It Takes More Than a Village Redux: The Decline of the Community Bank

The past 15 years have shown unprecedented concentration in the commercial banking space in the US, with banks with more than $10 billion in assets gaining deposit share in a most dramatic way. In 1995, the top five banks had 11% deposit share; today they have nearly 35%. On the other end of the scale, the number of banks under $100 million in assets dropped by 5,967 from 1992 to 2010.

In an updated report, It Takes More Than a Village Redux: The Decline of the Community Bank, Celent revisits the decline to see whether the numbers have been consistent since the original report was published. It also re-examines the concentration of deposits at the top of the pyramid.

Celent has found that the predictions made in the original report, published in January 2009, have held true over the last three years. The trends in efficiency ratios, bank counts, and deposits shares have continued to follow course. Celent argues that banking is a more complex business than it was 20 years ago and that this complexity puts small banks at an increasing cost disadvantage. Deposit-gathering is a scale business, and the largest banks understand that and are exploiting it up to FDIC limits.

“The difference in efficiency ratios between the smallest banks and the largest ones has grown from nil to just about 25%,” says Bart Narter, Senior Vice President of the Banking Group and author of the report. “This gap has been increasing steadily over time, and it will continue to increase. The world is only getting more complex. Regulatory burdens increase. Channels proliferate. Small banks are still overwhelmed.”

This report examines bank counts and the efficiency ratios that measure cost. It then analyzes the deposit gathering of banks by asset category and follows the top five banks and how they have merged, acquired, and evolved to obtain nearly 35% deposit share.