Mergers that create larger banking companies increase the economic impact if the new institution fails. An area where the evidence is a bit more definitive, however, is in whether they pose a threat to community banks. Unlike the situation in many other nations, the banking system in the United States is characterized by a large number of small, community-based institutions. Despite the trend toward consolidation, smaller banks still account for the vast majority of depository institutions and have demonstrated an ability to compete in their markets. Community banks operate in over 4,000 communities in which there are no offices of larger banks, providing essential financial services to consumers and businesses.
Community banks continue to serve as a key source of credit for small businesses and farms.
They are often more aware of the financial health and credit needs of local businesses and can use this knowledge to profitably originate loans that might not be made by a larger, multi-state institution. Many have raised concerns that the trend towards larger institutions will adversely affect the viability of community banks. However, there are many reasons to believe that community banks will continue to play a critical role in the financial system. First, smaller banks have competed effectively in states such as California, New York, North Carolina and Virginia, where statewide branching has long been allowed. Second, new community banks continue to be chartered.