The Disturbing Disappearance of Local Banks

[Guest writer, Marco Rosaire Rossi, is the executive director for Washingtonians for Public Banking and an adjunct professor in political science.]

In its first ever publication, Washingtonians for Public Banking (WPB)—a nonprofit advocacy organization that promotes public banking and banking reform—has released its report describing the decline of community banks in Washington. Titled Community Banking Decline and Consolidation: A Comparison Between Washington and North Dakota, the report (at Related Links below) describes how the United States has entered an unprecedented era of bank consolidation. Indeed, despite the Great Depression and the Second World War, the number of commercial banks in the United States in the 20^th century was relatively stable. However, beginning in late 1980s, and accelerating throughout the 1990s, the number of banks in the United States plummeted and the industry experienced an era of rapid consolidation. The banks hardest hit during this period were small community banks that provided financial services to a local market. 

There were several reasons for this decline, including social and technological changes in the banking sectors, such as the rise of FICO scores and the rapid adoption of ATMs. Nevertheless, the primary causes of the consolidation appear to be policy orientated. During the 1980s, many states loosened their banking restrictions and formed interstate banking agreements with neighboring states. By the 1990s, the concept of banking deregulation had gained majority support in Congress. In 1994, Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA). The act allowed bank holding companies to acquire banks anywhere in the country and invalidated state laws which only allowed interstate banking on the condition of reciprocity. In 1999, the IBBEA was followed by the Financial Services Modernization Act of 1999—also known as the Gramm-Leach-Bliley Act—which repealed parts of the Glass-Steagall Act of 1933, and allowed investment banks to hold deposits, thus permitting commercial banks, securities companies, and insurance companies to be consolidated into financial conglomerates. 

The consequence of this legislation meant that between 1992 and 2023, the number of commercial banks and saving institutions in the United States declined by 68%, while between 2004 and 2021, the number of credit unions declined by 54%. Currently, the top 20% of commercial banks in the United States control 95% of the total banking assets. At the same time, the top 10 wealthiest banks—which constitute just over 0.2% of the total number of commercial banks—have more total assets than the remaining 99.8%. 

Washington is not an exception to this trend. Between 1992 and 2023 the number of banks that were chartered or headquartered in the state also declined by 68%. Currently, there are 40 local commercial banks and saving institutions, 48 state chartered credit unions, and 28 federally chartered credit unions operating in Washington. However, the 33 out-of-state commercial banks or savings institutions operating in Washington have nearly one hundred times the assets of all of Washington’s local banks and credit unions, and control 74% of the commercial banking market. The bank with the single largest share of Washington’s market is Bank of America. Alone, it controls 21.02% of the state’s market.

In contrast, North Dakota has been somewhat resistant to the phenomenon of declining community banks. Between 1992 and 2023 the number of commercial banks and savings institutions chartered or headquartered in North Dakota declined at a slower rate than it did nationally. Additionally, there are only 10 out-of-state banks operating in North Dakota. While these 10 out-of-state banks have approximately one hundred times the assets of all of North Dakota’s local banks and credit unions, they only control 21% of North Dakota’s commercial banking market. The bank with the single largest share of North Dakota’s market is the locally chartered Bell Bank, which controls 12.35% of the commercial market, despite only having $13 billion in assets. 

The strength of North Dakota’s local banking sectors relative to Washington’s can be largely attributed to the support that the state’s community banks receive from the state owned and operated public bank, the Bank of North Dakota (BND). The BND was established in 1919. Since then, the BND has functioned as a central pillar of the North Dakota economy, providing low-interest loans for projects related to agriculture, infrastructure, higher education, and disaster relief. Critically, the BND acts as a mini-Federal Reserve for the state. It partners with the state’s community banks and credit unions to provide check clearing services, offers loan guarantees, and buys risky loans from their portfolios. That additional support makes it easier for North Dakota’s community banks to compete against the out-of-state banking behemoths that are monopolizing Washington’s banking sector. 

The report concludes with a dire prognostication. Unless countervailing trends quickly emerge, small community banks will become a thing of the past. In their place, the banking sector will be dominated by a few “too-big-to-fail” financial institutions. For states like Washington, this has meant a loss of local control and ownership over the state’s banking market, and instead, the dominance of out-of-state megabanks. Unfortunately, the decline of community banks has been associated with a lack of lending to small businesses, and underinvestment in poor—specifically minority—communities. Large banks mostly focus on securities, not day-to-day lending. The consequence is that much needed credit will become scarcer and more expensive, and the overall character of the banking sector throughout the United States will become more precarious and insecure. 

For these reasons, the report endorses Washington creating a state-owned public bank as a remedy to the issue of community bank decline. It advocates that Washington create a similar state owned and operated public bank as an effective means of saving its few remaining local community banks and small credit unions.