Community banking as a tool for sustainable growth
April 3, 2023
Community banks generally refer to banks, savings associations and holding companies with less than $10 billion in consolidated assets that serve local markets, including under-served rural, semi-rural, suburban and other niche markets. Community banks generally have simple, straight-forward business models, with a geographically concentrated credit exposure. As a result, community banks often have a better understanding of the local businesses they finance than larger banking organizations.
The community banking industry has a long history of resiliency and historically has exhibited a low rate of failure, particularly when compared with international commercial banks and financial institutions. Many community banks are well established, having been in business on average for more than 75 years and have survived many economic cycles, including the financial crisis of 2008.
Community banks are important to local economies in many ways. They provide a valuable source of financing and financial services to local areas, small businesses and individuals. They also help mitigate exposure to global financial sector events by reducing dependence on larger banking institutions. Community banks can play an important role in supporting local economies, such as by providing loans to local businesses, which has been proven to lead to job creation and capital investment within communities. In addition, they often offer critical support during natural disasters due to their understanding of the local environment and practices that promote longer-term economic security for the community.
While community banks are generally subject to the same regulations as their larger competitors, community banks have historically maintained significantly larger amounts of equity capital. Given that community banks do not typically have access to different forms of capital from the public markets, most equity in community banks is comprised of common equity, a form considered of the highest quality by international banking regulators. Accordingly, community banks generally have significantly better equity cushions than their larger competitors.
On a macro level, community banks can also help mitigate exposure to global financial sector volatility because they are often insulated from the cyclical forces that affect larger institutions. This helps promote financial stability in times of market uncertainty. In addition, increasing de-risking amongst international banks has caused many developing countries’ access to global credit markets to be reduced, resulting in a need for more support from local banks. Community banks are therefore well positioned to help fill this gap and provide critical services that would otherwise not be available.
Despite the potential of community banks to support sustainable growth, the supply of new capital available to community banks is constrained. This can be attributed to a number of reasons. First, community banks are often perceived by investors as risky due to their size, or due to their location in rural or niche markets that are unfamiliar to institutional investors. Investments in community banks may also be too small in proportion to an institutional investment portfolio. In addition, many investors lack the technical expertise to evaluate the quality of the small- and mid-sized privately-held community banks. Nonetheless, these obstacles can be overcome, and community banks can become a tremendous opportunity to finance sustainable growth in the real, local economy.
Community banks are an important part of many local economies, providing vital services and helping to mitigate exposure to the volatility of the global financial sector. They provide stability during economic downturns and offer critical support during natural disasters. They are well-positioned to help fill gaps in credit availability by helping emerging markets access capital in times of de-risking by larger banking institutions. Through their commitment to small business lending and dedication to their communities, community banks truly embody the spirit of sustainable growth while promoting long-term financial stability.
CPM
