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The role of community banks in the U.S. economy

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  • William Keeton
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    Abstract

    The U.S. banking system is unusual in consisting not only of some very large banks but also a large number of relatively small community banks. This bifurcated banking system in the United States has served the economy well. Over time, with regulatory change and financial innovation, large banks have become complex organizations engaged in a wide range of activities. They provide a variety of services to their customers, but often rely on hard financial information, computer models, and centralized decision-making as the basis for conducting business. In contrast, small banks have focused more on "relationship banking," basing decisions on personal knowledge of customers’ creditworthiness and a keen understanding of business conditions in the communities they serve.> The bifurcated banking system has served the needs of a diverse U.S. economy composed of businesses of all shapes and sizes and consumers with diverse needs and preferences. But despite the clear role that community banks play in the U.S. banking system, some analysts have questioned whether they play a sufficiently important role in the overall economy to warrant public interest and oversight.> This article examines the role of community banks in the U.S. economy and concludes that the Federal Reserve has a strong interest in understanding issues facing community banks. While community banks hold only a small share of the nation’s banking assets, they provide important financial services—for which there are few, if any, substitutes—to some key sectors of the economy. Moreover, community banks will continue to play an important role in the banking industry, even as technology and market conditions change.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

    Volume (Year): (2003)
    Issue (Month): Q II ()
    Pages: 15-43

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    Handle: RePEc:fip:fedker:y:2003:i:qii:p:15-43:n:v.88.no.2

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    Keywords: Community banks ; Economic conditions;

    References

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    1. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Robert DeYoung & William C. Hunter, 2001. "Deregulation, the Internet, and the competitive viability of large banks and community banks," Working Paper Series, Federal Reserve Bank of Chicago WP-01-11, Federal Reserve Bank of Chicago.
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    10. Mitchell A. Petersen & Raghuram G. Rajan, 2000. "Does Distance Still Matter? The Information Revolution in Small Business Lending," NBER Working Papers 7685, National Bureau of Economic Research, Inc.
    11. Hesna Genay, 2000. "Recent trends in deposit and loan growth: implications for small and large banks," Chicago Fed Letter, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Dec.
    12. Steven Pilloff & Stephen Rhoades, 2000. "Do Large, Diversified Banking Organizations Have Competitive Advantages?," Review of Industrial Organization, Springer, Springer, vol. 16(3), pages 287-302, May.
    13. Mitchell A. Petersen, 2000. "Does distance still matter? the information revolution in small business lending?," Proceedings, Federal Reserve Bank of Chicago 679, Federal Reserve Bank of Chicago.
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    15. Jayaratne, Jith & Wolken, John, 1999. "How important are small banks to small business lending?: New evidence from a survey of small firms," Journal of Banking & Finance, Elsevier, Elsevier, vol. 23(2-4), pages 427-458, February.
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    Cited by:
    1. Chernykh, Lucy, 2014. "Dwarf banks," Journal of Banking & Finance, Elsevier, Elsevier, vol. 38(C), pages 31-40.
    2. Jessica A. Holmes & Jonathan T. Isham & Paul M. Sommers, 2007. "Is George Bailey Dead?," Applied Financial Economics Letters, Taylor and Francis Journals, Taylor and Francis Journals, vol. 3(1), pages 19-24, January.
    3. Hamid Mehran & Michael Suher, 2009. "The impact of tax law changes on bank dividend policy, sell-offs, organizational form, and industry structure," Staff Reports, Federal Reserve Bank of New York 369, Federal Reserve Bank of New York.
    4. R. Alton Gilbert & David C. Wheelock, 2007. "Measuring Commercial Bank Profitability: Proceed With Caution," NFI Working Papers 2007-WP-22, Indiana State University, Scott College of Business, Networks Financial Institute.

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