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Fed's Bowman casts positive light on bank mergers sometimes seen as a blow to local lending

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ST. LOUIS, Oct 1 (Reuters) - Consolidation among the U.S.'s smaller banks in recent years has raised concerns about the rise of financial "deserts" in rural communities, and of megabanks gobbling up neighborhood institutions.

Federal Reserve Governor Michelle Bowman, appointed to the central bank because of her community banking background, arrived at an annual community bank conference here with a different message: it isn't all that bad.

While the number of banks with less than $250 million in assets declined from 4,600 to fewer than 3,000 from 2011 to 2018, "four out of five of the small banks that were acquired during this period, or about 930 banks, were acquired by another community bank," Bowman said in prepared remarks.

Failures have been few, and consolidation for the most part driven by solid business decisions.

The "key difference" between the acquired and the acquiring bank, Bowman said, was not their size or their geographic area, but profitability.

"This fact challenges the notion held by some that small scale or operating in a very limited geographic area is a disadvantage and it shows that many small, locally focused banks are performing well in a changing and challenging marketplace," Bowman said.

Under rules set in place after the financial crisis of 2007 to 2009, one of the seven members of the Fed board is supposed to have a background in community banking. The aim was to be sure that new capital rules and other regulations put in place to stabilize the financial system did not weigh too heavily on firms that are often important sources of credit and financial services in small communities.

Bowman, a former Kansas community banker and state bank commissioner, is the first to serve that role.

The decline in the number of community banks is sometimes cited as evidence that post-crisis regulations are driving consolidation and depriving some small towns and rural areas of banking services -- an issue that resonates at a time of concern about sections of the country being unable to stay in step economically.

Bowman said results can vary by community, with some studies suggesting that lending declines after a merger, and that communities that lose a bank headquarters get hit by a drop in charitable giving, and involvement in civic activity when executives pull up stakes.

But there mergers "in a general sense, are a natural and often desirable consequence of competition in a vibrant market economy," Bowman said. "In fact, when viewing the data in a national perspective, the number of banks per local market has been quite stable over time in both urban and rural areas." (Reporting by Howard Schneider Editing by Chizu Nomiyama)