Community banks often use a unique “relationship-based” approach that, for example, leverages personal knowledge of their customers’ creditworthiness and local business conditions to customize lending decisions and meet demand for credit and other financial services. This allows both consumers and small 1/6  BIS central bankers' speeches  businesses to contribute to economic activity. Community banks also provide important financial services to key – often underserved – sectors of the economy. For example, a study from a few years ago found that almost one out of five U.S. counties has no other physical banking offices except those operated by community banks.1 As a second example, in the typical county in the Second District (excluding Puerto Rico and the Virgin Islands), community banks account for about half of all banking deposits. It is the ability of smaller institutions to leverage “soft information” in important ways and reach underserved sectors that gives community banks a unique and critical role in driving sustainable economic growth. Supervisors are also keenly aware of the potential unintended consequences of the supervisory and regulatory framework. One of our goals as supervisors is to ensure that our efforts are not having an adverse effect on the ability of firms to provide credit and financial services that supports economic growth at businesses of all sizes. As I said in an earlier talk, in my view, it is entirely appropriate to continuously evaluate and rigorously debate whether the supervisory and regulatory framework is meeting its objectives efficiently.2 I’ll return to this topic shortly.

As a result, small C&I loans now constitute a smaller portion of total C&I lending, both in the Second District and nationally (Chart 2). This is likely due, in part, to nominal factors, but could also reflect underlying economic conditions. Turning to community banks, they have historically held a disproportionate amount of small commercial loans, and this is a trend that has continued post-crisis. Among all Second District firms with less than $ billion in total assets, community banking organizations (CBOs) hold 54 percent of total assets, but 66 percent of total small commercial loans. This share has declined somewhat since 2011 (Chart 3). Within small commercial lending, CBOs are especially important when it comes to small commercial real estate (CRE) loans, providing 79 percent of total CRE loans under $ million. 3/6  BIS central bankers' speeches  Given the importance of small businesses to employment and growth in so many communities around our District, we welcome hearing your views on what might be driving these trends. More generally, we are interested in your assessment of business and lending conditions in the communities that you serve. What are the key challenges and opportunities that community banks face? Your insight will provide a key supplement to our quantitative research, and combining these two perspectives will support our efforts to understand what we are seeing in small business lending. Our supervisory teams are interested in your insights when we visit your organizations to conduct examinations and in venues like this conference.