Has your hometown community bank disappeared, absorbed by one of the mega banks?
Looks like a cornerstone of our communities is fast disappearing. Since 1980 there has been a steady decline in their numbers, from approximately 18,000 in the late 1980’s to a little over 6,400 today (according to the Federal Deposit Insurance Company, FDIC). The rate of consolidation has been a gradual one, averaging about 3.5% a year. Credit union declines have pretty much kept pace with that of banks.
While smaller banks still make up the vast majority of our financial institutions, with 98% having fewer than $10 billion of assets and 89% with fewer than $1 billion of assets, it is the smaller ones that are hardest hit. From 1985 to 2013, institutions with less than $100 million declined by 85%.
There are a number of factors and many legal changes in the industry that have contributed to this, including a weaker economy, more stringent loan requirements, and the mortgage industry fiasco. The “mortgage meltdown” resulted in tightened credit and higher requirements from the FDIC for approving new banks so fewer bank charters are obtained and fewer small banks can open their doors. Last year, a Federal Reserve study claimed that at least three quarters of the decline in new charters is the result of the weak economy and low interest rates which results in fewer investors.
Still, regulations and the costs of keeping up with compliance have been huge factors. Jill Castilla, President and CEO of Citizen’s Bank of Edmond (Ok), says, “There is a lot of regulatory fatigue. I think there’s maybe a greater temptation to merge because of compliance costs and the economies of scale you’re able to gain when you combine.”
But what’s causing regulatory fatigue? Why is the cost of compliance escalating?