N°24-61: The performance of FDIC-Identified Community Banks

The US Federal Deposit Insurance Corporation (FDIC) recently redrew its criteria to identify community banks by including location and business strategy. We analyze the resultant re-classification of community banks and show it affects a wide array of salient outcomes. FDIC-included community banks exhibit superior stability and efficiency while facing reduced credit and liquidity risks compared to non-community banks. Higher residential mortgage proportions reduce credit risk and enhance stability. Newly designated community banks should not expect immediate financial advantages. Higher core deposit ratios improve stability, profitability, and efficiency for banks that just entered the community banking universe. During the Covid-19 crisis, FDIC-included community banks retain their financial stability and profitability. Community banks derive cost efficiency from market structure and organizational factors rather than managerial skills. Long-term cost efficiency varies across states, with smaller community banks being more efficient, especially in states favoring traditional banking practices and local relationships, such as the Midwest and Southeast regions.