It’s been more than 35 years since I began my post-collegiate working career in the commercial banking business.  At that time, there were well more than 17,000 federally chartered banking institutions in the United States.

The reasons for the high tally were clear.  Most states didn’t allow commercial branch banking across state lines.  And quite a few others – mainly in the Midwest and Plains regions – put severe restrictions on state branch banking as well.

That’s why states like Illinois and several others could have as many as 1,500 or more independent banking institutions each.

Of course, this hardly meant that these banks were operating in a vacuum.  Not only were there efficient automated clearing houses to process interbank transactions, there were also robust correspondent banking networks interlinking smaller and larger banks.

These networks enabled community banks to offer many of the same deposit, lending and cash management services provided by the larger institutions.

“Bigger is Better …”

Beginning in the late 1980s and early 1990s, many of the regulatory barriers began to fall.  States relaxed prohibitions on branch banking, while branching across state lines became common.  It wasn’t long before a string of acquisitions created large, consolidated banks.  The banking system began to look a lot more like Europe and Canada and a lot less like … well, the United States.

And it wasn’t just the small banking institutions that got swallowed up during this era of consolidation.  Many of the most venerable names in regional banking ceased to exist – institutions like National Bank of Detroit, Marine Midland, Maryland National Bank, Girard Bank and United Bank of Denver.

But then a countervailing trend developed, and it wasn’t the proverbial “dead-cat bounce.”  Consolidation caused voids in local banking coverage in many regions.  As a result, some businesses and consumers sought a return to banking institutions where ownership and management were part of the community, and where decision-making was based on a more intimate knowledge of the local economy.

So the commercial banking industry actually witnessed an uptick in the number of institutions during the late 1990s and early 2000s.

… Until the Great Recession of 2008/09 hit.

Today, the number of federally chartered U.S. banking institutions now stands at its lowest level since the Great Depression.

The stark facts are these:  A sluggish economy, low interest rates and ever-more complex regulations have diminished the number of federally chartered institutions to below 6,900.  The tally, according to FDIC stats, had never fallen below 7,000 since the mid-1930s.

Almost entirely, the recent numerical decline has come among smaller institutions – those with fewer than $100 million in assets.  And of the more than 10,000 banks that are now gone, it isn’t only because of mergers and consolidations.  Nearly 20% of them simply collapsed.

We’re not simply dealing with a reduction in banking charters; the number of physical bank locations is also declining – by about 3% since late 2009, thanks in part to the rise of online banking in addition to institutional consolidation.

I asked banking industry specialist John Barlow for his thoughts on the latest bank figures.  Not only is this expert head of Minneapolis-based Barlow Research, Inc., a nationally recognized financial services industry market research and consulting firm that counts the largest U.S. institutions among its client base, Barlow is also chairman of Iowa Falls State Bank, a family-owned institution that could be characterized as the quintessential “local bank.”  (He’s also a former boss of mine back when I was working in the banking industry during the 1970s.)

Barlow noted an additional point about small banks:  “By their very nature, community banks are typically closely held – often family-owned enterprises.  A significant headwind for continued ownership is the transition of the business to a younger generation.  The Baby Boomers had smaller households, and their children are more likely to move away from the business – mentally as well as geographically.”

… or Is it Not Better?

There may be something of a silver lining in the recent trends, however.  Actual bank deposits have continued to grow, and consolidations have helped alleviate concerns that an abundance of separate banks leads to lower efficiencies in the financial system and more difficulties in conducting regulatory oversight.

… But only to a degree.  “It remains to be seen where the economies of scale exist in banking.  According to our studies at Barlow Research, larger banks do appear to be more efficient at generating income.  But that’s because they’re more aggressive at charging fees, not because of lower costs,” Barlow reports.

David Kemper, CEO of Missouri-based Commerce Bancshares, may have a point when he notes, “There’s no reason why we need [so] many banks, especially if those smaller banks have a much lower return on capital.  The small banks’ bread-and-butter is just not there anymore.”

[To that point, Barlow contends that one of the reasons smaller banks have a lower return on capital is that they have too much capital.]

There’s an important counter-argument to the “consolidation is better” view.  It goes like this:  Community banks remain critically important to the economy because they are the ones more likely to engage in small-business lending.

Barlow Research’s statistical studies show that the small businesses that deal with community banks are more likely to be able to secure a loan.  And the average size of that loan will be larger than one obtained from a large institution.

The Most Startling Trend?

Another FDIC statistic might be the most startling trend of all.  Over the decades, each year has witnessed new bank startups – ranging from at least a handful to the low hundreds in any given year.  But that’s all changed since the Great Recession.

In fact, there has been just one new federally approved bank charter issued since 2010.

That institution, the Bank of Bird-in-Hand (located in Lancaster County, Pennsylvania), was able to raise approximately $17 million in investment capital.  But it also had to expend nearly $1 million in consulting and legal fees to properly prepare its application for a new charter — including spelling out policies and procedures detailing its systems to guard against cyber-attacks and other security risks.

“Intense” doesn’t tell the half of it when describing the effort needed to obtain a new Federal bank charter.

Considering those hurdles, what made the Bird-in-Hand investors think they could run a profitable banking operation in today’s economic and business climate?  It’s because they see an opportunity in serving a local community heavily populated by Amish and other rural/farming families.  Banking-wise, it’s an underserved community.

There once was a local independent bank, of course … but that one was acquired by a larger entity in 2003.  The new bank’s investors believe  they can provide services that are better suited to the needs of the local community – which, in turn, will make their new bank successful.

John Barlow adds this observation about community banking:  “A well-managed community bank is one of the best investments you can make, as long as you do not make bad loans.  Do that, and it’s all over in a couple years.”

And about the degree of governmental regulation in the industry, he remarks:  “I grew up in a banking family.  My grandfather and father complained about regulators all the time.  Banks are regulated businesses:  What’s new about that?”

Barlow and the Bird-in-Hand bank investors may well be right about the prospects for smaller banks in America.  Still … one wonders how many new banking institutions will be starting up in the current economic and regulatory environment.

… Or that the prospective investors will determine that it’s even worth the effort.