Assessing Community Bank Consolidation in Ninth District States

This interesting article by Ron J. Feldman and Paul Schreck was originally published on, February 6, 2014.  To read the article in its entirety, click here.


Observers argue that increased regulation and supervision added in response to the financial crisis will speed the decline of community banks. Determining if the rate of community bank consolidation is higher than it would have been absent this additional regulation requires a baseline estimate of community bank consolidation. A baseline estimate is particularly important because the number of community banks in the states of the Ninth Federal Reserve District and the nation as a whole has been in a steady rate of decline for several decades. This paper uses several simple methods to provide baseline estimates of community bank consolidation. We will compare actual consolidation against these baselines, updated quarterly, to help determine if consolidation proceeds at a higher than expected rate.

I. Introduction and summary

Community banks and their representatives argue that increased regulatory costs—arising out of post-financial-crisis regulatory and supervisory action—will accelerate the fall in the number of community banks. (We use the term “consolidation” to describe this decline.1) That is, there would be more community banks absent the increase in “regulatory burden.”2 Policymakers, too, have expressed concern about consolidation driven by government action rather than underlying market forces; they have suggested that nonmarket-driven consolidation could reduce the net economic benefits produced by community banks focused on information-intensive relationship lending.3

Thus, observers need to know if the amount of consolidation in a world of increased regulation and supervision is higher than it would have otherwise been. Evaluating this question requires a baseline estimate of consolidation. Baseline-to-actual comparisons are particularly important given that a consolidation trend is already well under way in U.S. banking; the number of community banks nationwide has been falling steadily since its peak in 1984. Some states have seen longer declines, some shorter. Because of these underlying trends, analysts cannot simply use the number of community banks or changes to that number as the sole indicators of the effect of regulatory costs. Those numbers would not distinguish between underlying consolidation trends and consolidation arising out of recent government action.

This paper provides several estimates of baseline underlying consolidation trends. To generate those estimates, we use a variety of simple techniques for the nation and the states in the Ninth District. We make these forecasts for one year out.

Table 1 summarizes our baseline forecasts for the number of community banks that will exist in each state in the Ninth District and in the United States as of the second quarter of 2014.4 Three of the models forecast annual declines between 2 percent and 5 percent. (The fourth model forecasts a decline between 8 percent and 13 percent.) This range of estimates is consistent with the U.S. long-run trends of a 2.7 percent average annual decrease since 1985 and a 2.6 percent average annual decrease since 2000.

The actual amount of consolidation that will occur in the future can deviate from these baseline estimates for many reasons, including but not limited to forecast error. Less consolidation than expected does not, by itself, prove that regulatory costs do not affect consolidation, nor does higher consolidation than forecast by itself prove that regulation is not affection consolidation. But the size and direction of deviations from forecasts should provide information and context for additional and more direct analysis of the causes of consolidation.

We will update these forecasts quarterly to provide the necessary baseline to make these comparisons.
We proceed as follows. In section II, we summarize data on community bank consolidation over the past 25 years in the nation and in Ninth District states. In section III, we provide summary descriptions of the models used to forecast the baselines (details are in the appendix). In section IV, we provide the baseline forecasts produced by the models. This is followed by a brief conclusion.

To read the rest of this article and view its tables and figures, click here.