The Efficiency of FDIC-Identified Community Banks

Abstract

The US Federal Deposit Insurance Corporation (FDIC) recently redrew its criteria to identify community banks by including location and business strategy. We analyze the resultant re-classification of community banks and show it affects a wide array of salient outcomes. The thus-defined community banks are one-fifth more cost-efficient than other banks. Most of this efficiency advantage finds its origin in market structure, regulatory, and business environment factors, with corresponding substantial state-level heterogeneity. Community banks fare especially better when competing with large non-community banks and where financial access is limited.

Keywords: Bank business model, Community banks, Liquidity creation, Persistent efficiency, Residual efficiency, Stochastic Frontier Analysis

JEL Classification: G14, G21, G38