Randal Quarles of FED on Trends in Urban and Rural Community Banks

The number of banks in the United States fell by almost half over the past 20 years—from about 10,700 in 1997 to about 5,600 in 2017. About 97% of the decrease was accounted for by community banks. Although the number of banks in both of these categories has been falling over time, the rate of decline was steeper for rural banks than for urban banks before the financial crisis but has reversed in the post-crisis period. In terms of performance measures, rural community banks consistently outperform urban community banks with regard to return on assets and return on equity. This difference was particularly pronounced during the financial crisis, when profitability fell much more sharply at urban community banks than at rural community banks. The data suggest that, despite facing a more challenging economic environment, rural community banks appear to be holding their own relative to urban community banks. Even if the data indicate that most rural markets are well-served, focus should be on the markets that may not be as well-served and how that is affecting the people who bank, or cannot bank, there. That is why the Community Development function of FED has undertaken a national series of listening sessions to assess the real effects of bank closures on rural communities. 

For residents in a particular community, the closure has not been much of a problem, as they do most of their routine banking online and even noted that they did not think automated teller machines (ATMs) were necessary because most of the retail businesses in town offer cash back with debit card purchases. Nonetheless, residents spoke positively about the importance of the personal touch a local bank can provide. Residents liked familiar faces at the teller window and loan officers who understand the local economy when making small business loan decisions. Moreover, online banking is not necessarily an opportunity for everyone, depending, for example, on whether the necessary infrastructure is available. In Nicholas County, Kentucky, many residents do not have access to high-speed internet; this lack of access has led most residents to travel outside of the county to conduct their banking needs. This situation is certainly not optimal for anyone, but it presents a particular challenge to the elderly, those without a car, and busy small business owners who do not have time to travel 25 miles each way to make change and deposit checks. 

The loss of a bank branch also has a ripple effect on a community as a whole. In the village of Brushton, New York, which lost its only bank branch in 2014, small business owners commented that when residents must leave the village to access banking services, they are more likely to shop, eat, and pay for services in other towns, which creates additional hardship for the small businesses of Brushton. Additionally, as the ability of community members to access cash has decreased, credit card use has increased. Small business owners in Brushton say that this growth in credit card usage has significantly increased the cost of doing business. Lastly, one theme that was clear across the country was that the loss of a local bank meant the loss of an important civic institution. Banks do not just cash checks and make loans—they also place ads in small town newspapers, donate to local nonprofits, and sponsor local Little League teams. As towns lose banks and bankers, they also lose important local leaders. He reiterated that FED will continue to explore challenges faced by local communities and looks forward to sharing the collective results of these efforts in a report that should be published in early 2019.

Related Link: Speech

Keywords: Americas, US, Banking, Community Banks, Urban Banks, Rural Banks, Trends, FED