A Community Bank: What Is It?
A community bank is a depository or lending organization that primarily assists local people and companies. Community banks frequently prioritize establishing personal connections with their clients. These smaller banks frequently offer loans to local firms and individuals who might not be eligible based on the more standardized criteria employed by big banks because they typically lack the product breadth and branch networks offered at larger institutions.
There is no formal definition for the designation “community bank,” which is used informally. The modifier generally applies to banks with a small number of locations that primarily cater to neighboring residents and local businesses
Legislators have occasionally tried to define what constitutes a community bank. For instance, the Economic Growth, Regulatory Relief, and Consumer Protection Act, approved by Congress in 2018, established “community banks” as financial institutions with consolidated assets of less than $10 billion, a leverage ratio of at least 9 percent, and other requirements.
The majority of community banks and thrifts are state-chartered as opposed to federally chartered, according to the Congressional Research Service. However, there is still some federal control over them. Community banks are nevertheless required to adhere to the Federal Reserve System’s reserve requirements even if they decide not to participate. The Federal Deposit Insurance Corporation (FDIC), which also protects deposits at the majority of banks, is in charge of supervising state-chartered banks that are not Fed member banks. These institutions check lenders’ financial stability and make sure they abide by federal banking legislation.
The majority of community banks and thrifts are state-chartered as opposed to federally chartered, according to the Congressional Research Service. However, there is still some federal control over them. Community banks are nevertheless required to adhere to the Federal Reserve System’s reserve requirements even if they decide not to participate. The Federal Deposit Insurance Corporation (FDIC), which also protects deposits at the majority of banks, is in charge of supervising state-chartered banks that are not Fed member banks. These institutions check lenders’ financial stability and make sure they abide by federal banking legislation.
Community banks typically concentrate on doing basic tasks like taking deposits and offering business loans, mortgages, and credit lines. Despite focusing on serving local clients, some have developed internet banking features that enable them to reach a wider audience.
A community bank’s top decision-makers are more likely to have direct interactions with the clients they serve, which has long been a priority for smaller organizations.
Therefore, compared to large banks, which frequently rely on standardized indicators like credit ratings, community banks may be more inclined to base lending choices on relationships and familiarity with the local economy. Small bank trade group Independent Community Bankers of America claims that its members often make lending decisions more quickly than big regional or national banks.
Jamie Dimon, the CEO of JPMorgan Chase, stated in a 2016 op-ed for The Wall Street Journal that “[Regional and smaller community banks] sit close to the communities they serve; their highest-ranking corporate employees reside in the same areas as their clients.” They have the capacity to create enduring bonds and bring a thorough understanding of the community’s politics and way of life. They typically have the capacity to offer specialized and high-touch banking services.
There is some evidence that community banks tend to give higher interest rates on deposits than their larger counterparts, despite their smaller size. According to a 2017 DepositAccounts analysis, smaller and midsize banks offered five-year CD rates that were more than 0.5 percentage points higher than those of their larger rivals.
Flexibility is one area where community banks typically fall short. Customers have a harder time banking if they operate a firm with interstate activities or if they intend to move to another region of the country without a substantial network of bank offices and ATMs.
In addition to competing with one another for customers’ checking accounts and mortgage loans, banks of all sizes also offer a range of services that smaller financial institutions don’t. Larger banks may have investment banking units that assist businesses in raising cash, offer foreign exchange services, and provide risk-management instruments like interest rate swaps.
Small companies showed a higher level of satisfaction with community banks than with larger ones in a 2019 Federal Reserve study. Generally speaking, 79 percent of respondents indicated they were satisfied with their small-bank lender, compared to 67 percent who were content with their major bank.
Community banks have nevertheless been rapidly losing market share to larger banks in recent years. There were 4,979 community banks with FDIC insurance in 2018, down from 7,442 in 2008 and 14,323 at the end of 1988, according to the Small Business Administration (SBA). This drop has been caused by a number of factors, including regulatory reforms that favor large banks and mergers that combined tiny banks into much larger organizations.
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A federal statute known as the Community Reinvestment Act (CRA) was passed in 1977 to encourage depository institutions to provide credit to low- and moderate-income neighborhoods as well as the communities where they are chartered.
According to the CRA, federal financial organizations must evaluate how well each institution upholds its duties to these communities. When assessing requests for future approval of bank mergers, charters, acquisitions, branch expansions, and deposit facilities, the agencies must take these performance ratings into account.
Prior to the Community Reinvestment Act (and other fair housing laws), American banks routinely turned down mortgage applications from Black Americans and other people of color who lived in specific neighborhoods that were “redlined” by a federal government agency called the Home Owners’ Loan Corporation (HOLC). Based on data obtained from a variety of sources, including local appraisers, loan officers, city authorities, and real estate brokers, the HOLC generated maps that categorize communities across the US based on a “perceived level of lending risk.”
Each hue on the maps of the communities represented the area’s estimated risk to lenders. The red neighborhoods were labeled as dangerous by HOLC, which stated that they were “marked by adverse impacts in a pronounced degree, undesirable population, or an infiltration of it.”
The phrase “redlined” refers to areas where racial and ethnic minorities predominate.
The maps served as a vehicle for pervasive racial prejudice. Redlining had the immediate result of preventing inhabitants in these locations from obtaining financing to purchase or upgrade housing. Redlining’s long-term impacts, however, continue to exist.
Based on a bank’s size and goal, the Federal Reserve ranks its performance using one of five approaches. Although a 1995 revision to the CRA mandated that regulators take into account lending and investment data, the review procedure is fairly subjective and does not have any predetermined quotas that banks must meet.
Nevertheless, each bank receives one of the subsequent rankings.
FAQ
A chartered bank is a type of financial institution (FI) whose main responsibilities include accepting and protecting the funds that people and organizations deposit and disbursing loans. The specifications of chartered banks differ from nation to nation. To operate in the financial services sector, a chartered bank must generally have some sort of government authorization. A commercial bank is frequently related to a chartered bank.
The fundamental financial intermediary services offered by chartered banks are crucial in the modern economy. People can simply deposit money into different kinds of accounts with a chartered bank to receive interest on their short-term savings. Chartered banks lend out the majority of their deposits to private borrowers and business borrowers to promote economic growth while maintaining a float of currency so they can execute customers’ everyday transactions.
Online banks versus chartered banks
Some online banks might have foreign charters; these don’t follow any local, state, or federal restrictions. In these situations, it is up to the customer to check whether the online bank might provide Federal Deposit Insurance Corporation (FDIC) protection. Deposits up to $250,000 per member institution are insured by the FDIC, which was established in 1933 to preserve public confidence and lessen bank failure in the United States.
Some big national banks are starting to see the advantages of switching to a state bank charter. These three factors—cost savings and increased revenue, access to local regulators and contacts, and a decline in national bank authority—typically account for it.
Banks used to function under various rules before 1863. People did not fully trust banks, thus it was thought that if all banks operated by the same set of standards, people would feel safer depositing money in banks.
Regular financial audits of their managed accounts are required for all licensed banks, regardless of their state or federal affiliation. These inspections are performed to make sure banks have the capital required to execute daily transactions. Additionally, banks may be compelled to participate in stress tests to simulate potential events that could result in financial difficulties.
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