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The role of community banks in the U.S. economy

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  • George A. Kahn
  • William R. Keeton
  • Linda Schroeder
  • Stuart E. Weiner

Abstract

The U.S. banking system is unusual in consisting not only of some very large banks but also a large number of relatively small community banks. This bifurcated banking system in the United States has served the economy well. Over time, with regulatory change and financial innovation, large banks have become complex organizations engaged in a wide range of activities. They provide a variety of services to their customers, but often rely on hard financial information, computer models, and centralized decision-making as the basis for conducting business. In contrast, small banks have focused more on \\"relationship banking,\\" basing decisions on personal knowledge of customers? creditworthiness and a keen understanding of business conditions in the communities they serve.> The bifurcated banking system has served the needs of a diverse U.S. economy composed of businesses of all shapes and sizes and consumers with diverse needs and preferences. But despite the clear role that community banks play in the U.S. banking system, some analysts have questioned whether they play a sufficiently important role in the overall economy to warrant public interest and oversight.> This article examines the role of community banks in the U.S. economy and concludes that the Federal Reserve has a strong interest in understanding issues facing community banks. While community banks hold only a small share of the nation?s banking assets, they provide important financial services?for which there are few, if any, substitutes?to some key sectors of the economy. Moreover, community banks will continue to play an important role in the banking industry, even as technology and market conditions change.

Suggested Citation

  • George A. Kahn & William R. Keeton & Linda Schroeder & Stuart E. Weiner, 2003. "The role of community banks in the U.S. economy," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 15-43.
    • Handle: RePEc:fip:fedker:y:2003:i:qii:p:15-43:n:v.88.no.2
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    2. R. Alton Gilbert & David C. Wheelock, 2007. "Measuring commercial bank profitability: proceed with caution," Review, Federal Reserve Bank of St. Louis, vol. 89(Nov), pages 515-532.
    3. Albert DePrince & William Ford & Pamela Morris, 2011. "Some causes of interstate differences in community bank performance," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(1), pages 22-40, January.
    4. Albert DePrince & Pamela Morris, 2007. "A longitudinal study of net interest margin by bank asset size: 1992–2005," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 31(1), pages 20-32, March.
    5. Chernykh, Lucy, 2014. "Dwarf banks," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 31-40.
    6. Hamid Mehran & Michael Suher, 2009. "The impact of tax law changes on bank dividend policy, sell-offs, organizational form, and industry structure," Staff Reports 369, Federal Reserve Bank of New York.

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    Keywords

    Community banks; Economic conditions;

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