Big Banks in Small Places: Are Community Banks Being Driven Out of Rural Markets

T he U.S. banking system has consolidated in recent years, and the shares of total banking system assets and deposits held by the very largest banking organizations have increased markedly. The number of commercial banks reached its post-World War II peak of 14,483 banks in 1984. By year-end 2012, the number of commercial banks had declined to 6,096. In 2001, the five largest commercial banks held 30 percent of total U.S. banking system assets; of these, Bank of America was the top asset holder with $552 billion in assets. Ten years later, in 2011, the five largest banks held 48 percent of total system assets and four banks had total assets in excess of $1 trillion. The largest commercial bank—JPMorgan Chase Bank—had $1.8 trillion in assets in 2011, equal to 14 percent of the total assets of all U.S. commercial banks. The shares of total U.S. banking assets and deposits held by the very largest banking organizations have increased markedly over the past 25 years, while the shares held by small “community” banks have declined. Advances in information technology may have reduced the advantages of small scale, close proximity, and local ties that traditionally have given small, community-focused banks a competitive advantage in lending to small businesses and other “informationally opaque” borrowers. This article examines trends in deposit shares of banks of different sizes in rural U.S. counties. If the community banking model is to remain viable, it is likely to be in rural markets with (i) a relatively high percentage of informationally opaque borrowers and (ii) relatively low costs of acquiring qualitative information about potential borrowers. The authors find that rural deposit shares of both the smallest and very largest banking organizations changed little between 2001 and 2012, despite the upheavals of the financial crisis and recession, and in contrast to the 1980s and 1990s, when the shares held by the smallest banks declined markedly. The evidence suggests that well-managed community banks remain competitive, at least in rural markets, where their niche is most likely stronger than in urban markets. (JEL G21, G28, L1)