Consolidation Fears 'Overstated', FDIC Says

WASHINGTON — The Federal Deposit Insurance Corp. released a report Wednesday that tried to put to rest fears that community banks are headed for extinction.

The study, which follows the FDIC's earlier community bank research in 2012 and is part of a broader agency initiative to reach out to smaller institutions, says their resilience and focus on services overlooked by larger banks will likely preserve community banks' role in the future, even if consolidation continues at a sustained pace.

"These conclusions are somewhat at odds with the often expressed view that the post-crisis period will be characterized by heightened consolidation, which will increasingly marginalize the community banking sector," the FDIC said in the study. "Our analysis shows that the projected decline of the community banking sector has been significantly over­stated."

Many industry observers have suggested that the population of community banks will continue to decline dramatically as small players seek to team up to gain scale and better absorb rising compliance and technology costs. At the same time, bankers say regulators have been too stingy in granting new bank charters.

Overall, the number of bank and thrift charters has declined from roughly 20,000 in 1980 to just over 6,800 at the end of 2013. But the study argues that factors triggering the recent rise in consolidation will likely dissipate as time passes, and that past consolidation in fact has had a milder effect on the community bank sector than otherwise thought.

Supporting its findings, the agency says, are statistics showing that consolidation has mostly affected the very small — which on net have experienced the bulk of the industry's "charter attrition" — and the very large, which have grown sharply in size. But institutions between $100 million and $10 billion of assets actually increased on an aggregate basis during the study period. (The agency researched consolidation trends between 1985 and 2013.)

"The FDIC study clearly demonstrates the strength and resilience of the community bank sector and supports the conclusion that community banks will continue to play a vital role in the financial system of the United States for the foreseeable future," said FDIC Chairman Martin Gruenberg in a press release.

The number of institutions with between $100 million and $1 billion of assets increased by 7% during the study period, while those with between $1 billion and $10 billion increased by 5%. Meanwhile, the whole net decline in charters during the 28-year span was due to the net reduction in the number of institutions with less than $100 million of assets. That number declined by 85%, the agency said.

"What this implies is that while economies of scale may help to explain the large declines that have occurred over time in the number of banks with assets less than $100 million, they do not appear to have had nearly the same effect on banks bigger than $100 million," the study said. "As such, economies of scale do not appear to be working against the majority of community banks."

Industry representatives generally welcomed the research and its positive conclusions. Yet they nonetheless objected to some of its findings, saying they would have preferred more focus more on conditions that community bankers cite as challenges, including heightened regulation and competitive threats from other sectors such as credit unions.

Camden Fine, chief executive of the Independent Community Bankers of America, said he agreed with the agency's conclusions about the sector's resilience.

"Community banks have faced every kind of obstacle and challenge you can throw at them. They're like the old Timex. They take a licking and keep on ticking," he said. "From that standpoint, the FDIC study was very positive."

Yet he added that the FDIC should have included a greater emphasis on why community banks feel under pressure.

"Where I believe ICBA feels that something that was maybe overlooked by the FDIC study is the cumulative impact of regulatory burden," Fine said.

"The FDIC study seemed to indicate that regulatory burden was not a significant driver of consolidation. ICBA would certainly disagree with that. There is no question in... my mind that regulatory burden is driving consolidation today — maybe not over the great expanse of 30 years.... But certainly over the past decade, increasing regulatory burden has been a driver of consolidation."

The FDIC also noted that while the recent crisis "has taken a particularly severe toll on the pace of chartering activity," historical trends following prior crises suggests that new charters will soon enjoy a rebound. The study said the most recent downturn took "a particularly severe toll on the pace of chartering activity." Between the end of 2009 and the end of 2013, only 15 new charters were established.

"If the experience of the last banking crisis is any guide, chartering activity can be expected to recover over the next few years as the effects of the crisis recede," the study said.

Yet there too industry advocates took issue with the emphasis of some of the report's findings, noting that growth in new banks has been slow to emerge in part because regulators — including the FDIC — have been too demanding of those trying to organize startups.

"The regulatory requirements now and the amount of capital required and the extra supervision that will inevitably come their way will keep capital out of new banks and in other non-banking investments," says James Chessen, the chief economist for the American Bankers Association.

Chessen says it is "terrific" that the FDIC was "taking a deeper dive" into the community banking sector, but he wishes the agency had gone even further.

"They've shed a lot of light on issues that has not been there before," he says. "To me, the next steps are really looking hard at the competition from credit unions and the Farm Credit System and acknowledging that it has an impact on the future of community banking."