Photo Credit: Michael D Brown

By Joel S. Dunn, CAMS, CICA, Director

In August 2015, a colleague of mine wrote an article titled “Planning in a Consolidating Banking Industry.” Now that it is 2019, I took a look at the article to determine whether his predictions, as shown below, are accurate and if there is a decline in banking organizations.

“On December 31, 1999, there were 8,356 banking organizations active in the United States (see chart below). Banking organizations consist of independent banks and thrifts, one-bank holding companies and multibank holding companies. On March 31, 2015, there were 5,977 banking organizations, a decrease of 2,379 or 28.5% from (the beginning of) 2000…How many banking organizations will there be in the next five years, or even next 10 years? I have discussed this with many industry experts who predict that there will be as little as 3,000 organizations by 2025. Just looking at the recent trend, there will be fewer than 5,000 institutions before 2020.”

Number of FDIC-Insured Banking Organizations 

Report Date	Thrifts and Independent Banks	One-Bank Holding Companies	Multi-Bank Holding Companies	Total
December 31, 1999	3,253	4,372	731	8,356
December 31, 2000	3,153	4,400	696	8,249
December 31, 2001	3,005	4,449	652	8,106
December 31, 2002	2,857	4,507	604	7,968
December 31, 2003	2,717	4,552	576	7,846
December 31, 2004	2,584	4,568	555	7,707
December 31, 2005	2,520	4,598	524	7,642
December 31, 2006	2,442	4,568	518	7,528
December 31, 2007	2,354	4,548	509	7,411
December 31, 2008	2,286	4,523	476	7,285
December 31, 2009	2,176	4,520	427	7,123
December 31, 2010	2,096	4,420	400	6,916
December 31, 2011	1,999	4,363	359	6,721
December 31, 2012	1,882	4,278	342	6,502
December 31, 2013	1,779	4,211	312	6,302
December 31, 2014	1,655	4,115	284	6,054
March 31, 2015	1,624	4,074	279	5,977
December 31, 2015	1,514	3,986	267	5,767
December 31, 2016	1,385	3,894	242	5,521
December 31, 2017	1,284	3,795	226	5,305
September 30, 2018	1,217	3,696	218	5,131

Source: FDIC [www.fdic.gov]

Using the most recent data from the FDIC, as of September 30, 2018, there are 5,131 institutions in the United States. If this trend continues, my colleague’s prediction will be on target. Here are a few reasons why this disturbing trend may continue:

• During the past 10+ years, financial institutions have been faced with increasing regulatory scrutiny, which has brought additional challenges and complexities.
• There are increased compliance costs (in New York State as an example) with the implementation of Parts 500 and 504, which apply to all banks, trust companies, private bankers, savings banks, loan associations, branches and agencies of foreign banking corporations, check cashers, and money transmitters.
  • Under Part 500, financial institutions are now required to have a Chief Information Security Officer (CISO). They are required to perform penetration testing on an annual basis and vulnerability assessments on a bi-annual basis.
  • Under Part 504, financial institutions are now required to perform end-to-end testing of their AML Models on an annual basis, which includes AML scenario rules and name-matching logic validation, along with data accuracy and completeness assessments.
• Capital requirements are being scrutinized and are potentially increasing. Is 11% the new 9%?
• Earnings – at small banks, secondary sources of income are being looked at regularly. Where is a financial institution supposed to add revenue streams with interest rates still remaining at historic lows?

Community banks will continue to see increased competition from large banks, as well as non-bank competitors. Costs will continue to increase for technology, and there is high demand for skilled IT and compliance professionals. As a result, salary and benefit costs associated with recruiting and/or maintaining such professionals will continue to rise. The threat of cybersecurity hacks and data theft remains at an all-time high, along with the negative publicity, reputational risk, and potential fines that a financial institution could incur. Board of Directors or Head Office involvement also continues to increase, causing “fatigued” Boards.

I do believe, as my colleague did, that most banks would prefer to continue operating as independent organizations which provide a personalized service that larger banks, for the most part, don’t do; but when a community bank can no longer independently support itself under the heavy weight of today’s financial and regulatory expectations, at what point will it look to merge with or sell to another organization? Does an “enhanced’ regulatory environment – or the pressure on earnings, increased compliance, and technology costs – speed up a financial institution’s decision to merge, sell, or, in the case of a foreign branch, simply close down and exit?

Is it possible that by 2025, there will be fewer than 3,000 banking organizations? I believe that with all the above factors, we will hit that number by 2022.

To learn about acxell’s Internal Audit and Risk Management Services and how we can help your institution, email WhatsYourRisk@acxellrms.com or call 877-651-1700.

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