There Is No Such Thing as 'Overbanked'

A recent American Banker story suggested that Chicago has become "overbanked." But casually asserting that a major American city is overburdened by local financial institutions dismisses the importance of community banks to our communities and overall banking system. In fact, that assertion runs counter to what many bankers view as a dangerous trend: the consolidation of the banking industry into fewer and fewer hands.

Local Economic Drivers

The diverse U.S. banking system of many community-based institutions has been essential for our nation's economy. Community banks are highly capitalized and locally owned institutions that reinvest in the communities in which they operate. As the only physical banking presence in nearly one in five U.S. counties, community banks are critical sources of financing, providing more than half of the nation's small-business loans under $1 million.

As locally owned institutions, community banks are held accountable by their communities and have an inherent incentive to treat their customers fairly. After all, you just can't afford to take advantage of a customer who knows you — and your other customers — on a first-name basis. Community banks are deeply involved in local affairs and use that knowledge to support prosperity county by county and neighborhood by neighborhood across the nation.

Consolidating Risk

Our banking system is plagued not by oversupply, but rather consolidation that has shrunk the number of U.S. banks from more than 18,000 to roughly 6,000 in the past 30 years. This rising concentration — fueled in part by increasing regulatory burdens — puts many American communities in jeopardy of losing access to financial services. According to the Federal Deposit Insurance Corp., 16.3 million people in roughly one in three U.S. counties would have limited or no physical access to mainstream banking services without the presence of community banks.

Further, the continued concentration of our nation's banking assets in a handful of large financial institutions increases risk to the industry. While the 10 largest banks controlled 19% of industry assets in 1990, they now account for roughly two-thirds.

Decades of increasing concentration in the banking industry have resulted in financial institutions large enough to pose systemwide risk and require taxpayer assistance when they reached the brink of failure. There's also evidence these institutions enjoy a funding advantage because of their government subsidies, while executives are exempt from prosecution because of the risks their institutions pose. Encouraging further concentration isn't in our industry's interest, and it certainly isn't in the interest of a nation of savers who continue to be impacted by flat-lined interest rates for eight years and running.

De Novos Denied

Rather than encouraging community banks to exit the market, we should instead focus on enticing the establishment of de novo institutions. A combination of low interest rates, sluggish economic conditions and burgeoning regulatory red tape has brought new bank formation to a standstill.

This "trickle" of bank applications further inhibits access to credit and financial services in communities overlooked by larger institutions. While the FDIC has shortened the period of heightened de novo supervision and pledged new resources for organizing groups, a broader revamp of industry regulations would do much to encourage the entry of new institutions into the industry.

The challenge facing the banking industry is not how to foster more buyouts to line the pockets of merger-and-acquisition consultants, but how to maintain a diverse and decentralized financial system. Community banking is a uniquely American system that goes to the heart of what we believe as a nation: that we are stronger from the bottom up than from the top down. That we are more powerful collectively when we are empowered individually. This is our heritage, as community bankers and as Americans.

Camden R. Fine is president and CEO of the Independent Community Bankers of America.