St. Louis Fed: Number of commercial banks in ongoing decline

The number of community banks will likely continue declining in the coming years, according to a Federal Reserve Bank of St. Louis researcher. 

“The long-term decline in the number of commercial banks shows no signs of ending,” said William R. Emmons, an assistant vice president and lead economist in the St. Louis Fed’s Supervision Division, in his Dec. 9 “On the Economy” blog post. “Bank failures have become much less common, but the rate of new-bank chartering also has declined to insignificance.”

A decades-long trend 

Emmons’ prediction would be a continuation of the century-long decline in the number of commercial banks:  Since reaching an all-time high of nearly 30,460 in 1921, the bank population had declined 86 percent to less than 4,400 by the end of 2020. 

The number of commercial banks grew rapidly in the first two decades of the 20th century, from 13,424 in 1901 to nearly 30,500 20 years later. Much of that decline happened after the 1933 bank holiday shuttered thousands of banks. The newly established FDIC stabilized the banking system — however, the bank population has still declined by 71 percent or 10,973 institutions. 

The post-1940 peak of commercial banks came in 1984 at nearly 14,500, an increase that belies the steady decline of commercial banks over the past 37 years. Since then, a large number of banks failed during the 1980s and early 1990s, and again during and after the Great Recession, declines basically offset by the entry of newly chartered banks. 

Bank mergers also significantly increased starting in the early 1980s; mergers continued at a historically high rate. Bank failures and new-bank entries have nearly ceased since 2015: The FDIC only lists nine new commercial banks and four voluntary bank liquidations for this year. Bank mergers continue to take place at a rapid pace: As of Nov. 29, 173 bank mergers had taken place in 2021— 4 percent of the banks that had existed at the end of 2020, following recent trends, according to Pacific Coast Bankers’ Bank

“It turns out this was a post-1940 peak that may never be reached again,” Emmons said. “Between 1984 and 2020, the number of banks decreased by 70 percent. Even though, on balance, more than 10,000 banks disappeared during this period, the number of disappearances in any year never reached 600 banks or 5 percent of the total. Instead, the decline has been remarkably steady in percentage terms.”