The Increasing Brick-and-Mortar Efficiency of Community Banks

Over the last four decades, the number of community banks in the United States has steadily declined, from 15,000 in 1984 to less than 5,000 in 2021. Although community banks still account for more than 91 percent of all banks today, they hold a much smaller share of total industry assets: in particular, their asset share declined from 38 percent in 1984 to less than 12 percent in 2021. This decline has raised questions about the continued viability of the community bank business model. Community banks play an outsized role in originating loans to small businesses, so a continued decline in their numbers and asset holdings could constrain entrepreneurs’ access to credit—and, accordingly, constrain growth in the overall economy. Understanding the source of this decline is thus important for both regulators and policymakers. One possible explanation for the declining number of community banks is that larger banks have outpaced them in terms of efficiency. Community banks, which have less than $300 million in assets on average, may be less able to benefit from the economies of scale enjoyed by larger banks. In particular, community banks may be less able to afford or adapt to new technologies (such as mobile banking) that make banking more efficient. Moreover, a string of landmark regulatory changes— including the Riegle-Neal Act of 1994, the Gramm-Leach-Bliley Act