What it means
A community bank is a smaller bank that is based in a particular town or region and makes most of its loans to people and businesses nearby. Loan officers often know their customers personally, and decisions are made locally rather than at a distant head office.
This style of lending is called relationship banking. Trade associations like the ICBA exist because small banks cannot afford large teams of lawyers and lobbyists.
By banding together, they can respond to proposed rules, give evidence to Congress and argue for regulation that is proportionate to their size. The association is headquartered in Washington, DC, close to the institutions it deals with.
Much of the debate is about the cost of compliance. A rule designed for a global bank with thousands of staff may be a heavy burden for a bank with fifty employees, and the association pushes for lighter treatment for smaller institutions.
Regulators and large banks sometimes disagree, arguing that consistent standards protect customers and the financial system. For a business owner, the relevance is practical.
A local manufacturer or farmer may find that a community bank is willing to lend on the strength of a long relationship, where a larger bank would rely on a standard scorecard. Knowing that these banks have an organised voice helps explain why certain rules, such as capital requirements, are often adjusted for smaller banks.
The ICBA should not be confused with other bank bodies. Some groups represent large national banks, and others cover credit unions or banks of all sizes.
When reading a policy paper, it is worth checking which type of institution the author speaks for, because the viewpoint can differ. The association also offers practical help.
Members can use its training, research and shared products, such as support on managing cyber security and compliance, which small banks might struggle to build on their own.
In practice
Real-world examples.
Example
A small-town bank with $400,000,000 in assets receives a draft regulation that would require expensive new reporting. Its chief executive contacts the association, which submits a comment letter explaining the extra cost for small banks. The final rule includes an exemption for the smallest institutions. The chief executive tells his board that the comment letter was worth the effort.
Example
A farmer needs a loan to buy a new tractor before harvest. The local bank knows his family history, the quality of his land and his record of repaying on time, and it approves a $250,000 loan in a week. A national lender would have needed several months of paperwork. The farmer repays on a schedule that matches his harvest income.
Example
A graduate student writing a paper on bank competition cites the association's research on the number of local lending offices. She compares it with studies from groups representing larger banks to show both viewpoints. Her conclusion is that the truth lies between the two.
Case study
Seen in the real world.
Prairie Valley Bank is a fictional community bank with 60 employees and $500,000,000 in assets. When a new reporting rule was proposed, the bank's compliance officer estimated that it would add two full-time roles at a cost of about $180,000 a year.
The bank joined other small banks in sending feedback through its trade association, which combined their examples into a single detailed letter. The group argued that the rule's benefits for supervisors did not justify such costs for banks of that size.
In this illustrative case, the final rule included a simpler version for small institutions. Prairie Valley avoided the extra hires and used the savings to lend an additional $2,000,000 to local firms, though regulators kept their right to inspect the bank as before. The bank's board also noted that the saving might change if the rules were revised again.
Watch out
Common mistakes.
- Assuming all banks in the United States share the same interests, when small and large banks often take different positions on rules.
- Believing a trade association sets the law, when it only informs and lobbies the people who do.
- Thinking community banks are always safer than large banks, when each has its own risks, such as heavy exposure to loans in a single local industry.
Questions
People also ask.
What is a community bank?
It is a smaller bank, usually owned and run locally, that focuses on lending to nearby households and businesses, and that often holds the loans it makes instead of selling them on.
What does the ICBA do for its members?
It represents them in policy debates and provides education, research and products, so that small banks can compete without large compliance teams.
Is it a government body?
No. It is a private membership organisation that is funded by its members, and its views are those of its members rather than of the government.
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