Smaller banks spend proportionately more on compliance, yet don’t perform better than larger ones, at least in one key metric.
Net interest margins are clearly under pressure at community banks, but this trend is not new. It is a product of a highly competitive banking industry and a direct result of today’s lower lending levels and abundant balance sheet liquidity. The net interest margin is the difference between interest income and interest expense. Interest income and interest expense fluctuated considerably through the business cycle, but the long-term trend indicates that asset yields are falling faster than deposit and other funding costs.
The total volume of loans held by community banks peaked in 2008 and dropped during the financial crisis and Great Recession. Total loans bottomed out in 2011 and, as of December 2012, have only recovered to a level roughly 10 percent below their 2008 peak. During this period, both demand and supply factors undoubtedly played roles in the change in bank lending.
Find out why community banks will benefit from the new FDIC assessment base as called for under the Dodd-Frank Act.
Reforms enacted after the S&L crisis have yet to persuade holders of jumbo CDs to monitor their banks' risky practices.
The diagnosis on banks is comforting, despite a few weak spots here and there and an economy that's slowing down.