The Past, Present, and Probable Future for Community Banks

Byline: Robert DeYoung (1), William C. Hunter (2), Gregory F. Udell (3) Keywords: Community banks; small business lending; banking industry consolidation. Abstract: We review how deregulation, technological advance, and increased competitive rivalry have affected the size and health of the United States community banking sector and the quality and availability of banking products and services. We then develop a simple theoretical framework for analyzing how these changes have affected the competitive viability of community banks. Empirical evidence presented in this paper is consistent with the model's prediction that regulatory and technological change has exposed community banks to intensified competition on the one hand, but on the other hand has left well-managed community banks with a potentially exploitable strategic position in the industry. We also offer an analysis of how the number and distribution of community banks may change in the future. Author Affiliation: (1) Federal Reserve Bank of Chicago, USA (2) University of Connecticut, USA (3) Indiana University, USA Article History: Registration Date: 30/09/2004