Jerome H Powell: Community banks in the United States
Introductory remarks by Mr Jerome H Powell, Member of the Board of Governors of the
Federal Reserve System, at the Community Banking Research and Policy Conference,
co-sponsored by the Federal Reserve System and Conference of State Bank Supervisors,
St. Louis, Missouri, 23 September 2014.
* * *
It is a pleasure for me to join Jim Bullard and John Ryan in welcoming all of you to the
second annual Community Banking Research and Policy Conference, co-sponsored by the
Federal Reserve System and Conference of State Bank Supervisors. I had the privilege of
addressing the inaugural community banking conference held here last year, and as
chairman of the Federal Reserve Board's Subcommittee on Smaller Regional and
Community Banking, I am delighted to return to this venue to participate in this year's event.1
As all of you surely know, community banks play a vital role in America's financial system,
providing essential services to households, small businesses, and small farms in
communities throughout the country. Community banks differ from their larger cousins, not
just in size, but in the fundamental focus of their business. Community bankers' primary
objective is to serve the members of their local communities, who are not only their
customers but also their neighbors and friends. They have strong links to the people and
businesses that reside in their communities, as well as direct knowledge of local economic
conditions. These close ties give community bankers a clear advantage in understanding
local needs and tailoring their products and services to meet those needs. I will confess that I
have never worked at a community bank; however, I have been a community bank customer,
and in that role I have had personal experience interacting with bankers whose mission is to
provide high quality of service to every customer who walks in the door.
Despite the advantages that I just mentioned, life is not always easy for community bankers.
The number of community banks in the United States has declined sharply over the past
three decades, due to a combination of failures and acquisitions.2 And many remaining
community banks have struggled to survive, especially during the last five or six years.
Although improving overall economic conditions have begun to provide some relief to these
struggling banks, they continue to face significant challenges. The burden of regulatory
compliance can be particularly daunting for small banks. And competition, from large banks
and credit unions as well as other nonbank financial service providers, is always a concern.
My colleagues on the Federal Reserve Board and I are committed to making sure that we
understand the challenges faced by community banks. One way that we further our
understanding is by talking to the bankers themselves. The entire Board of Governors meets
twice a year with the Community Depository Institutions Advisory Council, which includes
representatives of community banks, thrifts, and credit unions in each of the 12 Federal
Reserve Districts.3 Individual governors also take advantage of opportunities to meet with
community bankers from time to time. During last year's conference I met with a group of
St. Louis area community bankers to hear what was on their minds. I will conduct a
nationwide webinar with community bankers next month. In fact, I speak regularly to a
number of bank executives, including those who run smaller institutions. I find these types of
conversations - with people who live and work in the world outside the Capital Beltway and
far from Wall Street - to be particularly enlightening. And, of course, this conference, which
was conceived as the result of a successful collaboration between the Federal Reserve
System and the Conference of State Bank Supervisors, provides an annual opportunity for
community bankers, bank regulators, and academic researchers to come together to share
ideas and insights surrounding the issues that matter most to community bankers.
This year's program includes presentations by the authors of a number of excellent academic
research papers, the unveiling of the results of a new survey of community banks conducted
on behalf of the conference organizers, reactions by community bankers to the research and
survey findings, and several compelling speeches.
The primary focus of today's agenda is research. The response to the conference's call for
papers was quite impressive, and the conference research committee faced the challenging
task of selecting the most relevant, interesting, and high-quality papers to be included in the
program. The authors of these papers include academics and policymakers, with
backgrounds in law, economics, and finance. The topics covered clearly demonstrate a
desire, on the part of the researchers, to promote a deeper understanding of what makes
community banks tick and of how a wide range of government policies affects the activities,
profitability, and viability of community banks.
The first session considers factors underlying community bank formation, behavior, and
performance. The first paper looks at characteristics of newly chartered banks - where they
form, and how they fare over time. The second paper also focuses on newly chartered
banks, considering possible explanations for the near absence of new bank charters over the
past few years. Those of us at the Fed pay a great deal of attention to this type of bank
formation, because it is the primary source of new competition in the markets in which
community banks compete. The third paper in this session looks at how rivalry among banks
affects their decisions to adopt new technology, and the fourth seeks to explain the
persistence of low net-interest income among community banks in recent years.
The second session addresses the effects, both intended and unintended, of specific
government policies on community bank behavior. One paper looks at how the 2006
commercial real estate guidance for banks affected loan growth.4 Another paper examines
the effect of the creation of the Small Business Lending Fund on community bank lending to
small businesses. The third paper in this session focuses on what happens when banks
perceive that examiners have given them inappropriately negative evaluations.
The underlying theme of the third research session is how broad government policies affect
community bank profitability and viability. The first paper provides an overview of the effects
of the Dodd-Frank Wall Street Reform and Consumer Protection Act on community banks.
The second paper considers whether a provision of the JOBS Act that modified the threshold
for Exchange Act reporting for unlisted banks and bank holding companies helped or hurt
small banks. The third paper contrasts the thousands of small community banks operating in
the United States with the handful of very large financial institutions and proposes a new
approach to regulation that recognizes the very different business models of these two types
of institutions. The fourth and final paper takes a high-level look at the effects of regulatory
policy on the structure of the U.S. banking system and the viability of community banks.
On day two of the conference, you will learn about the results of a recently conducted survey
that was completed by more than 1,000 community bankers from across the country, as well
as the feedback obtained from more than 1,300 bankers participating in town hall meetings
hosted by state bank commissioners in 30 states. The presentation of these findings will be
followed by a panel discussion by a select group of community banking experts.
I hope I have succeeded in whetting your appetite for the sessions that lie ahead, and I
encourage you to make the most of this unique opportunity to interact with bankers,
regulators, and researchers who share a common interest in the future of community
banking.