Fed’s Powell Discusses Community Bank Market Dynamics

Federal Reserve Governor Jerome Powell today highlighted the role that the smallest community banks play in the financial system. Speaking to the annual community bank research conference hosted by the Federal Reserve Bank of St. Louis, Powell noted that because de novo banks have historically been in that asset category, “banks with less than $100 million in assets should be viewed as a key source of dynamism and competition within the banking sector.”

However, the number of community banks in that asset class has fallen by two-thirds since 1995, while numbers in other bank asset groups under $10 billion have grown. He attributed this in part to ongoing consolidation not offset by new entrants.

“The key question for policymakers is whether the recent acceleration in the rate of decline in the number of small banks is primarily a structural change attributable to increasing economies of scale — or, perhaps more accurately, diseconomies of very small scale — or whether recent efforts by the FDIC and others to encourage more chartering of new banks, combined with a return to higher interest rates and stronger economic growth, will mitigate the decline in numbers,” Powell said. “At this point, I think it is too soon to say.”