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

Kahn, George A.; Keeton, William R.; Schroeder, Linda; Weiner, Stuart E.

Journal Article

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

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.

Keywords: Community banks; Economic conditions;