. but it will make the financial system much more vulnerable when the bust does occur. occurring with less frequency, the bust will be a bigger surprise to market participants. they will be less well - prepared with the capital buffers and liquidity cushions needed to traverse an adverse economic environment. the complete breakdown in trust across markets has been remarkable. essentially, it has gone like this : even if i think you are a good credit, i am not going to lend to you, because others may not share the same opinion. the problem is if no one else thinks you are good, i may not be able to get my money back if i need it. conversely, others are not willing to lend to you, even though they think you are a good credit, because they are not convinced that i will do so. the result is that no one lends, financial conditions tighten and this exacerbates the downward pressure on the economy. as economic conditions deteriorate, this undermines the financial strength of the major financial institutions, further reinforcing the downward spiral in confidence. another bad dynamic that exacerbated the crisis has been the reluctance of some banks to raise the additional capital they might need should the economic outlook deteriorate sharply. repeatedly over the past 18 months we have heard – from the gses, from the investment banks, from the commercial banks – now is not a good time to raise capital. this desire to postpone capital raising stems, in part, to the fact that bank executives often do not want to dilute the existing shareholders ( which, of course, include themselves ). i believe that the management calculus has often gone like this : in good states of the world, i have enough capital. in bad states of the world, perhaps i don ’ t. but to raise enough capital to guarantee i can endure all the potential bad states of the world, i will have to massively dilute my existing shareholders now. so the self - interested thing to do is to avoid the dilution and hope for a good state of the world. this does not always work well in practice. once capital preservation becomes paramount, deleveraging intensifies and counterparties grow more wary about engaging. this dynamic, in turn, makes a bad state of the world more likely. what may be sensible for each institution individually, may collectively be a bad idea. that is because each firm does not internalize the cost that their decision not to raise capital has on the

at the national level of 64 percent over the same period. 2 / 6 bis central bankers'speeches within commercial and industrial ( c & i ) lending for these banks, small business lending is particularly important, given the traditional role of small businesses in job creation. while data are not immediately available on borrower size, we can look at a simple proxy for small business lending by isolating individual c & i loans to commercial borrowers that are each under $ 1 million. these data show that while the dollar value of small c & i loans has grown since 2010, the pace of growth has not been as high as overall c & i lending growth. 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 $ 50 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 $ 1 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. enhancing the framework as i ’ ve said earlier, supervisors recognize it is important to ensure that the oversight framework continues to function efficiently. in that regard, the federal reserve recently participated in a review, as mandated by the economic growth and regulatory paperwork reduction act of 1996 ( egrpra ), to identify rules that are outdated, unnecessary, or