US Small Bank Apocalypse Coming Soon

US small banks have been vanishing for 40 years. After Silvergate and Silicon Valley Bank failures, the speed of their demise may increase. By James Early, BBAE CIO

I penned a Forbes column (click here to read it) about the demise of America’s small and mid-sized banks. They’ve been dropping like flies. But not just since Silicon Valley Bank blew up — since the early 1980s.

Abha Bhattarai from The Washington Post did a more thorough piece on the current trend of plunging deposits at small banks.

Because of farming, and because the US didn’t want “big” banks siphoning money from farming communities into big cities, early regulators made branching out hard. Times have changed.

Low interest rates and technological advancements in part caused the long-term trend (and to be clear, more of the disappearing banks got acquired than failed). The near-term trend is from confidence, which is what banking and especially fractional reserve banking rests on.

Does the US have too many banks?
The US has 4,237 banks.
Canada has 34.
The UK has 357.
China has 187, and Japan has 198.

Smaller banks are given — thanks to lobbying from Silicon Valley Bank and others — significantly easier regulatory requirements than too-big-to-fail/systemically important banks. Yet they still score worse on efficiency ratios.

It’s hard for a small-town store to compete with Walmart. It’s also hard for a small-town bank to compete with a national bank, even with laxer standards that are probably too lax, we’re seeing.

And as SVB and Silvergate showed, specialization has a downside.

Anyway, take a look at my piece — I welcome any thoughts.

James

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