A scalable algorithm for solving compact banded linear systems on distributed memory architectures is presented. The proposed method factorizes the original system into two levels of memory hierarchies, and solves it using parallel cyclic reduction on both distributed and shared memory. This method has a lower communication footprint across distributed memory partitions compared to conventional algorithms involving data transpose or re-partitioning. The algorithm developed in this work is generalized to cyclic compact banded systems with flexible data decompositions. For cyclic compact banded systems, the method is a direct solver with a deterministic operation and communication counts depending on the matrix size, its bandwidth, and the partition strategy. The implementation and runtime configuration details are discussed for performance optimization. Scalability is demonstrated on the linear solver as well as on a representative fluid mechanics application problem, in which the dominant computational cost is solving the cyclic tridiagonal linear systems of compact numerical schemes on a 3D periodic domain. The algorithm is particularly useful for solving the linear systems arising from the application of compact finite difference operators to a wide range of partial differential equation problems, such as but not limited to the numerical simulations of compressible turbulent flows, aeroacoustics, elastic-plastic wave propagation, and electromagnetics. It alleviates obstacles to their use on modern high performance computing hardware, where memory and computational power are distributed across nodes with multi-threaded processing units.