A.M. Best Special Report: Community Bank Advantages Challenge Historical Assumptions

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December 29, 2009 Tuesday 09:12 AM EST

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A.M. Best Special Report: Community Bank Advantages Challenge Historical Assumptions

Christine LaBelle

OLDWICK, N.J.

A bank's size alone can have less to do with its performance, safety and soundness than would be expected, based on A.M. Best's analysis of data from the Federal Deposit Insurance Corp. and other, qualitative factors. Various operating models carry key advantages and disadvantages, as best delineated by a threshold of $5 billion in assets between small and large banks.

--Despite common industry perceptions that large commercial banks have greater safety and earnings power than community banks, a bank's assets don't necessarily equate to economies of scale, diversification of risk and market power.

--Small community banks generally have smaller scale and less diversification, but their local owner-managers provide stability, and they draw strength from focusing on their local communities and limiting risk.

--Larger institutions historically have tended to take on more leverage and complex risk exposures, and they also may forego diversification to assume concentrated risk in certain regions or in certain products, such as subprime mortgages.

--Relative risk aside, community banks are better capitalized according to certain regulatory capital ratios, including the Tier 1 risk based capital and tangible common equity.

--Community banks are less susceptible to downswings in banking cycles, as shown by more gradual declines in median return on assets and return on equity compared with larger banks.

--The diverse operating models in U.S. banks - from the traditional, relationship-based business of community banks to the more market- and transaction-based models of large banks - mean that when one segment falters, another is better able to survive.

To download a PDF copy of all banking special reports at no cost and to access data, analytical methodologies and news on the U.S. banking industry, please visit http://www.ambest.com/banks.

December 30, 2009

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