The Past, Present, and Probable Future for Community Banks

67 Pages Posted: 4 Jan 2004

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

William C. Hunter

University of Connecticut - School of Business; Tippie College of Business

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

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The large majority of banks and savings institutions are small and community-based. But advances in information technology, new financial instruments, innovations in bank production processes, deregulation, and increased competition have created a less hospitable environment for community banks. The number of community banks is shrinking, along with their shares of loan and deposit markets. By some measures both the number and market share of community banks in the U.S. have approximately halved since 1980. Given these trends, it is natural to wonder if the community bank business model will continue to be viable in the future. The specter of a declining, or perhaps a disappearing, community banking sector has potentially serious implications for local communities, small businesses seeking credit, and by extension the U.S. economy.

This paper presents a comprehensive view of the community banking sector in the U.S. in three parts. Each of these three sections includes numerous citations to the recent academic literature, and each is supported by a variety of data from the U.S. banking industry.

First, we review the past three decades of change in the U.S. banking system, with a special focus on how deregulation, technological advance, and increased competitive rivalry have affected the size and health of the community banking sector. Second, we use a strategic map approach to develop a theory of how deregulation and technological change have affected the competitive viability of community banks. The theory suggests that this change (a) has exposed community banks to intensified competition that is likely to force many more of them out of the industry, but (b) has also left well-managed community banks with a potentially exploitable strategic position. We show that U.S. banking data over the past three decades supports these theoretical conclusions.

Third, we consider the number of community banks that will remain viable in the future. Projecting the future number and size distribution of commercial banks after the U.S. banking industry has fully adjusted to deregulation is a treacherous exercise, and we do not pretend to be able to make accurate point estimates. Rather, we consider the recent financial performance of community banks relative to large banks, and, based on straightforward market principles, suggest which types of community banks, and how many of each type, are most at risk and least at risk going forward.

Keywords: Community bank, small business lending, banking industry consolidation

JEL Classification: G18, G21, L11, O33

Suggested Citation

DeYoung, Robert and Hunter, William Curt and Hunter, William Curt and Udell, Gregory F., The Past, Present, and Probable Future for Community Banks. Available at SSRN: or

Robert DeYoung (Contact Author)

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

William Curt Hunter

University of Connecticut - School of Business ( email )

Tippie College of Business
108 Pappajohn Business Bldg
Iowa City, IA 52242
United States
319-335-0866 (Phone)
318-0860 (Fax)

Tippie College of Business ( email )

5020 Main Library
Iowa City, IA 52242-1000
United States

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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