I'm also further curious on how you think that the huge corporations are more merit-based? My gut would be that they are about the same, all told. They will have the benefit of more applicants, but they have the downside of lower risk of failure.
I mentioned in another comment about how most small banks closely tied to the local business environment and especially CRE markets. The difference between a single CRE developer being 5% of your portfolio when you're one tiny bank and 0.5% when you're a slightly larger bank is massive. You scale that up even more and banking gets more reliable and easier to manage the larger the banks are.
The fewer banks there are, the easier it is to provide oversight and regulate them. You have fewer institutions to coordinate when trying to push big changes, and what fewer institutions do exist are more resilient and able to absorb larger losses.
That is, sure, the bank disappears if the town does. But the question is if local banks help towns not disappear? There are tangible goods for having value pumped locally into the place that has it. Versus the larger banks that have no reason to invest in smaller towns.
The too big to fail banks are also prone to this but in theory because they are regionally diversified less so. Still without government guarantees about half or more would have failed in 2008/2010 time period. Still with government guarantees these banks have access to much cheaper capital and more liquidity when a crisis happens to they can out compete smaller banks.
And again, any systemic risk to a town seems to still exist. Just now there is nothing keeping money made on interest in the town. Literally all profits from localities are shifted out to wherever the bank is located.
There are other ways to mitigate that institutional risk. Such as FDIC insurance. And the availability of securitization for loans. The bank makes the loan, sells it off to Wall St, where it becomes part of a bond deal. And now the bank is insulated from default risk, and can make another loan.
Before securitization, when a local crash hit, lending became hard, and the downturn would stretch out. After securitization, towns began to bounce back more quickly after local hard times (eg a factory closing).
On the other hand "too big to fail" is a huge problem with the biggest banks. And regulation stops being meaningful when the institutions engage in regulatory capture. As an example, in the leadup to 2008, a ton of new financial regulations were enacted. But all benefited the same 5 Wall St firms. Who, when they ran into trouble, nearly destroyed our financial system. (I know people think it was overblown. But we were actually within 1 day of "ATMs will stop working" when TARP was passed.)
This isn't necessarily a bad thing from the perspective of the town.
And it creates a great incentive for the bank to invest back into the town. At least on paper?
Where I’m from a lot of family businesses/businesses that end up becoming functionally family businesses basically only hire family into upper level positions, which often function more like sinecures. You can argue it’s their right, sure, but I think it’s bad for society. You see it all the time in real estate, local banking and financial services (esp. wealth management), law, logistics or other local blue collar businesses (even medicine - it turns out when you’re an influential local doctor it’s a lot easier to get your kid into the local medical school). That is not to say that family connections are always meritless but I think it’s a big negative of small “family owned businesses” in locking outsiders out of opportunities for social advancement.
Regarding bigger banks being better - they can afford to hire really smart people whose work scales over all their customers. They have a much more diverse customer base which reduces risk. Local banks cannot do this as efficiently due to having less customers. I also personally don’t care about the human aspect of my bank at all - they provide financial products which are usually very comparable to those at other banks, and I prefer to do everything online by myself - so I see investments in that area as unnecessary and potentially wasteful (insofar as it impacts rates/terms/etc with poorer margins).
A big downside is that they are also less incentivized to train up folks. Larger corporations seem to have decided that that can all be offloaded to "the market forces" such that they can just hire new folks that are more up on current techniques.
I don't buy them being able to better scale over their customers. At face value, it seems more that they have more managed to get society to stop giving a shit about the smaller communities that have no choice but to bank with them.