Rural banks and their communities: a matter of survival.

• Author: Markley, Deborah M.
• Position: Spotlighting Small Governments

As rural community banks chart their futures, they are challenged by economic and financial change. Today's rural communities are no longer isolated from global and national economic trends. Competition from abroad has hurt profit margins for rural businesses. Technical innovation, while boosting productivity, has softened the demand for rural labor. Many of the most educated rural businesses are being drawn to urban centers where they can be closer to suppliers and customers.

Just as the economic landscape is changing, so is the financial environment in which rural community bankers must operate. Deregulation and new technology have brought larger financial institutions into the rural marketplace. And, as the regulatory burden on banks continues to change, rural bankers are finding it harder to compete on their home turf.

This article explores the challenges that face rural communities and their community banks. The article also discusses strategies bankers might use to help themselves in the changing environment. The article concludes that to survive and prosper, rural community bankers need to play a more active role in fostering economic growth in their communities. Fundamentally, the success of rural community bankers is closely tied to the economic health of their rural communities.

Changing Financial Environments

Just as the national economy is being shaped by changes in the global marketplace, the economies of rural communities are being shaped by national and global economic trends. As a result, a rural location no longer provides a buffer against the ebb and flow of distant markets. Indeed, many rural communities find themselves disadvantaged by recent economic and financial change. Bankers in rural communities also are finding themselves buffeted by change. Deregulation and the changing regulatory burden continue to redefine the competitive environment for banks, while advances in technology, products and services are creating new opportunities and new challenges.

Globalization of the U.S. Economy. Advances in technology, travel, communications and financial markets have created a global marketplace for most goods and services--a marketplace that offers both incentives and challenges to rural economies. Low-wage, low-skill rural manufacturers face stiffer competition from developing or emerging economies in the rest of the world. As rural communities adapt to the competitive pressure, those with a diversified economic base are likely to prosper. In contrast, the loss of a plant to an offshore location, for example, could cripple a rural community that lacks other employment opportunities.

Trade agreements may have a disproportionate impact on rural communities. While the effects of the North American Free Trade Agreement (NAFTA) cannot yet be adequately measured, some researchers suggest that the plants most likely to move as a result of NAFTA are concentrated in rural communities. At the same time, NAFTA may give a boost to communities in the heartland that depend on agricultural production.

Industrial Restructuring within the United States. Several key changes in the world's industrial sector are reshaping the way that rural businesses must operate to remain competitive. As the industrial structure of rural communities evolves, rural community bankers must develop new tools to meet increased credit needs. And bankers must make difficult decisions about whether to lend to nontraditional businesses.

One key change occurring in the national economy is the shift away from goods-producing industries toward service producing industries. In rural areas, goods producers and low-skill, service-sector activities still tend to predominate. Attracting higher-wage, higher-skill producer services to rural communities will depend on a community's location, its quality of educational and job training resources, and its infrastructure investments, particularly in telecommunications.

To remain competitive, U.S. firms are being forced to rethink almost every aspect of the manufacturing process. Flexible manufacturing has become the objective for many firms. This change entails reorganizing the production process so that the firm can respond...