FDIC Community Bank Analysis Largely Ignores Impact of Regulatory Burden

The Federal Deposit Insurance Corporation recently issued a report on how banking industry consolidation has impacted community banks. While the analysis provides useful information, Mercatus Center senior research fellow Hester Peirce in a new blog post notes that the FDIC study generally fails to consider the impact of regulations on smaller banks.

"The message of the most recent report is clear--despite years of consolidation activity, community banks are here to stay. That is good news, because the diversity of the U.S. financial system--including its large number of community banks--is critical to its ability to serve the nation's diverse financial needs. The study's optimistic assessment of the future, however, largely ignores one key issue--the effects of regulatory burdens on small banks."

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"The report mentions regulations as a positive factor; they can prevent bank failures. It does not look at the degree to which regulatory costs drive consolidation, a factor that should temper their optimistic projections. In a recent Mercatus Center survey, small banks told us that compliance costs have gone up in the wake of Dodd-Frank, the median number of compliance personnel has increased from one to two, and new regulations have affected the way community banks interact with their customers. Moreover, almost all of the surveyed banks anticipate continued consolidation in the next five years, and a quarter of them expect to be part of it. To the extent that regulatory cost considerations are driving purportedly voluntary bank consolidation, regulators owe it to small banks and their customers to think carefully about ways to reduce regulatory burdens."