The Evolution of U.S. Community Banks and Its Impact on Small Business Lending

A previous version of this working paper was originally published in March 2014.

This paper examines the roles and characteristics of U.S. community banks in the past decade, covering the recent economic boom and downturn. The authors analyze risk characteristics (including the confidential ratings assigned by bank regulators) of acquired community banks, compare pre- and post-acquisition performance, and investigate how the acquisitions have affected SBL. Contrary to concerns, the authors’ regression analysis shows that the overall amount of SBL increases more after a merger when a large bank acquires a community bank. Data suggest an overall (regardless of mergers) declining SBL trend for all size groups. In fact, the decline in the SBL ratio has been more severe among community banks on average, relative to large banks. Community banks that were merged during the financial crisis were less healthy than in earlier periods. The authors’ results indicate that mergers involving community bank targets over the past decade have enhanced the overall safety and soundness of the banking system without adversely impacting SBL. Supervisory policies that discourage mergers between community banks and large banks could potentially result in an unintentional dampening effect on the supply of SBL.