital to the health and growth of the U.S. economy. They provide essential support to small businesses, which are key drivers of employment and innovation. However, the declining number of community banks poses a significant threat to economic growth and stability. It is crucial to address the challenges facing community banks to ensure they can continue to support small businesses and contribute to a vibrant economy. Policymakers, regulators, and the banking industry must work together to preserve and strengthen the community banking sector for the benefit of all Americans.
Written by: Adam Compton
[2] 2024 Report on Employer Firms: Findings from the 2023 Small Business Credit Survey.” 2024. Small Business Credit Survey. Federal Reserve Banks. https://doi.org/10.55350/sbcs-20240307