Prior empirical research found that in the United States, rural community banks earn higher profits than their metropolitan counterparts and have lower risk loan portfolios as well. Investigating community bank failures since 2000 we find support for the competition-fragility view that increased competition in banking correlates with an increase in bank failures based on the finding that preponderance of US bank failures are community banks in metropolitan areas where they face direct competition from multiple large banks. This study tests seven hypotheses using a nationwide survey of community bankers. The results indicate metropolitan bankers perceive an intense competitive environment where it is difficult to get their message to potential new clients while also losing their most creditworthy business clients to mega-banks. Bankers across geographic regions suggest that economies of scale in technology and regulatory compliance drive merger and acquisition activity and it will continue despite the shocking reduction of over 70% of banks since deregulation through mergers, acquisitions, and failures. Prior research also suggests that larger banks extend less credit to small businesses. If true, fewer metropolitan community banks will further restrict the bank credit available to new businesses and existing microenterprises, especially in the metropolitan areas where 86% of the US population now live. This study provides additional support for the position that US community banks are not a homogenous group and studies need to consider the geographic scope of operation. Based on these results and the relevant literature, we provide suggestions for community bankers, entrepreneurs, regulators, and future research.
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Global Journal of Accounting of Finance
Morrison, R., Jackson, D., Jung, J., 2023. THE COMPETITIVE ENVIRONMENT OF U.S. COMMUNITY BANKING: A NATIONWIDE SURVEY OF RURAL AND METROPOLITAN COMMUNITY BANKERS. Global Journal of Accounting of Finance 95–121.