For release on delivery
11:00 a.m. EDT (10:00 a.m. local time)
October 2, 2024
Building a Community Banking Framework for the Future
Remarks by
Michelle W. Bowman
Member
Board of Governors of the Federal Reserve System
at
The 2024 Community Banking Research Conference
Sponsored by the Federal Reserve System, the Conference of State Bank Supervisors, and the
Federal Deposit Insurance Corporation
St. Louis, Missouri
October 2, 2024
It is an honor to return to St. Louis for the 12th year of the Community Banking Research
Conference.1 This conference is a model of effective partnership between the Federal Reserve
and the Conference of State Bank Supervisors, and more recently, the Federal Deposit Insurance
Corporation (FDIC). It is an opportunity for us all to dig deeper into the community banking
model and the important role of community banks now and into the future. Together, regulators
work to ensure that the approach to supervision and regulation is fit for purpose, and that each
element of both supervision and regulation acts in a complementary manner. Policy
disagreements are a healthy part of the process, but we must also strive to build consensus where
we can. At a minimum, we must understand and respect our counterparts' and colleagues'
viewpoints. Ultimately, we all share the same goal of promoting a safe and sound banking
system.
The strength of the U.S. banking system relies upon the diversity of its institutions, and
facilitating an environment that allows each category of bank to thrive is essential to fostering a
healthy financial system. For community banks, this includes building a framework that better
supports the unique characteristics of these institutions. Today, my remarks will consider three
foundational questions as we contemplate revising the community banking framework:
(1) Given the continued evolution of the banking system, how should a community bank be
defined? (2) Are we pursuing the most appropriate approach to supervision and regulation of
community banks, and finally, (3) How can we build a policy framework that better supports and
anticipates this evolution of the banking system now and into the future?
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How to Define a Community Bank
By necessity, regulators divide banks into more manageable categories. The Federal
and four "categories" of
Reserve has distinct portfolios that oversee "community," "regional,"
larger banks.2 The Federal Reserve and federal banking agencies further subdivide these
portfolios based on additional factors. They may also depart from this framework altogether to
group banks across portfolios or based on other common features.
This approach to separating bank supervisory portfolios can enable us to more clearly
articulate the tailoring applied to specific requirements of supervision and regulation.3 This
approach has its virtues, including allowing examiners to better organize supervisory activities
and training in different portfolios to focus on issues that are most relevant for the institutions
being examined. When appropriately executed, it can lead to better and more risk-focused
supervision, which ultimately promotes a safer and more sound banking system.
Of course, there are limits to this framework. And we should continue to ask if the
metrics and thresholds established through regulation, and more often recently through
supervisory policy decisions, are appropriate over time as conditions change.
Locking regulatory standards into a fixed asset-size threshold has its costs. Over time,
these fixed thresholds fail to take into account growth attributable to broader economic growth
2
Larger banks are defined using tests that look primarily at asset size but may include other metrics like
crossjurisdictional activity, nonbank assets, short-term wholesale funding, or off-balance sheet exposures.
3
For example, the "tailoring" rule in 2019 included a helpful visual that laid out the various standards and
thresholds at which such standards applied across Category I-IV firms, and firms with more than $50 billion in
Board of Governors of the Federal Reserve System, Tailoring Rule Visual, "Requirements for Domestic
assets. See
and Foreign Banking Organizations" (October 10, 2019),
https://www.federalreserve.gov/aboutthefed/boardmeetings/files/tailoring-rule-visual-20191010.pdf. We use a
variety of asset-size thresholds to help define our current portfolios and establish thresholds for supervisory and
regulatory expectations. These thresholds apply for banks with assets of $10 billion, $50 billion, $100 billion, $250
billion, and $750 billion. Some regulatory standards implement lower thresholds under the current $10 billion
228.12 (defining a "small bank" and "intermediate bank" for
community bank asset threshold. See, e.g., 12 C.F.R.
purposes of the regulations implementing the Community Reinvestment Act); 13 C.F.R. 121.201 (SBA regulations
defining small business entities, including commercial banks with less than $850 million in assets).
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in a particular bank's activities or risk
and inflation. They are also not reflective of any changes
profile. As a result, many firms that are stable in their growth, business model, and risk profile
end up unintentionally crossing regulatory thresholds. As they approach, and certainly once they
cross over these asset-size lines, they must comply with additional regulatory and supervisory
requirements that were specifically designed and implemented for larger and more complex
firms.
While the fixed-threshold approach benefits from simplicity, it is necessary to
periodically revisit the policy effect of these bright-line thresholds. There are certainly cases in
which a bank with assets less than $10 billion faces risks that are disproportionate to its asset
size, warranting greater supervisory scrutiny. For these firms, asset size may vastly understate
their risk profile. Often, they do not operate like traditional community banks, relying instead on
nontraditional services and engaging in complex activities. Therefore, it may be appropriate for
a community bank to be subject to additional oversight. This is particularly relevant when a
bank has un-remediated, long-standing supervisory issues that require more supervisory
monitoring and oversight. In such cases, a community bank supervisory approach is likely not
sufficient or appropriate.
At the same time, many banks with assets over $10 billion do operate like community
banks, with a relationship-based straightforward business model, yet they are not regulated or
supervised as such. Over time, the mismatch in supervisory expectations around this and other
asset thresholds becomes more pronounced as economic growth and inflation effectively lower
them. This results in potentially overly complex supervisory constructs for banks with a limited
traditional community bank risk profile.
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Is it appropriate to impose more restrictive requirements on firms when those heightened
requirements are not a deliberate policy choice based on the level of risk? Is it appropriate to
treat each bank below a regulatory threshold as a traditional community bank? Historically,
regulators have been willing to push more complex requirements and expectations down to
smaller banks-essentially bumping them into a higher risk tier-than moving larger firms into a
lower risk tier when that treatment may be more appropriate.
One important aspect of this definitional question involves the natural evolution of
as it relates to innovation. The "push down" of regulatory and supervisory
banking, specifically
standards often applies when a bank pursues activities that fit under the broad umbrella of
"innovation." Innovation can be defined expansively to include engaging in bank-fintech
partnerships, using (or considering using) digital ledger technology, or even providing traditional
banking services to entities that touch the crypto-asset ecosystem. Innovation can present a
the "cost"
challenging problem for both regulators and banks. If of adopting innovation results
in a bank's inclusion in a higher compliance tier, it may be difficult to encourage greater
investment in innovation for smaller banks. Establishing appropriate regulatory thresholds does
not force regulators to eliminate or purge innovation from the banking system, especially among
community banks.4
When considering building a framework to support community banks, the definition is
key-which banks will be in scope? The answer lies in the bank's business model, activities,
and risk profile.
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Where we have established fixed-dollar asset thresholds, we must commit to revisit and
adjust them as needed. In my view, this is a principle that extends beyond the lines defining
community banks to all regulatory and supervisory thresholds. While there is need for flexibility
in both directions, it is apparent that over time economic growth and inflation will result in
thresholds that are inappropriately low.
The Supervision and Regulation of Community Banks
Establishing a definition for community banks leaves open the fundamental question of
regulatory and supervisory approach. Before turning to that discussion, we need to take stock of
supervision and regulation today. What areas of the framework require review and attention?
The Tradeoffs of Regulation
Regulation can be a powerful and effective tool to promote bank safety and soundness,
and U.S. financial stability. The special privileges that are granted with a banking charter-
including deposit insurance and access to the discount window-all come with the responsibility
and obligation to comply with the bank regulatory framework.
A robust presence of community banks, especially those that are remote and rural,
enables access to credit, banking, and payment services in underserved markets and
communities. These banks support local economies by serving consumers and small- and
medium-sized businesses, building an economic foundation to drive business development and
growth. But community banks, like any business, face the economic reality that accompanies
running a successful business. Each must manage its costs-including personnel, funding, and
regulatory compliance-in light of its revenues to achieve a reasonable return on equity.
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a bank's
When costs increase, there is, by necessity, a need to make changes if the bank
hopes to maintain profitability and ultimately its survival. This usually involves either cutting
costs or raising prices on banking services.
How do the realities of operating a business inform our current approach to regulation?
The question becomes acutely relevant when regulators consider imposing new or revised
regulations. Regulators should always ask (1) what problem does this new regulation solve,
(2) what are costs of this approach, and (3) are there alternative approaches? Before discussing
the path forward, I would like to note an example that highlights this concern.
The final Community Reinvestment Act (CRA) regulations issued in 2023 established
new regulatory thresholds defining "small," "intermediate" and "large" banks, with the last
category-large banks-including every bank with more than $2 billion in assets.5 In my view,
this rulemaking represented a missed opportunity to rationalize the requirements of the CRA
among community banks, and ignored the fundamental differences among banks with different
balance sheets and business models.6 An approach that applies the same evaluation standards to
a bank with $2 billion in assets as it does to a bank with $2 trillion in assets arguably represents a
shortcoming in considering the fundamental differences among firms, and the disproportionate
costs these standards may impose on the smallest banks.
The Hidden Cost of Supervision and Guidance
While regulation carries with it the obligation to comply with public notice and comment
procedures under the Administrative Procedure Act, regulators have far more discretion in the
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"guidance" that is technically
supervisory process, and in issuing non-binding but often operates
as a de facto requirement. The development and implementation of new supervisory approaches
and of guidance largely escape rigorous scrutiny due to the lack of formal procedural
requirements for its development. This is true even though the expectations created by guidance
can be equally or more impactful to banks than rules.
For example, the examination process often produces supervisory findings over-
emphasizing non-core and non-financial risks, highlighting issues like IT and operational risk,
management, risk management, and internal controls.7 These issues have filtered down from
examinations and findings at the largest banks to the smallest, raising the question of
appropriateness of application for smaller firms.
In the supervisory process, we should guard against being distracted by less relevant
issues. The prevalence of supervisory findings related to nonfinancial metrics is in part driven
by the time it may take to remediate certain issues. However, we should also scrutinize whether
this trend is indicative of our supervisory focus-beyond financial risk and toward non-financial
risks and internal processes-and whether that shift is appropriate. We should also be aware that
due to the vast diversity in business models, size, and geographic footprint among banks, we
should not expect every firm to follow the same standards and must be careful to prevent forcing
"grading on a
uniformity through curve." This risk can be exacerbated through any type of
horizontal-like reviews. The supervisory findings made during the examination process inform
bank ratings, which can have follow-on effects like limiting options for mergers and acquisitions
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(M&A) activity; raising the cost of liquidity; or diverting resources away from other, more
important bank management priorities.
Guidance can also impose costs on banks that are not always obvious or quantified. The
purpose of guidance is to provide clarity to banks and reduce implementation uncertainty and
risk. To serve this purpose, however, guidance must be clear, actionable, and account for the
needs of the targeted firms, especially for community banks.
In 2023, the federal banking agencies published supervisory guidance addressing third-
party risk management, guidance expressly applicable to community banks. As I noted at the
time this guidance was issued, it included shortcomings that were known and identified, but not
addressed in advance.8 While I am pleased that the community bank implementation guide was
eventually published, this recent example demonstrates that we need to ensure new guidance
provides clarity to regulated firms on its own, or that we provide additional resources at the same
time we publish the guidance.
Guidance can help clarify uncertainty about the application of legal requirements or
suggest how regulators may view particular activities in the supervisory process. But when
guidance is unclear or ambiguous about supervisory views and expectations, it can hinder
ability
community banks' to clearly understand and meet them. Community bankers feel a
strong obligation to review the voluminous body of guidance published by regulators, knowing
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that even where it does not apply to them on its face, it may be pushed down to these banks as a
best practice in the future.9
Bank Mergers, Acquisitions, and De Novo Formations
What does a healthy banking system look like? While we often espouse the virtues of a
"diverse" banking
system-one with many different sizes of institutions and the flexibility to
shift in size over time-a healthy banking system includes opportunities for entry and exit-
from de novo bank formation through merger and acquisition activity.
De novo bank formation promotes competition and greater availability of banking
services. As banks consolidate or wind down operations, new banks fill gaps in the banking
system. But the significant decline in the number of de novo banks raises questions about
whether this pipeline can continue to be effective, even while there is existing and unmet demand
for new charters.10 While factors other than the regulatory climate for applications may influence
bank formation, the application process itself can be a significant roadblock, one that can limit
the healthy formation of new community banks. For example, the M&A approval process can
because the "screens" used to evaluate the
have a disproportionate impact on community banks
competitive effects of a proposed merger often result in a finding that a rural market M&A is
9
applicability "threshold" may effectively
As I have noted in the past, even guidance with an establish new
expectations even for much smaller banks. Michelle W. Bowman, "Tailoring, Fidelity to the Rule of Law, and
Unintended Consequences" (speech at the Harvard Law School Faculty Club, Cambridge, Massachusetts, March 5,
2024), https://www.federalreserve.gov/newsevents/speech/files/bowman20240305a.pdf ("[w]hen guidance notes
that 'all financial institutions, regardless of size, may have material exposures to climate-related financial
risks...,' my intuition is that banks will take little comfort from the nominal carveout [of banks with less than $100
billion in assets] in light of this language....").
10
See Michelle W. Bowman, "Bank Mergers and Acquisitions, and De Novo Bank Formation: Implications for the
Future of the Banking System" (speech
at A Workshop on the Future of Banking, Hosted by the Federal Reserve
Bank of Kansas City, Kansas City, Missouri, April 2, 2024),
https://www.federalreserve.gov/newsevents/speech/files/bowman20240402a.pdf.
"anticompetitive."11 Even when these transactions are eventually approved, the mechanical
approach to analyzing competitive effects, which isolates deposits as the proxy for the bundle of
banking services, results in many delays for M&A transactions involving community banks or
requiring additional review and analysis.
Some recent policy changes at the FDIC have signaled a growing awareness of the need
to better recognize a broader range of competition. But I am concerned that fully pivoting to a
segment-by-segment analysis of competitive effects could, in practice, result in greater
opportunities for regulatory objection to transactions, rather than as a mechanism to better reflect
the competitive pressures for community banks. Replacing the deposit-based threshold to
analyze competition with a completely open-ended approach-without standards for what
products will be reviewed, what standards to apply for different products, and how to approach a
transaction where the competitive impacts vary by product type-seems likely to promote
inconsistency in the analysis among firms, and even longer delays in processing times. This is
especially concerning when accompanied by changes that may result in even greater barriers to
M&A regulatory approval.12
Fostering an environment that enables bank formation and merger transactions is vital to
ensuring a future for community banking. Without viable formation and merger options for all
create a "barbell" in the banking
banks, but especially for community banks, we will system. If
this continues, it will eventually result in a handful of very large banks, and an ever-shrinking
number of community banks, with nothing left in the middle. Over time, these trends will result
in a reduction in available credit and services, an increase in the number of unbanked or
underbanked communities, and economic harm.
Building a Framework to Better Support Community Banks
After acknowledging the importance of community banks and effectively defining these
firms, the next step is identifying principles for how these firms should be regulated and
supervised. The guiding principles are relatively straightforward: the approach must be tailored
to risk, transparent, and consistent across similar institutions. Together, these elements can
create an opportunity to construct an enduring community bank regulatory and supervisory
framework for the future.
This conference provides an ideal venue to facilitate conversations that can help spur the
development of blue-sky ideas to preserve community banking well into the future. While it
would be impossible to lay out a comprehensive blueprint for a community banking reform
agenda in this speech, I see several opportunities that are promising and essential.
The Value of Experience
Building this framework for the future starts with personnel, the people making decisions
over the long term. How do we approach our responsibilities? We should highlight examples
that have been successful but also reflect on the significant work that remains to be done.
Congress reserved one seat on the Federal Reserve Board for someone with demonstrated
primary experience working in or supervising community banks.13 While Congress did not
enumerate any specific additional responsibilities for this particular seat on the Board, the
creation of this role itself is an implicit acknowledgement of the value that this experience can
bring across the Board's functions, especially regarding bank regulation and
supervision.
This experience, of having worked as a banker or as a state regulator, is uncommon
within the Federal regulatory agencies. For example, of the current members of the Federal
Reserve Board, I am the only member with experience as a banker or state regulator. In my
view, we should ask how someone with this experience in the community banking system can
best serve on the Board.
This experience and perspective is critical. As a former community banker at a state-
chartered bank and as the State Bank Commissioner of Kansas, I have seen and directly
experienced the practical effect of supervision and regulation from "both sides" of the banker's
desk. With this background, one understands and appreciates the importance of a respectful and
healthy partnership between state and federal regulators and the need for setting high standards
and applying strong oversight to banks of all sizes, including community banks. This
background also provides perspective on how overregulation can impose disproportionate burden
on a community bank, over time leading to the erosion of the viability of the community banking
model.
The requirement for community banking experience does not equate to advocacy on
behalf of community banks. Instead, this role provides much-needed perspective on-and calls
attention to-bank regulatory and supervisory matters that affect community banks.
When I arrived at the Board, I was designated to serve as the chair of the Subcommittee
on Smaller Regional and Community Banking. One of my first priorities was to make clear to
examination staff the importance of their work in supervising community banks. After the 2008
financial crisis, although many community banks failed, much of the supervisory attention
shifted to the very largest firms. The focus of this role provided the platform and opportunity to
prioritize small regional and community banking issues, which led to a number of important
successes, including:
• the creation of the Small Bank Supervision Working Group to focus on the unique issues
facing small banks with Reserve Bank staff from across the system;
• the development and implementation of tools to assist community banks in complying
Current Expected Credit Losses ("CECL") reporting change;
with the
• as interest rates were rising, encouraged supervisory focus to develop examination
guidance to assess the risks associated with a changing interest rate environment and low
tangible common equity, well before the spring 2023 banking failures;
•
improved frequency and content of communication with community banks; and
• during the COVID-19 response, worked together with agency partners to implement
approaches that encouraged banks to work with their borrowers, suspend exam timelines,
and extend reporting deadlines for affected banks. During that time, staff also developed
guidance for examiners as we emerged from the pandemic.
These accomplishments highlight how prioritizing community banking issues at the highest level
can improve the outcomes and experiences for community banks. We need a balanced approach
to regulation and supervision of community banks. This approach should prioritize the key risks
facing the banking system, acknowledge the costs of regulation and supervision, and consider
alternatives that may be more efficient than simply adding additional requirements and
expectations for smaller institutions.
While I am proud of these accomplishments and our work together, a more formal
structure for this seat's
responsibilities-one that includes dedicated responsibility over the
supervision and regulation of community banks, and to play an active role in interagency
coordinating bodies like the Federal Financial Institutions Examination Council (FFIEC)-
would go a long way toward building and preserving an enduring framework that supports
community banks in the future.
State Coordination
One priority that would enhance our current approach to supervision would be to more
effectively engage and coordinate with state banking regulators. What does coordination look
like in practice? As a baseline, it should include communication during the consideration of
regulatory proposals. But let's begin with the examination process. One of the concerning
trends in 2023 were reports-including reports from state banking regulators-that some federal
supervisory actions were excessive considering the risks posed by some smaller institutions.14
Historically, such disagreements have been uncommon because the examination process for
state-chartered banks is joint between the state and federal counterparts at the Fed or the FDIC.
We share responsibility for oversight of state banks, and jointly participate in examinations, so it
is unsurprising that we often reach similar conclusions. When there are disagreements,
supervisory divergence can also signal material changes in approach or standards, a shift that
fails to accomplish the goal of effective supervisory judgment and consistency in the supervision
of banks of all types.
There are other opportunities to expand coordination with states, both through formal
coordination bodies and when engaged in rule making efforts that are intended to impact state-
chartered institutions. These coordination bodies include (1) the FFIEC-which is tasked with
prescribing uniform principles, standards, and reporting forms for the federal examination of
financial institutions, and making recommendations to promote consistency in the supervision of
financial institutions-and (2) the Financial and Banking Information Infrastructure
Committee-which is tasked with promoting information sharing and enhancing incident
response planning, in addition to identifying cybersecurity best practices.
Coordination is only effective if we are committed to work in an open, collaborative, and
balanced way with other agencies and policymakers. There are unmet opportunities on this
front. For example, the FFIEC is the venue in which regulators coordinate on examination
standards and discuss and agree on reporting requirements that apply to smaller banks. With a
growing divergence in the approach of state and federal regulators to the examination process,
we need to ask how the FFIEC can better accomplish its goals.
We also need to ask whether the other important work of the FFIEC, like establishing
reporting requirements, is being conducted in an appropriate way. The opportunities for input,
review, and oversight of this important work are very limited, with only the Board representative
on the FFIEC participating. Notwithstanding these structural impediments, I have prioritized
rationalizing the Call Report, an effort that I revived when I joined the Board.
These types of overly broad requirements pose their own risks to community banks, and
we should remember to focus on the unglamorous work of making sure we are not collecting
more data than is necessary and appropriate for supervisory purposes, and that we are efficient in
the collection of that data, for example, by leveraging data previously collected instead of
requiring further collection of the same data.
Regulators also tend to be very proprietary about the development of regulatory and
supervisory proposals. Often, policies are far along in the development process before they are
published for public comment in the rulemaking process, and state banking regulators rarely
provide feedback on proposals before or after they are put out for comment.
While regulators tasked with implementing regulations, supervision, and guidance bear
the ultimate responsibility for those policy choices, this process can greatly benefit from more
interaction among federal regulators and our state bank regulatory counterparts. More extensive
dialogue with state regulators can improve proposals in the formulation stage by sharing
practical, real-world perspectives, including observations on the impacts of intended and
unintended consequences. While it is challenging to anticipate the unintended consequences of
reforms, casting a wide net for views can lead to better, less disruptive, and better-informed
policy choices.
The importance of enhancing coordination between state regulators and the Federal
Reserve cannot be overstated. At a recent meeting of the Board's Subcommittee on Smaller
Regional and Community Banking, my colleagues and I were delighted to welcome
representatives of the Conference of State Bank Supervisors and four of their State Bank
Commissioner members. We learned firsthand about the successes, frustrations, concerns, and
areas for improvement in the coordination between state and federal regulators. There is simply
no substitute for these direct conversations and building upon and improving these important
intergovernmental relationships.
Collaborative Approach to Reform
Historically, one of the many virtues of the Federal Reserve Board is the structural
incentive to work together to achieve compromise. Governors serve extended, staggered terms
intended to insulate them from political considerations. The Board consists of seven independent
governors who often bring their unique voices to a range of policy matters. While instances of
dissent tend to attract the most attention, the Fed has a long history and tradition of engaging in
thoughtful debate, exchange of views, and reaching more durable compromises on rulemaking
matters. The history of consensus on bank regulatory matters is not surprising because we work
toward common goals of safety and soundness and financial stability.
Consensus is a powerful tool. When there is broad policy agreement, there tends to be
moderation in approach, acting as a check on wild swings of the regulatory pendulum and
providing banks and holding companies with an important degree of stability in their regulatory
and supervisory expectations. While it is important for regulators to adapt to changing
conditions, and to evolve in the face of new and emerging risks, this incremental approach tends
to produce better policy and better outcomes in the banking system.
The antithesis of this policymaking approach is one that involves the close guarding of
information, limiting the airing of competing views, and failing to engage in meaningful
discussion and debate about policy. When contrasting these two ends of the policymaking
spectrum, the virtues of consensus-building are even more apparent. Regulatory reform should
not be a "shock" to the banking system, and
meaningful discussion and consensus act as a check
on dramatic swings of the regulatory pendulum.
Collaborative reform is more effective when we have both a widespread sharing of
information, analysis, and policy perspectives, and when a range of views is brought to bear on
important regulatory questions. One way that we can accomplish this goal is through
representation of those with banking or state regulatory experience representing the Federal
Reserve in bodies that are influential in the shaping of policy approaches, like the FFIEC, and by
embracing a culture of freely sharing information among policymakers both within and across
regulatory agencies.
Assessing the Costs and Benefits of Existing Approaches and Reform
Too often when regulators impose requirements on banks, the temptation is to
overestimate the benefits and underestimate the costs. Requiring banks to report additional data
allows us to better understand the operations of banks. Limiting the fees that may be charged to
consumers may result in a short-run reduction in consumer costs. But in the long run, regulation
carries with it many cos