The Viability of Small Banks in the United States

Small banks have an important role in financing economic activity through their financial services for small businesses. There has been a sharp decline in the number of small banking organizations in the U.S. since the early 1980s. A continuation of this trend would raise important issues about access to financial services for small businesses. Data on the number of banks, their profits, and the distribution of consistent high and low earning banks tend to tell the same story about the viability of small banks. The number of banks with assets less than $100 million has been declining in recent years, and median profit rates of these very small banks are lower than the profit rates of banks with assets between $100 million and $1 billion. While some of the banks with consistent high earnings have total assets less than $100 million, there are many more consistent low earning banks in this size range than consistent high earning banks. The prospects are brighter for banks with assets between $100 million and $1 billion. The number of banks in this size range has increased in recent years, and profit rates for these banks tend to be higher than the profit rates of the smaller banks. The geographic distribution of the banks that consistently report high and low profit rates indicates that the viability of small banks varies among the regions of the nation. This regional variation may have important implications for whether the small businesses located in some regions are able to receive the kind of financial services that small banks provide to small businesses in other regions of the nation.