Fare thee well, 2021

The year 2021 was unlike any other for community banks. 

Even as Covid-19 variants blanketed parts of the country with illnesses and deaths, creating uncomfortable reminders of 2020, more Americans became inoculated against the virus. The economy strengthened, and many bank employees returned to their offices, easing previous fears of an influx of available commercial space.  

Still, more familiar challenges roared back: President Joe Biden’s administration, inaugurated in January, has already proposed tightening policies relating to overdrafts, reporting requirements and M&A, three issues that could have significant impacts on community bankers in the coming years.

With a toast to 2021, BankBeat.biz has compiled the five stories that especially captivated the industry during the previous 12 months:


1. M&A picks up in 2021

Fueled by banks seeking to increase their return to shareholders, bank M&A surged by its fastest pace in 14 years, according to Bloomberg. Banks with higher stock values have been less impacted by shrinking net interest margins and have proven more attractive as acquisition targets. As of early October, more than 150 whole-bank M&A had taken place compared to 110 in 2020, still lower than the average of approximately 250 between 2015-2019. 

Regulatory uncertainty could slow the pace of M&A in the next 12 months as Democrats, who say industrial consolidation is detrimental for consumers, continue pushing back against the agreements. Still, slow loan growth and competition from larger or more tech-savvy rivals is likely to continue forcing banks to seek out combinations with other banks. 


2. Banks push back on IRS reporting, direct loan proposals 

Two legislative proposals placed bankers on edge for the future. 

One bill required financial institutions to report to the IRS activity on accounts with a balance of at least $600. After much bipartisan uproar, that minimum was raised to $10,000. Bankers successfully pushed back and helped exclude the proposal from the budget bill. Still, Treasury Secretary Janet Yellen and other top officials are expressing support for the plan and could reintroduce it in the future. 

The gist of the opposition was summed up in one quote from the Independent Community Bankers of America’s Minority Bank Advisory Council: “The proposal would undermine the critical relationship of trust we foster within the communities we serve — communities prone to distrust of institutions and government agencies. … Invasive and indiscriminate account reporting would undermine the policy priority of bringing more people into the banking system and may drive many of those in the system to leave.” 

The second proposal drawing the ire of bankers would provide approximately $2 billion over 10 years to the Small Business Administration to offer loans of up to $150,000 to small businesses or through third-party relationships. Acknowledging bankers’ concerns over government-backed competition, House Small Business Committee Ranking Member Blaine Luetkemeyer (R-Mo.) has introduced a bill to ban Small Business Administration direct lending, after the proposal was included in the stalled Build Back Better legislative package. 


3. Overdraft fees targeted

The debate over overdraft fees reached a fever pitch in 2021.

Regulators’ stance on the issue was evident as Consumer Financial Protection Bureau Director Rohit Chopra pledged to take a stronger stand by enhancing supervisory and enforcement scrutiny of financial institutions “that are heavily dependent on overdraft fees.” Banking trade groups, including the American Bankers Association, fired back. ABA President and CEO Rob Nichols noted that customers have multiple tools to help them manage accounts and avoid overdrafts, including text alerts about low balances and the chance to digitally monitor their accounts. 

Larger banks are already changing their overdraft practices. Chase will introduce new checking account features next year to help consumers avoid the fees. Following an overdraft, customers will have until the end of the business day to bring their balance back up to $50 overdrawn or less to avoid overdraft service fees. Ally Bank is ending overdrafts entirely.



4. Crypto gains continue 

If it wasn’t already evident, this year left no doubt of the emerging role of cryptocurrencies in banking. 

The market capitalization of all cryptocurrencies soared to a record $2 trillion in 2021, and there are almost 10,000 different cryptocurrencies. There were numerous developments this year that should keep bankers aware of the role they will play in the crypto market. The most pertinent reminder was Oklahoma community financial institution Vast Bank becoming the first nationally-chartered, FDIC-insured bank to allow customers to buy, sell and hold cryptocurrencies through a user interface. 

Still, community bankers should not panic, as consumers seeking decentralized finance will still yearn for the security financial institutions offer. A January 2021 NYDIG survey involving nearly 2,200 U.S. consumers found that more than 80 percent of Bitcoin holders would move their cryptocurrencies to a bank if it had secure Bitcoin storage. Also, more than 70 percent of Bitcoin holders said they would switch their primary bank to one that offered Bitcoin-related products as well as regular bank products. 


5. Economic improvements hampered by inflation 

The U.S. economy surged in 2021, even with inflation at its highest in decades and the pandemic continuing to course through the country. 

Federal Open Markets Committee participants reported 5.5 percent GDP growth this year and are projecting 4 percent growth in 2022, a sign that the economy will remain strong during the next 12 months. The U.S. economy has added an average of 378,000 jobs over the last four months, reducing job losses from earlier in the pandemic. Commercial real estate lending exploded across the Upper Midwest this year: Aggregate 4Q 2021 CRE loans saw double-digit, year-over-year increases in Illinois, Indiana, Michigan, Minnesota and Montana, according to the FDIC and S&P Capital IQ Pro loan tracker data. Companies continue moving forward with strategic growth plans despite inflated construction material prices. Kevin Crowley, manager of NAI Iowa Realty Commercial, expects the industrial CRE sector to drive the next 18 to 36 months of growth. 

However, inflation and ongoing supply chain and worker shortages could throw a wrench into long-term CRE prospects as businesses finalize where their employees work in a post-pandemic economy. Inflation is another top concern: The FOMC is ending its massive increase in economic support in the coming months, and plans to hike interest rates three times in 2022 from near-zero to help curb rising inflation.