How Do You Define a Community Bank?

Since the financial crisis, there has been a lot of anger over megabanks which not only contributed to the financial crisis, but also grew bigger during the financial crisis as they acquired banks that failed. That anger peaked last year with the first Bank Transfer Day which was intended to encourage people to move their money from the megabanks to community banks and credit unions. If you want to help community banks, there's an important question to ask. How do you define a community bank?

This question has recently been investigated by the FDIC. This week the FDIC released its community banking study. The study was primarily intended to help regulators to understand community banks. You can read all of the details at this FDIC page. The first chapter deals with the definition of the community bank.

A common perception of a community bank is one that's focused on providing traditional banking services in its local community. In the FDIC study, quantitative attributes are described. The simplest way to define a community bank is by size. The FDIC cites past studies that have used size thresholds of $1 billion and $10 billion in assets. In addition to the issue of inflation affecting the dollar-based size thresholds, the FDIC mentioned another issue: "attributes associated with community banking are only loosely correlated with size." There are some small banks that shouldn't be considered community banks while there are large banks that may be considered community banks. Some examples of small banks that don't fit a community bank definition include credit card specialists, industrial loan companies and trust companies.

The following table shows the number of community banks and other banks based on the FDIC criteria:

The table shows a total of 6,524 community banks which hold a total of $1.9 trillion in assets. There are only 298 large banks that aren't considered community banks, but their total assets are over $11.3 trillion. Out of those 298 large banks, 4 are the megabanks (Chase, Wells Fargo, Bank of America and Citigroup) which have a total of almost $6 trillion in assets.

One worry that I have with this FDIC research is that it may deter small banks from accepting out-of-state deposits. Over the years we have seen many community banks launch internet divisions and online applications that accept deposits from every state. They have given us more choices and higher rates for savings accounts, CDs, checking accounts and reward checking accounts. If these out-of-state deposits cause the loss of their community bank designations and if that has regulation consequences, will it deter community banks from accepting out-of-state deposits? I hope not.