For release on delivery
8:15 p.m. EST (5:15 p.m. PST)
December 5, 2018
Banks as Vital Infrastructure for Rural Communities of the West
Remarks by
Randal K. Quarles
Vice Chairman for Supervision
Board of Governors of the Federal Reserve System
at the
Stanford Institute for Economic Policy Research
Stanford University
Stanford, California
December 5, 2018
It's a pleasure to be here at Stanford, an honor to be invited to speak by SIEPR and the
Bill Lane Center--two institutions for which I have long had fondness and respect--and a great
luxury to have the chance to talk for an hour with a group of people who share my love for a part
of the world we call the West. Most of my day job enmeshes me, of necessity, in either broad
systemic questions of global financial stability or the impossibly arcane minutiae of our
convoluted and labyrinthine financial regulatory system. Both of those are perfectly worthy
occupations but inescapably require a relentlessly global outlook. Yet my first intellectual
passion as a very young man was for the history and life of a specific part of the world--the
Western United States, as place and idea. Your own presence here in the audience suggests that
many of you have been moved at some point in your life, as I have been, by the words of
Wallace Stegner:
If there is such a thing as being conditioned by climate and geography, and I think there
is, it is the West that has conditioned me. It has the forms and lights and colors that I
respond to in nature and in art. If there is a western speech, I speak it; if there is a
western character or personality, I am some variant of it; if there is a western culture in
the small-c, anthropological sense, I have not escaped it.1
So, that is why I say it is a pleasure and an honor but most especially a luxury for me to
speak to an audience that shares my concern for and love of the West on the topic of how the
preoccupations of my day job--banking and finance--affect this particular part of the world. We
all know that throughout the history of the West, banking and finance have played an important
role as vital infrastructure for the economy. That remains true today, although it is often
overlooked in the traditional litany of issues critical to the West. A strong banking industry is
necessary for households and businesses to engage in the spending, saving, and investment that
constitute economic activity, and one of the purposes of financial regulation is to ensure that
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banks continue to be able to serve this purpose. So it is my plan today to talk about the economy
of the West and link the recent and future performance of the western economy to the central and
supportive role banks play as vital infrastructure in their communities.
Defining the West
Let's start by defining our terms. What do we mean by the West? Before this audience, I
approach this question with respect and a little caution, because I know that in a broad sense, it is
what the Center for the American West has been addressing since its founding. That aside, it
makes sense to use a definition, as the center often does, that includes parts of states in the
middle of the country whose economies, heavily dependent on natural resources, ranching, and
farming, more closely resemble Montana and New Mexico than they do states on the Eastern
seaboard.
Nevertheless, for the purposes of these remarks, I am going to use a less expansive
definition comprising the 13 westernmost states. I do so partly because this is a common
definition of the West, and because it is the one used by the U.S. Census Bureau in dividing the
country into four regions and this has helped me gather data for this speech more readily. (Figure
1)
The first thing to mention that distinguishes the West from the rest of the country is
apparent on this map--land area. The West is large and would appear even larger of course, if it
weren't necessary to shrink the vastness of Alaska to fit on one page. Even using my more
modest definition, the West still represents half of the land area of the United States. This is
important in this context because of one theme I will be exploring today, which is the economy
of the rural West and the banking services available there.
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As this map should make plain, when we talk about rural America, to a significant extent
we are talking about the rural West. Another way to put it is that while the West is half of the
United States geographically, it is only a quarter of its population.2 Eight of the 13 states in our
definition of the West are among the dozen in the nation with the lowest population density.3
Even after subtracting the large share of unpopulated government-owned land in the West, the
overwhelming majority of the West is rural.
Yet it is also true that, as most of you know, the West is the most urban region of the
country. Five of the 15 largest metro areas in the United States are located in the West, and 90
percent of the entire region's population lives in cities, compared to 81 percent of the country as
4,5
a whole. Nevada and Utah are among the least densely populated states, but 90 percent or
more of their residents live in cities. Like the rest of the country, the West is urbanizing. I will
return to the differences between urban and rural areas, but first, let's look at the economy of the
West.
The Economy of the West: From Boom to Boom
The West accounts for 25 percent of U.S. gross domestic product, almost exactly the
share of the U.S. population in the West. This isn't entirely a coincidence, because population
relates to labor supply, which is one determinant of economic output. I mention this because it is
2
Source: Federal Reserve Board staff calculations were done using data from the following website: "List of states
and territories of the United States by population," Wikipedia, last modified November 18, 2018,
https://en.wikipedia.org/wiki/List_of_states_and_territories_of_the_United_States_by_population.
3
Source: "List of states and territories of the United States by population density," Wikipedia, last modified October
12, 2018,
https://en.wikipedia.org/wiki/List_of_states_and_territories_of_the_United_States_by_population_density.
4
Source: "List of metropolitan statistical areas," Wikipedia, last modified November 29, 2018,
https://en.wikipedia.org/wiki/List_of_metropolitan_statistical_areas.
5
Source: "Urbanization in the United States," Wikipedia, last modified November 10, 2018,
https://en.wikipedia.org/wiki/Urbanization_in_the_United_States.
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also true that the change in population over time has a bearing on the economic health of
communities and regions, and is part of the story for economic growth in the western United
States.
In recent years, that story has been a very positive one. The U.S. economy is strong, and
the western economy is especially strong. While we don't have state or regional numbers for
this year, from 2015 through 2017, GDP, after adjusting for inflation, grew two to nearly three
times as fast in the West as in the rest of the United States. Since the Great Recession ended in
2010, real GDP has grown twice as fast in the West as in the Northeast, about 50 percent faster
than in the Midwest, and a third faster than in the South.6
But there is another distinction to the western economy, one that many in this audience
know well, that brings these high-flying results down to earth. While the good times are
typically very good in the West, the bad times are usually pretty bad, and that was certainly true
during the Great Recession. From 2008 through 2010, the western economy contracted four
times as much as the average for all of the United States. The same is true for per capita
personal income, which contracted more sharply in the West than elsewhere, as job losses in the
western region during the recession were worse than elsewhere.
Taking a longer perspective, however, even with the booms and the busts that have
characterized the West for upwards of 200 years, the West is still the fastest growing region of
the United States. Since 2000, real GDP has grown twice as fast in the West as in the Northeast
and Midwest, and about 30 percent faster than in the South. Since 1988, the numbers are
roughly the same. Per capita personal income grew faster in the West during good years,
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outweighing the sharper losses during the recession and since 2000 has grown about 20 percent
faster in the West than in the rest of the country.
This picture of the West leading the nation in economic growth is also reflected in
population, a key factor in that growth. From 2010 to 2017, the population of the West increased
7.4 percent, compared to 5.3 percent for the nation.7 One might guess that this strong growth is
primarily in cities, and in fact reflects the drain of population from smaller towns that is reported
to be happening all over the United States. But in fact, population gains in the West are quite
well balanced between cities and towns, and smaller towns are doing better in the West than
elsewhere in holding and even increasing their populations.
In the cities of the West, those communities of 50,000 or more, the population grew 7.8
percent from 2010 to 2017, eclipsed by the 10 percent growth in southern cities but well above
the 2 percent to 3 percent increase in the cities of the Northeast and Midwest.8 At the same time,
the West led the other regions of the United States in growth for towns and cities from 10,000 to
50,000 in size, and likewise for towns between 5,000 and 10,000.
Now let's look at small towns, those with 5,000 or fewer residents. It is this cohort of
towns and their people that to my mind is really the essence of rural America. There is a
widespread impression that small towns all over America are shrinking and that population is
shifting to larger towns and cities, and that is the story we can see in much of the regional data.
From 2010 to 2017, the average small town shrank by 2 percent in the Northeast, by 1.4 percent
in the Midwest, and only grew 1.3 percent in the South, while larger towns and cities grew
substantially faster there and elsewhere.
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What about the West, where urbanization is happening more quickly than anywhere else?
In fact, the average western small town grew 7.8 percent in those seven years, which is roughly
the same healthy pace of growth registered in western towns and cities from the smallest to the
largest.
With a nod to Mark Twain, the message here is that reports of the death of small towns,
at least in the West, have been greatly exaggerated. I don't mean to minimize the challenges
small towns face, because they are considerable, or suggest that western small towns are immune
to them, because they certainly are not. But the more positive message I come away with here is
that a rising tide of prosperity in the West seems to be lifting communities large and small, and
that the many instances of small towns in decline that we all hear about are counterbalanced by
other small towns growing healthily. Another lesson is that population growth and the attendant
economic growth in the West is not zero sum, and that small towns can still grow healthily while
the metropolises of the West continue to attract people, partly from outside the region. I will
return to the issue of how the economies of the urban and rural West differ, but the backdrop is
that population data are promising for both.
Banking in the West
Now that I have outlined how the economy of the West relates to that of the rest of the
United States, let me do the same for banking in the West. There is a lot to this topic, but my
focus is banking as it is experienced at the retail level by households and small- and medium-
sized businesses. Again, I use the Census Bureau's list of 13 states to define the West, and for a
simpler comparison, and in honor of Frank Church, I will refer to the other 37 states as "eastern"
even though they cover several regions. Some of you are old enough to remember Frank
Church, the U.S. Senator from Idaho--a Stanford grad and hero of mine when I was a teenager.
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When he ran for president in 1976 and had some success in the primaries, he was challenged by
the press that said his victories were limited to the West, and he replied "What do you mean I
can't win an eastern state? I won Nebraska!"
One dimension to how households and most businesses experience banking is the number
of banks competing for their services, and one difference between the West and the East is that
the West has fewer banks, even if we count them on a per capita basis.9 In addition, banks in the
West tend to be larger. One reason for the disparity in the average number and size of banks is
that historically, a larger share of western states allowed statewide branching or had relatively
limited branching restrictions, leading to the development of fewer and larger banks.10
In metropolitan areas of the West, the average number of banks was 23 in 2017,
compared to 27 in eastern metro areas. In rural counties of the West, customers had access to an
average of 4.6 banks in 2017, compared to 5.4 banks in the East. In both urban and rural areas,
in both the East and the West, the average number of banks increased in the years leading up to
the financial crisis but has been declining since then. While there is certainly more to say about
banking services in cities, I want to focus on rural areas for the moment. Over the last 20 years,
rural westerners have consistently had access to something like 20 percent fewer banks than rural
easterners, which amounts to about one less bank per rural county. That may not sound like
much, but that one less bank, on average, can make a big difference to the households and small
businesses inhabiting those rural counties.
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In any community, access to credit is essential for economic growth. In any community,
but especially in rural communities, small businesses are key drivers of growth. Small
businesses heavily rely on banks for funding, and community banks, those with less than $10
billion in assets, account for a disproportionate share of bank lending to small businesses.
But across the country, the number of community banks has fallen by half over the past
20 years, mostly due to consolidation. This fall has been slightly larger in the West than the
East, but the reason I highlight this trend is that I believe it has significant consequences for rural
communities in the West. The reason returns me to that map I showed earlier. The West is vast,
and many rural communities in the West must deal with the challenges of isolation from larger
towns and cities that few communities in the East face. Rural westerners have access to far
fewer banks overall than rural easterners, but that understates the disparity when some western
counties are the size of Maryland or Massachusetts and many are more than a hundred miles
across, so that access to a limited number of banks can be difficult or out of reach.
To provide some perspective on this challenge, let me share what westerners in one small
town have to say about their access to banking services. This account is culled from a series of
public meetings that the Federal Reserve is convening in communities all around the country, in
support of our responsibilities overseeing community banks and promoting community
development.
Not quite a month ago, we held one such session in my home state of Utah, in the town of
Green River, population 940, located on the eastern side of the state. It is just off an isolated
stretch of interstate, and its economy depends on those passersby and tourism related to outdoor
recreation. In 2014, Green River lost its only bank, and around that time, banks closed in several
nearby communities. As a result, most residents of Green River who need banking services must
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drive the 52 miles to Moab, Utah. This loss has had a profound effect on households and
businesses, essentially turning back the clock in Green River by decades, as far as its access to
the banking system. Business owners say their work days have been curtailed by the need to
drive two or three times a week to Moab to obtain change and make deposits. Businesses have
become banks for many residents, agreeing to cash their checks. Because of this new service to
residents, and the long distance to a real bank, retail businesses say they are carrying much larger
amounts of cash, which has heightened security concerns and prompted some merchants to
invest in new safes. Security is also a concern for residents who no longer have access to safety
deposit boxes for valuables and important papers.
Faster and more efficient electronic payments hold some promise to bridge these gaps,
eventually, and the Federal Reserve is working hard on this and making significant progress.
But one thing that technology cannot do is replace the knowledge and perspective of a local
banker who is part of the community. Relationship-based lending that is the hallmark of
community banking can stem losses during downturns, since community banks may be able to
work with borrowers to avoid losses. Research has shown that small business lending at smaller
banks declined less severely than at large banks during the last recession.
Community banks face considerable competition. One of the reasons that community
banks continue to succeed in many places is their understanding of their customers' needs and
opportunities to invest in families and businesses. The loss of this relationship, for a community,
means that needs will go unmet, and opportunities will be lost.
In some communities, of course, this may be unavoidable, if a town has lost a major
employer and has no new industry or plan to replace the jobs lost. But let me remind you of the
very encouraging data I cited on the growth of small towns in the West. Overall, rural
communities are growing at a healthy pace, and growing communities need banks. It is my hope
that the opportunity for the future that this population growth suggests will support the local
banks that communities need to thrive.
A significant part of the Federal Reserve's recent regulatory focus has been aimed at
streamlining regulations and reducing the regulatory burden on smaller and regional banks.
The Fed, along with the other banking agencies, recently proposed a community bank
leverage ratio that is designed to simplify significantly the standards banks must abide by for
holding capital.11 As a result, qualifying community banks will only need to calculate and meet
a single measure of capital adequacy, rather than multiple measures. We have also proposed a
reduction in the burden of reporting requirements for community banks, and expect soon to
propose an exemption for community banks to the Volcker rule.12 For a subset of the smallest
banks--those with less than $5 billion in total assets--we have also lengthened the amount of time
between supervisory examinations and expanded eligibility of small bank holding companies
that qualify for an exemption to the Federal Reserve's capital rules, a policy that was designed to
promote local ownership of small banks and to help maintain banks in rural areas.13
Most recently, the Federal Reserve spearheaded a proposal to tailor regulation that
applies to firms that are larger than community banks, but the potential failure of which generally
11
See Board of Governors of the Federal Reserve System, "Agencies propose community bank leverage ratio for
qualifying community banking organizations," news releases, November 21, 2018.
12
See Board of Governors of the Federal Reserve System, "Agencies issue proposal to streamline regulatory
reporting for qualifying small institutions," news release, November 7, 2018.
13
See Board of Governors of the Federal Reserve System, "Agencies issue interim final rules expanding
examination cycle for qualifying small banks and U.S. branches of foreign banks," news release, August 23, 2018
and Board of Governors of the Federal Reserve System, "Federal Reserve Board issues interim final rule expanding
the applicability of the Board's small bank holding company policy statement," news release, August 28, 2018. Of
course, while the holding companies of community banks may be eligible for an exemption from capital rules, the
subsidiary banks are still subject to capital requirements.
does not pose risks to the financial system.14 These are firms with between $100 billion and
$250 billion in total assets. Those changes are designed to reduce unnecessary regulatory
burdens on specific institutions without any loss of resiliency for the financial system.
By these steps, I believe the Federal Reserve is helping community banks remain
competitive and play the central role they have long played as vital infrastructure for rural
communities. The future of community banks in these communities is one reason that I'm
optimistic about the economic prospects of small towns in the West, which continue to grow
even as the region and the nation overall becomes more urban. That's a good thing, because
small towns, and especially their values, have long helped define the West, and I hope will
continue to do so.
Banks as Vital Infrastructure
For Rural Communities of the West
Randall K. Quarles
Vice Chairman for Supervision
Board of Governors of the Federal Reserve System
at
Stanford Institute for Economic Policy Research
December 5, 2018
U.S. Census Bureau