There are only a handful of banks in the U.S. that are behemoth in size, but they currently hold most of the country’s assets. These “megabanks” — including “Big Four” Wells Fargo, Citigroup, Bank of America, and JP Morgan Chase — not only swindle their customers, and taxpayers, to plump shareholder pockets, they fail to meet the financial needs of local businesses and communities.
Meanwhile, community banks and credit unions have been vanishing for the past three decades. These small financial institutions are crucial for fostering vital local economies. Research shows that states where community banks account for a larger share of the banking sector have more small business startups and stronger growth. Local banks and credit unions are more effective at meeting the financial needs of their communities, in part, because their business model is dependent on making productive loans, which ties their success to the prosperity of the community.
Yet community banks are declining in the shadow of federal banking policies that have spurred consolidation and allowed megabanks to dominate the economy through a business model that is primarily extractive in nature. Black and working-class communities have been especially hard hit. As a consequence, many communities today are starving for the capital they need to build strong local economies, rectify economic inequality and racial injustice, and enable people to thrive.
The lack of community banks across many states and regions, amid a devastating economic downturn, will both hold back recovery and make it more unequal. While big banks will extend credit to big companies and serve the needs of the wealthy, small businesses and ordinary people will be without the financing they need to get through the crisis and rebuild. There are, however, powerful levers that states can pull to address the power of megabanks and strengthen community banks and credit unions.
In the early 1990s, the banking industry was comprised of a relatively balanced mix of three basic types of banks. There were thousands of small, local banks, which, together with credit unions, focused on serving their local communities. There were several hundred regional banks, with branch offices spanning a state or several states. And, finally, there were a few dozen large banks that had branches across the country.
Although regional banks were already buying up small banks and national banks were buying them both up, it wasn’t until the early 1990s, when a new breed of megabank emerged, that consolidation of the banking industry truly took hold. By 1994, these new megabanks (massive conglomerates with more than $120 billion in assets in today’s dollars) held 16 percent of bank assets. By 2006, their market share had mushroomed to 50 percent. Today, they account for 64 percent of bank assets, with the Big Four alone controlling 41 percent of assets.
This consolidation of banking has led to a sharp decline in community banks and credit unions. In 1994, there were about 12,500 community banks and they controlled 50 percent of the industry’s assets. By 2019 that number shrank to 5,000 and their share of the market fell to 17 percent. The number of credit unions shrank from over 12,500 to less than 5,400.
These national figures mask considerable variation by state. North Dakota is home to 45 community banks per 500,000 people, while Michigan has just four per half million people and Arizona has only one. The difference matters. A wealth of evidence demonstrates that community banks outperform megabanks in several important ways, and that places with more of these local financial institutions are better off.
First, small, local financial institutions are less expensive. On checking accounts and other services, community banks charge fees that are roughly twenty-five percent lower on average than those charged by big banks. How do small banks win on price? Not by providing less sophisticated services; most community banks and credit unions offer mobile banking and other leading-edge features. Research shows that these smaller institutions are generally more efficient than big banks, which are top-heavy with bureaucracy.
Community banks and credit unions also do a better job of judging and managing risk than megabanks do. In the aftermath of the 2008 financial crisis, researchers found that local banks were far less likely to have issued mortgages that borrowers had trouble paying back, and that foreclosure rates were lower in counties with greater community bank and credit union presence. Indeed, local banks consistently post lower default rates across their loan portfolios, despite funding more borrowers that fall outside of big banks’ standardized lending formulas. Community banks and credit unions are more capitalized than larger banks, so they’re better prepared for an economic crisis and build more resilience into the financial system as a whole.
Local banks and credit unions also devote a larger share of their resources to productive lending, while the megabanks are more engaged in speculative trading that provides no value to the real economy. This difference is particularly striking in the context of small-business lending. Although small and mid-size banks hold only 17 percent of industry assets, they supply 46 percent of all bank lending to new and growing businesses, a major source of net job growth. By comparison, the Big Four control 41 percent of assets but provide just 16 percent of small business lending.
One reason for this dramatic difference in lending is that local bankers have access to a rich trove of “soft” information. They get to know both their communities and their borrowers, and this enables them to extend loans to small businesses on the basis of factors that aren’t easily quantified (while judging correctly that the loan will be paid back). In contrast, big banks are operating at a national or global scale that leaves them blind to this kind of local information. As a consequence, they rely more on factors like credit scores and collateral, leaving many would-be entrepreneurs, especially people of color and women, on the sidelines. (See the Small Business section.)
Another key reason that local banks are a smarter way to structure the banking system stems from a fundamental difference in their business model. Megabanks make money on their up-front fees and tend to securitize and sell-off many of their loans. Theirs is thus a transactional relationship with the customer. They don’t care what happens after the customer walks out the door.
But local banks have a long-term interest in their customers and communities, in part because the majority of their revenues come from interest on their lending. They don’t tend to sell or securitize their loans. They hold onto them. So, if a homeowner does well and pays his mortgage, or if a small business owner does well and pays her loan, then the community bank or credit union prospers too. As Rebeca Romera Rainey, the third-generation CEO of Centinel Bank in Taos, New Mexico, explains it: “If our customers are not successful, there’s no way we would be.”
Local banks and credit unions are thus not only cheaper and less risky, they operate in alignment with the broader interests of the economy and community. By making productive loans, they foster viable, meaningful economic growth and distribute wealth more equitably. This stands in sharp contrast to the big Wall Street banks, which often profit at the expense of their customers, as the 2008 crisis painfully revealed, and whose complex financial products are designed not to support the real economy, but to siphon revenue from it. Losing community banks means we are losing crucial institutions of economic growth, stability, and prosperity.
For half a century, from the 1930s until the 1980s, the banking industry underpinned our economy by carrying out a few primary functions: providing a safe place to park our money; facilitating non-cash payments; and extending credit to help both people make major purchases and businesses to finance their growth. Banking was boring, efficient, and effective. New Deal laws enacted during the Great Depression and a dual banking system that empowered states to regulate banks supported these straightforward functions by strictly limiting banks’ size and mandating that they focus on serving their local communities. State and national laws restricted the ability of banks to open branches, especially across state lines. The 1933 Glass-Steagall Act also prevented banks that accepted deposits (and thus were covered by federal deposit insurance) from acting as investment banks by trading – casino style – in securities or engaging in other types of risky speculation.
Between 2010 and 2018, one of every three community banks — about 2,300 in total — vanished. In counties with a higher than average share of African American residents, the losses were even greater.
As a result of these layers of state and national protections, between 1940 and 1980 America’s community-rooted banking system proved remarkably stable. There were fewer than 260 bank failures, compared to more than 2,800 in the years since. But in the 1980s, Congress and federal regulators began slicing away the policies underpinning this system by, for example, lifting caps on interest rates, loosening mortgage rules, and hollowing out state restrictions on geographic expansion via branching and mergers.
The 1990s then saw state authority to regulate banks within their borders degraded and the wholesale dismantling of Depression-era policies. In 1994, the Clinton Administration successfully pushed to allow banks to branch across state lines with no limits. They did this by passing the Riegle Neal Interstate Banking and Branching Efficiency Act, which opened the way for a wave of mergers across the country. The law signified a new era of pro-Wall Street policies, which included Congress overturning Glass-Steagall with the Gramm-Leach-Bliley Act in 1999. This expanded the scope of what banks could do by allowing commercial and investment banking under one roof.
This shift in policy emboldened federal regulators to systematically preempt state laws that had ensured fair dealing, protected consumers from predatory lending, and protected small banks from exclusion. This opened the way for megabanks to use their control of essential infrastructure, such as electronic funds transfer networks, to impose excessive fees and other barriers on local financial institutions. An unprecedented period of mergers and consolidation followed these policy changes, not to mention the megabanks’ predatory lending practices that led to the financial crisis.
In the aftermath of the crisis, Congress passed the Dodd-Frank Act of 2010. Purported to curb the excesses of an outsized financial industry, the law in many ways did the opposite. Dodd-Frank had important regulatory successes, including the Consumer Financial Protection Bureau, but it essentially doubled-down on the policy status quo. It failed to seriously challenge big bank power – and the megabanks have successfully lobbied regulators to further weaken Dodd-Frank in the rule-making process. It also created new compliance burdens for community banks, credit unions, and bank startups, including lengthy quarterly regulatory filings. Since the passage of Dodd-Frank, the market share of megabanks has swelled from 59 percent to 64 percent, with the very largest banks gaining the most ground.
As big banks grew larger, they gained another policy-driven competitive advantage. The fact that government won’t let these sprawling institutions fail provides an insurance policy for their investors that is funded by American taxpayers. Because creditors and investors believe taxpayers will rescue the banks if anything goes awry, they are willing to finance big banks at much lower interest rates than they offer community banks.
All of this has worked to create a market in which local banks are losing ground, not because they can’t compete and offer as much or more value, but because policy has created a rigged game that favors big financial institutions.
Through all of this, locally owned banks and credit unions have stuck to their knitting. Few are involved with the Wall Street casino. Indeed, when the 2008 crisis hit, the vast majority were fine; they hadn’t made mortgages that were doomed to default or loaded up on toxic securities. Their real challenge came with the ensuing recession, as their customers lost jobs and fell behind on loan payments, and with the bursting of the Wall-Street-created real estate bubble, the property providing collateral for these loans plummeted in value. The government offered relatively little help to community banks and credit unions; they were “small enough to fail.” The programs that were available were designed for the needs of big banks, not the particular challenges facing small ones. Between 2010 and 2018, one of every three community banks — about 2,300 in total — vanished. In counties with a higher than average share of African American residents, the losses were even greater.
Across the country, communities and businesses are suffering the consequences of a banking system that is dominated by a handful of megabanks, rather than a dense landscape of local, community banks. Losing community banks means losing local businesses because owners can’t access a loan. Instead they have to rely on high-cost online loans or credit cards, which puts their business at more risk of failing. Lack of community banks has been linked to fewer business startups, fewer firms in operation, and fewer new jobs. Research shows that in both urban and rural places where there is a strong community bank presence, there tends to be more robust economic growth.
With the country now facing an economic downturn that could be even more devastating than the Great Recession, the lack of community banks across many states and regions will both impede recovery and make it more unequal. Big banks will extend credit to big companies and serve the needs of the wealthy, while leaving small businesses and ordinary people without the financing they need to get through the crisis and rebuild.
Indeed, we’ve already begun to see these effects. Small businesses in states with a relatively strong community bank presence have had a much easier time securing a federal relief loan under the Paycheck Protection Program (PPP). Our analysis found a strong correlation between the number of relief loans distributed in a state and the market share of community banks. In North Dakota, where community banks are numerous, nearly 19,000 small business relief loans were issued, or about 2,500 loans per 100,000 residents. At the other end of the spectrum, in Arizona, a state dominated by big banks, just 1,035 loans were issued per 100,000 people.
Research shows that in both urban and rural places where there is a strong community bank presence, there tends to be more robust economic growth.
The decline in community banks is particularly problematic for Black communities. Over the last decade, counties where African Americans account for more than 20 percent of the population have lost significantly more community banks. This may be one reason why Black business owners are less likely to have a lending relationship with a bank than white business owners. In the past five years, only 23 percent of Black-owned businesses were able to access credit from a bank, compared to 46 percent of white-owned businesses. Without credit, Black-owned businesses, which have been disproportionately hobbled by the pandemic, are struggling to secure the resources to survive and adapt. Many are at risk of closing permanently.
Consolidation in banking is thus reproducing and amplifying inequality and concentration across the economy. Megabanks would rather finance corporate mergers and speculative trading than help new businesses get off the ground. The result: Monopoly power reinforces itself, while communities of color, low-income neighborhoods, and rural areas are left further behind.
The loss of local banks is also devastating for our democracy. Only one bank executive went to jail for their role in triggering the global financial crisis, which demonstrates the level of political power the industry holds. Having a less concentrated banking industry would help to disarm the financial industry and foster more political and economic equality.
The role that states can play in restructuring their banking systems is constrained by both federal banking laws and federal regulatory agencies, which have systematically preempted state authority over national banks. Nevertheless, there are still potent levers that states can pull to curb the power of megabanks and strengthen and expand community banks and credit unions. That task has been made all the more urgent by the current economic crisis and the need to finance a recovery that not only rebuilds the economy but begins to rectify long-standing racial and economic inequalities. We believe three pathways are essential:
As discussed earlier, the only state where community banks have flourished in recent decades is North Dakota, which has four times as many local banks per capita as the national average. Local banks and credit unions hold more than 80 percent of the deposits in North Dakota. Their strength is largely owed to the Bank of North Dakota (BND), a state-owned “bankers’ bank” that is the only one of its kind in the country. The deposit base of the BND is the State of North Dakota. All state funds, excluding pension funds, are deposited with the bank.
BND doesn’t lend directly to North Dakota businesses and farmers. Its lending is mainly done in partnership with local banks and credit unions. They originate the loans, while BND provides part of the funds and assumes part risk on its balance sheet. In this way, BND expands the lending capacity of the state’s community banks and credit unions. As a result, the volume of small business lending per capita in North Dakota is about three times the national average.
Another critical function of BND is the role it plays in municipal financing. BND lends directly to local governments at lower rates than the municipal bond market provides. This stands in contrast to what’s happened in many other states, where city residents are on the hook for municipal finance schemes peddled by Wall Street and loaded with hidden costs.
BND’s profits belong to the people of North Dakota and are periodically transferred into the state’s general fund. Over the last decade, BND has generated about $1 billion in profit, and more than $400 million of that, or about $3,300 per household, has been shifted into the state’s general fund to support education and other public services.
A handful of states and cities have passed or are considering legislation to create their own public banks modeled on the Bank of North Dakota. In 2019, New Jersey’s governor issued an executive order to launch a state-owned public bank within a year. California has also passed a public banking law. It doesn’t authorize the chartering of public banks immediately, but establishes a framework for cities and counties to apply for a public bank license, which would require a business plan, an independent board, and FDIC deposit insurance, among other requirements.
The Riegle-Neal Act set a national deposit cap of ten percent for banks, meaning no single institution could push its control above ten percent of Americans’ deposits by buying another bank. The law, however, does allow banks to exceed the cap if they acquire a distressed bank, which happened during the financial crisis, or grow on their own without merging with other banks. Because of these exceptions, JP Morgan Chase, Bank of America, and Wells Fargo now exceed the cap, each holding more than $1.7 trillion in deposits.
Riegle-Neal also authorized states to adopt their own deposit caps. Many have declined to do so or have imposed very lenient caps. States should look to adopt strict deposit-share caps to impede future mergers that would further consolidate their banking sectors.
Most lawsuits against banks come through a state Attorney General’s office. However, in recent years, cities like Baltimore and Philadelphia have sued big banks on antitrust grounds. These lawsuits are animated by accusations of bond and asset mismanagement and anticompetitive misconduct done by the banks on behalf of the City or the City’s employee pension funds.
As megabanks were amassing power in the 1990s and 2000s, many states worked to keep these banks in line by passing regulations to block them from engaging in predatory lending and prevent them from using their control over shared infrastructure, such as ATM networks, to undermine their smaller competitors.
Yet, two federal regulatory agencies — the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) — preempted states from enforcing these protections against national banks and federal savings banks, known as thrifts. This helped to clear the way for the high-risk mortgages at the center of the financial crisis in 2008. It also induced many state-chartered banks to switch to national charters, further diminishing state regulatory power.
While debating financial reform after the crisis, Congress acknowledged the role that federal preemption played in tying the hands of states and fueling the housing crisis. The Dodd-Frank Act restored some state regulatory power, mainly for consumer protection rules. Unfortunately, the OCC (which absorbed the OTS per Dodd-Frank) failed to honor this directive when the agency issued its new rules in 2011, further complicating what actions states can effectively take.
State officials should exert pressure on Congress and the OCC and insist that the OCC amend these rules to bring them into compliance with the standards under the Dodd-Frank Act. Dodd-Frank requires the OCC to review its preemption rules every five years and to explain to Congress whether those rules are justified and should be retained. But a decade after the passage of Dodd-Frank, the OCC has never performed this required review.
Despite the OCC’s actions, there is some room to maneuver in the arena of consumer protection regulations, which, by holding megabanks accountable, means smaller, more responsible banks and credit unions have a better chance to compete. State attorneys general can pursue enforcement of existing federal laws by bringing civil action against banks and financial institutions for practices that constitute “unfair, deceptive, or abusive acts or practices” as enumerated in Dodd-Frank. States can also expand their “unfair and deceptive acts and practice” laws (UDAP) and allow consumer class action lawsuits, all of which would grant consumers, state Attorneys General, and state banking regulators more authority to pursue civil action against giant banks.
 “Large Commercial Banks,” Federal Reserve Statistical Release, Accessed June 2020.
 Community banks obtain most of their deposits locally and make most of their loans within their local area. For the figures in this analysis, we use bank size as a proxy for defining which banks are community banks. We define small community banks as those with under $1.2 billion in assets, and mid-sized community banks as those with under $12 billion in assets. For more on defining community banks, see the FDIC’s Community Bank Study.
 Credit unions are financial institutions, but not technically banks. They are owned by customers, nonprofit, and governed by a board of directors that is elected by its customers. For most of its history, the customers of credit unions have typically had some affiliation in common (for example, a workplace, religious organization, geographic location, etc.) that holds them accountable to one another; but overtime those requirements have loosened. Credit unions tend to provide consumer banking and lending services. But, unlike community banks, they don’t typically do much business lending.
 “Bank Market Share by Size of Institution 1994 to 2018,” Institute for Local Self-Reliance, May 2019; Institute for Local Self-Reliance analysis of data from the Federal Deposit Insurance Corporation (FDIC), March 2020.
 Institute for Local Self-Reliance analysis of data from the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA).
 “Banking for the Rest of Us,” Institute for Local Self-Reliance, April 2012.
 “Implications of the ‘Volcker Rules’ for Financial Stability: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs,” testimony of Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, Sloan School of Management, Mass. Inst. of Tech, 2010; Dean Amel, Colleen Barnes, Fabio Panetta, and Carmelo Salleo, ‘‘Consolidation and Efficiency in the Financial Sector: A Review of the International Evidence,’’ Journal of Banking and Finance, 2004.
 “The Transformation of the U.S. Financial Services Industry, 1975-2000: Competition, Consolidation, and Increased Risks,” Arthur E. Wilmarth, Jr., University of Illinois Law Review, 2002.
 Institute for Local Self-Reliance analysis of data from the Federal Deposit Insurance Corporation (FDIC). For data on small and mid-size banks, we include all banks under $12 billion in assets.
 Op cit. “Banking for the Rest of Us.”
 “Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,” Federal Reserve History, September 1994.
 “Glass Steagall Act & the Volcker Rule,” Institute for Local Self-Reliance, October 2010.
 Institute for Local Self-Reliance analysis of data from the Federal Deposit Insurance Corporation (FDIC).
 “Federal Study Confirms ‘Too Big To Fail’ Gives Megabanks a Hidden Funding Advantage,” Olivia LaVecchia, Institute for Local Self-Reliance, Aug. 20, 2014.
 Institute for Local Self-Reliance analysis of data from the Federal Deposit Insurance Corporation (FDIC).
 “Buoyed by Public Support, Independent Businesses Report Strong Sales Growth, National Survey Finds,” Institute for Local Self-Reliance, February 2015; “Small Business Lending by Size of Institution, 2018,” Institute for Local Self-Reliance, May 2019.
 “Further Evidence on the Link between Finance and Growth: An International Analysis of Community Banking and Economic Performance,” Allen N. Berger et al., Journal of Financial Services Research, 2004; “Challenges and Opportunities for Community Banks in Rural Pennsylvania,” Victoria Geyfman and Jonathan Scott, Center for Rural Pennsylvania, January 2010.
 “Update: PPP Loan Data Continues to Show that Big Bank Consolidation has Hampered Small Business Relief,” Stacy Mitchell, Institute for Local Self-Reliance, June 2020.
 Institute for Local Self-Reliance analysis of data from the Federal Deposit Insurance Corporation (FDIC).
 “Why Some Black-Owned U.S. Businesses Are Hardest Hit by Coronavirus Shutdowns,” Reuters, The New York Times, June 2020.
 “Number of Working Black Business Owners Falls 40 Percent, Far More Than Other Groups Amid Coronavirus,” Hannah Knowles, Washington Post, May 2020.
 “How Wall Street’s Bankers Stayed Out of Jail,” William D. Cohan, The Atlantic, September 2015.
 “Public Banks: Bank of North Dakota,” Stacy Mitchell, Institute for Local Self-Reliance.
 Op Cit. “Measuring the Impact of the Bank of North Dakota.”
 “Murphy Pushes Taxpayer-Funded Bank for N.J. No State has Done That in a Century,” Sophie Nieto-Munoz, New Jersey.com, November 2019.
 “A Century in the Making,” David Dayen, The American Prospect, October 2019.
 “Market Share Caps,” Institute for Local Self-Reliance, May 2012.
 “Cities and Pension Funds Are Suing Big Banks (Again),” Liz Farmer, Governing, April 2019.
 “Philadelphia Sues Seven Big Banks, Alleges Municipal Bond Collusion,” Jonathan Stempel, Reuters, February 2019.
 Although often blamed, subprime mortgages did not cause the financial crisis. The value of these loans wasn’t large enough to deal such a death blow—and, as we can see today, it’s home loans in general, not just subprime ones, that are underwater. What brought down the system were the layers of derivatives piled on top of these loans. Derivatives were used to mislead investors about the risk that they were taking on. Also, because information about them generally didn’t have to be reported to regulators, no one knew who had how many. Wall Street had created an inverted pyramid, with trillions of dollars in speculative positions resting on a small base of doomed mortgages. When derivatives started going toxic en masse, no one knew which customers were going bankrupt next, and the whole pyramid collapsed, leaving the nation’s largest banks insolvent. Had it not been for extraordinary government intervention, most would have failed.
 “Consumer Protection in the States,” National Consumer Law Center, March 2018.