Review & Outlook

Our take on the investing, financial, & economic themes of the day

The Decline of Community Banks

The Wall Street Journal reports today on a partnership between the online consumer lending start-up Lending Club and 200 community banks around the country.  The statistic in the article that struck me was this:

Community banks—those with less than $10 billion in assets—made slightly more than 75% of all consumer loans in 1990, according to SNL Financial, but that amount has plummeted to less than 9% of the market last year, with larger banks seizing that business.

Much of this consolidation in the banking sector has been driven by regulatory preference for big banks (or the “capture” of regulators by big banks, to put it another way) which has only accelerated since the financial crisis and the Dodd-Frank legislation.  A few weeks ago I had breakfast with the CEO of a community bank in the Philadelphia region who told me how the increased capital requirements on big banks were unintentionally driving consumer deposits out of small banks like his, since big banks were paying incentive programs to attract ordinary depositors in response to the government rules.

It will be interesting to see whether “fintech” (i.e., financial technology such as Lending Club’s direct lending platform) will help to shift the balance of power back in some small degree towards community banks.