ben s bernanke : the financial crisis and community banking speech by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, at the independent community bankers of america's national convention and techworld, phoenix, arizona, 20 march 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * when i addressed this convention three years ago, with all of five weeks under my belt as chairman of the federal reserve board, i opened my remarks with three observations : that community banks played a critical role in the u. s. economy, that community banks were generally doing well, and that community banks faced a changing business environment that posed important challenges. i am struck that all three observations, at least to some degree, still hold true today. community banks continue to play a critical role in our economy and, in many cases, have an opportunity to step in and make sound profitable loans, where some competitors have pulled back. relatively speaking at least, community banks are doing better as a group than other segments of our financial system, but at the same time they are far from immune to current conditions. and, surely, it is still true that the business environment poses important challenges to community banks. in fact, i think it is safe to say that few of us in the convention hall three years ago envisioned the financial and economic environment we now confront. envisioning the conditions we will face three years from now is equally difficult, but it is my hope and expectation that those conditions will be significantly brighter. this morning, i'd like to spend some time reviewing the federal reserve's response to the financial crisis of the past 18 months, as well as the current challenges – and opportunities – facing community banks. in addition, i'll discuss two important steps that policymakers can and should take to improve the financial regulatory system that likely are of particular interest to you. the first step is the need to address the very real problem caused by institutions that are too big – or too interconnected – to fail in a disorderly manner. the second involves ways of making the system less procyclical, so that the financial system is less susceptible to exuberant booms and disastrous busts. in discussing the road back to financial stability and economic prosperity, i want to leave you with the idea that, yes, this is indeed a time of challenge for community

this tradeoff between risk sensitivity and competitive concerns, on the one hand, with the additional reporting burden on the other, so that we can develop a proposal for capital that is workable for the large number of banks that will continue to use basel i as amended. in addition to the basel i anpr, the u. s. banking agencies issued within the past two weeks a statement about the plans for basel ii implementation in the united states. the agencies had previously indicated a delay in the basel ii notice of proposed rulemaking based on the results from a recent quantitative impact study ( qis4 ), which showed a wider dispersion and larger overall drop in regulatory capital requirements for the qis4 population of banks than the agencies had expected. i am very pleased that the agencies, based on additional analysis of qis4 data over the summer, were able to come to an agreement on a way forward, described in the recent interagency statement. in our statement, we made every effort to provide as much information as possible to institutions interested in basel ii, and also, i hope, showed how seriously we are taking basel ii implementation and paying attention to its possible consequences. in particular, the agencies underscored the prudence we are using in moving to basel ii by revising the proposed implementation timeline and suggesting extra safeguards beyond the ones already in the basel ii framework. as we move forward, we continue to heed the findings from qis4, especially those relating to the overall level of regulatory capital. capital serves as an important backstop against risk - taking and we need to ensure that an adequate level of capital is produced by the basel ii framework. as i have said before, the federal reserve would not be comfortable qualifying any bank based on the results of qis4, if basel ii were to be applied today. the qis4 results demonstrated that bank data and risk - 3 / 5 management systems required by basel ii are not yet fully developed and implemented as expected by the framework. to be sure, by the time that basel ii " goes live, " bankers would have significantly more information regarding our expectations on model specifications and more robust default and loss - severity data. banks would also have to adhere to the qualification standards set by supervisors. the road to basel ii will take several more additional steps, but we believe they are well worth the effort. we will carefully review the comments to the anpr on basel i amendments, and then move to a notice of proposed