U.S. Community Banks post the 2008 Financial Crisis

Abstract

Although community banks hold a small proportion of U.S. banking assets and market share, they perform a crucial function in the U.S. economy by offering vital financial services to businesses and individuals in regions where major banks do not operate. Their diseconomies of scale put them at a competitive disadvantage in relation to large, national commercial banks when coping with digital transformation and regulatory requirements. These challenges mounted after the Great Recession. This research, with the usage of four key financial ratio categories and the implementation of logit regression, looks into how U.S. community banks evolved in the aftermath of the financial crisis, 2009-2017. It divides the entire sample period into two sub-sample periods, 2009-2012 and 2013-2017, and comparing community banks with their larger counterpart and within the community bank sector between the largest and the smallest asset size quartiles of the group. This study, to the best of our knowledge, represents the only known research at the time of publication that compares recovery of banks post the Great Recession based on whether they are community or non-community banks. It finds that community banks tended to recover more slowly in terms of the bottom line, ROE, after the Great Recession than large national banks. Additionally, community banks are more likely to carry even less capital than their national counterparts in the later time period as compared with the earlier time period. In contrast, banks with higher liquidity and greater operating efficiency are more associated with community banks than non-community banks. Also, the empirical findings posit that size matters, to a certain extent. That is, while size does not command an absolute advantage, a certain threshold may be necessary for a bank to stay competitive. This provides a rationale for mergers and acquisitions taking place in the banking sector.