Richmond Fed Completes Study on New Bank Formation
The Federal Reserve Bank of Richmond published a study on the causes of the decline in the number of community banks. While consolidation and failure contributed to the decline, they concluded that the primary cause of the decline was due to the lack of new banks established since the financial crisis of 2007-08. The study also addresses the potential economic impacts of the decline in community banks.
“This collapse in new bank entry has no precedent during the past 50 years, and it could have significant economic repercussions. In particular, the decline in new bank entry disproportionately decreases the number of community banks because most new banks start small. Since small banks have a comparative advantage in lending to small businesses, their declining number could affect the allocation of credit to different sectors in the economy.”