How do you define a community bank?

by Ken Tumin

Since the financial crisis, there has been a lot of anger over megabanks which not only contributed to the financial crisis, but also grew bigger during the financial crisis as they acquired banks that failed. That anger peaked last year with the first Bank Transfer Day which was intended to encourage people to move their money from the megabanks to community banks and credit unions. If you want to help community banks, there’s an important question to ask. How do you define a community bank?

This question has recently been investigated by the FDIC. This week the FDIC released its community banking study. The study was primarily intended to help regulators to understand community banks. You can read all of the details at this FDIC page. The first chapter deals with the definition of the community bank.

A common perception of a community bank is one that’s focused on providing traditional banking services in its local community. In the FDIC study, quantitative attributes are described. The simplest way to define a community bank is by size. The FDIC cites past studies that have used size thresholds of $1 billion and $10 billion in assets. In addition to the issue of inflation affecting the dollar-based size thresholds, the FDIC mentioned another issue: “attributes associated with community banking are only loosely correlated with size.” There are some small banks that shouldn’t be considered community banks while there are large banks that may be considered community banks. Some examples of small banks that don’t fit a community bank definition include credit card specialists, industrial loan companies and trust companies.

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