The Past, Present, and Probable Future for Community Banks

Abstract

We review how deregulation, technological advance, and increased competitive rivalry have affected the size and health of the U.S. community banking sector and the quality and availability of banking products and services. We then develop a simple theoretical framework for analyzing how these changes have affected the competitive viability of community banks. Empirical evidence presented in this paper is consistent with the model's prediction that regulatory and technological change has exposed community banks to intensified competition on the one hand, but on the other hand has left well-managed community banks with a potentially exploitable strategic position in the industry. We also offer an analysis of how the number and distribution of community banks may change in the future.

Selecting a target segment: market structure and new venture entry strategies

“…Before deregulation, banking was a relatively mature market with stable or slowly growing demand, dominant product designs and process technologies, and a relatively limited variety of strategies. Deregulation reduced the entry barriers for new bank ventures and reshaped the competitive landscape in the industry (DeYoung et al, 2003). The transformation of the regulatory environment involved the deregulation of deposit accounts, major changes in capital requirements, and liberalization of geographic restrictions on interstate banking, all of which provided ample room for new bank entries and changed the competitive dynamics of the market.…”

“…The transformation of the regulatory environment involved the deregulation of deposit accounts, major changes in capital requirements, and liberalization of geographic restrictions on interstate banking, all of which provided ample room for new bank entries and changed the competitive dynamics of the market. Research in organizational ecology has shown that events such as technological innovations or shifts in regulation or an economic depression can significantly affect the overall structure of the market (DeYoung et al, 2003). Whereas prior studies have typically focused on differences in industry structure across populations (in different regions, for example), this study focused on changes over time within a regional population (new banks in California), and investigated how changes in the dynamics of the market affected the market niche positioning decisions of new banks.…”

“…As a result of the stock market crash of 1929 and subsequent bank failures, the Glass-Steagall Act of 1933 had ever since forced a separation between commercial and investment banking. The 1980s, however, witnessed a sea change in attitudes toward the regulation of business in general and regulation of the financial industry in particular (DeYoung et al, 2003). Regulation of deposit accounts was weakened; there were major changes in capital requirements, and most notably, geographic restrictions on interstate banking were relaxed (Berger et al, 1995).…”

“…Retail competition was especially promoted in 1980 by the Depository Institutions Deregulation and Monetary Control Act, which deregulated the interest rates that could be offered on bank deposits. All the deregulation led to a shift in the institutional logic from the previous regulatory emphasis to an increasing market orientation (DeYoung et al, 2003). This transformation provided new opportunities for product and service innovations which had been inhibited since the 1930s, and supported and justified a more competitive financial services marketplace.…”

“…A third advantage of this sample is that the study period facilitated examining new bank entries following deregulation in the US banking industry during the late 1970s and early 1980s. The deregulation fostered a relatively competitive environment and brought tremendous market opportunities which triggered an influx of new banks and other financial institutions (DeYoung et al, 2003). This made the setting and timing ideal for entrepreneurship research.…”