##standing personal relationships with customers and borrowers. given the important role that community banks play in their local economies, we at the federal reserve are keenly interested in their health and their collective future. local communities, ranging from small towns to urban neighborhoods, are the foundation of the u. s. economy and communities need community banks to help them grow and prosper. as i ’ m sure you are all too aware, the financial crisis and its aftermath have hit some community banks especially hard, and those institutions will continue to need time to repair their balance sheets. although we are not yet where we would like to be, the good news is that many community banks are recovering and reporting stronger performance. indeed, despite some of the worst economic conditions since the great depression and their own strained balance sheets, community banks have already been doing their part to meet the credit needs of their customers, notably including small business customers. we have been spending a lot of time at the federal reserve trying to understand and promote lending to small businesses, and one of the interesting things we have found is that while small business lending contracted overall from mid - 2008 through 2010, this contraction was not bis central bankers ’ speeches uniform. in fact, a majority of the smallest banks ( in this case, those with assets of $ 250 million or less ) actually increased their small business lending during this period. and while banks with assets between $ 250 million and $ 1 billion showed a slight decline in small business lending over this period, the contraction was not nearly as sharp as it was for the largest banks. this hard evidence underscores the important benefits of relationship banking, particularly in periods of unusual economic and financial stress. community banks and the federal reserve you may recall that in my remarks to this group last year, i noted that the decentralized structure of the federal reserve system, with 12 reserve banks and 24 branches located in cities across the country, was designed to ensure that local insights and information would be incorporated in the deliberations of both the board and the federal open market committee. during the debates leading up to the passage of the dodd - frank wall street reform and consumer protection act, we emphasized that our supervisory responsibility for state - chartered banks that are members of the federal reserve system and bank holding companies of all sizes not only provides valuable economic information at the grass - roots level that would be very difficult to replace, it also gives us a fuller picture of the nation ’ s financial system. at the same time, the range

costs for smaller banking firms as low as possible. also, to minimize the impact of the new capital rules on credit availability while the global economy is still recovering, we and our international colleagues have agreed to allow long transition periods for the implementation of the new standards. in addition to stricter regulation and supervision of large financial firms, the dodd - frank act places new checks on the growth by acquisition of our major financial firms. it expands current restraints on acquisitions by bank holding companies to include a broader range of acquired firms ( not just banks ) and a broader range of liabilities ( not just deposits ). this expansion reflects a financial system that has changed in important ways since 1994, when the congress first adopted concentration limits for banks and bank holding companies. the act also imposes new restrictions on the capital markets activities of banking firms – restrictions that will disproportionately affect the structure and profitability of the largest banking firms. for example, the so - called volcker rule will restrict the ability of banking firms to engage in proprietary trading of securities and derivatives and to invest in or sponsor private investment funds. among the most important aspects of act are the measures that it authorizes to reduce the financial and economic effects of the failure of large firms. a clear lesson of the past few years is that the government must not be forced to choose between bailing out a systemically important firm and having it fail in a disorderly and disruptive manner. instead, we need the tools to resolve a failing firm in a manner that preserves market discipline – by ensuring that shareholders and creditors incur losses and that culpable managers are replaced – and that at the same time cushions the broader financial system from the possibly destabilizing effects of the firm ’ s collapse. of course, such a framework has been in place for banks for several decades now, as you know. the dodd - frank act creates an analogous framework for systemically important nonbank financial firms, including bank holding companies. resolving a large, multinational financial firm safely will likely always be a difficult challenge, and a great deal of work remains to be done to make these new authorities fully effective. ultimately, though, these changes will mitigate moral hazard in our financial system by reducing expectations of government support by the creditors and counterparties of large firms. taken together, the measures i have described should give us a financial system that is safer, more efficient, and more equitable. in short, two key objectives of financial regulatory reform are,