Harvard Report Sheds Light on Plight of Community Banks

“Particularly troubling is community banks’ declining market share in several key lending markets, their decline in small business lending volume, and the disproportionate losses being realized by particularly small community banks.”

The State and Fate of Community Banking. Harvard University. February 9, 2015.

Risk managers at community banks who are feeling the pressure of heavy regulation with limited resources can take heart in the results of a recent Harvard study. The working paper, titled “The State and Fate of Community Banking,” was completed by the Mossavar-Rahmani Center for Business and Government at Harvard University, and focuses on the plight of community banks in today’s environment of tighter regulatory controls. Harvard’s researchers underscore concerns that “an increasingly complex and uncoordinated regulatory system has created an uneven regulatory playing field that is accelerating consolidation for the wrong reasons.”

A Look at the Numbers

Notably, the academic paper highlights the steep decline in market share and lending volume that community banks have faced over the last two decades, but particularly in the aftermath of the financial crisis and the 2010 passing of the Dodd-Frank Act. Noting that the three largest federal banking regulators – the Office of the Comptroller of the Currency, the FDIC, and the Federal Reserve Board – cannot agree on how to define a community bank, the Harvard study defined them as institutions with $10 billion or less in assets. A few notable statistics from the study (based on FDIC data):

  • Community banks’ share of U.S. banking assets and lending markets has fallen from 41 percent in 1994 to 22 percent today, while the market share of the top five largest banks has more than doubled from 17 percent to 41 percent.
  • Community banks emerged from the financial crisis with a market share 6 percent lower, but since the second quarter of 2010 – around the time of the passage of the Dodd-Frank Act – their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.
  • In 2Q2014, community banks accounted for 22 percent of bank loans in 2014, compared to 41 percent by the top five banks:


  • Community banks make up a disproportionately large share, or 46 percent, of the commercial real estate lending market:
  • The total number of community banks has shrunk from 10,329 in 2Q1994 to 6,094 in 2Q2014, a decline of 69% over two decades.

What’s Behind the Numbers?

While sobering, the stats are not exactly breaking news—“Community bankers are living this every day,” Terry Jorde, senior executive vice president at the Independent Community Bankers of America (ICBA) told American Banker. The Harvard study is timely, however, considering that its release coincided with a series of hearings on regulatory relief for smaller institutions in the Senate Banking Committee.

Regulatory compliance is front and center for institutions right now as they struggle to keep up with the complex web of requirements—and compliance experts are in demand. In fact, a recent George Mason University survey reported that over one-quarter of community banks would hire new compliance or legal personnel in the next 12 months. . The impact of regulations on smaller banks is even more acute. As Fed Governor Tarullo recently observed, “Any regulatory requirement is likely to be disproportionately costly for community banks, since the fixed costs associated with compliance must be spread over a smaller base of assets.”

“Community banks had little role in the financial crisis, yet play a major role in critical U.S. lending markets. However, as our analysis of lending market data reveals, community banks are losing market share and volume in individual, small business, and residential mortgage lending markets. Smaller community banks have fared particularly poorly the last four years.”

The State and Fate of Community Banking. Harvard University. February 9, 2015.


The Harvard report uses the statistics on the changing competitive composition of the lending sector to force scrutiny on the impact of Dodd-Frank on community banking. According to one estimate, Dodd-Frank will increase total U.S. financial regulatory restrictions by 32 percent relative to 2010 levels once all of its rulemakings are complete. Another noted that “the legal costs for community banks associated with more regulations are inherently a larger portion of overall revenue than for larger institutions, making any form of compliance more difficult.”

The Harvard study concludes that since the passage of the Dodd-Frank Act, the pace at which community banks have lost market share is nearly double what it was during the crisis, and its authors argue for Congress to streamline existing financial regulations, and consider providing regulatory relief to community banks. The report is likely to be leveraged by organizations like the ICBA working for regulatory relief for community banks.



Lux, Marshall and Robert Greene. The State and Fate of Community Banking. February 9, 2015. Harvard University. Mossavar-Rahmani Center for Business and Government.

The study includes a review of studies on the impact of regulation on community banks, and examines the consequences of consolidation on U.S. lending markets. You will also find a discussion of policies that the Harvard researchers believe would promote a “more competitive and robust banking sector.”

To access the abstract and download a pdf of the paper, visit the report link here.