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Big Banks in Small Places: Are Community Banks Being Driven Out of Rural Markets?

The shares of total U.S. banking assets and deposits held by the very largest banking organizations have increased markedly over the past 25 years, while the shares held by small “community” banks have declined. Advances in information technology may have reduced the advantages of small scale, close proximity, and local ties that traditionally have given small, community-focused banks a competitive advantage in lending to small businesses and other “informationally opaque” borrowers. This article examines trends in deposit shares of banks of different sizes in rural U.S. counties. If the community banking model is to remain viable, it is likely to be in rural markets with (i) a relatively high percentage of informationally opaque borrowers and (ii) relatively low costs of acquiring qualitative information about potential borrowers. The authors find that rural deposit shares of both the smallest and very largest banking organizations changed little between 2001 and 2012, despite the upheavals of the financial crisis and recession, and in contrast to the 1980s and 1990s, when the shares held by the smallest banks declined markedly. The evidence suggests that well-managed community banks remain competitive, at least in rural markets, where their niche is most likely stronger than in urban markets.

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