to counteract this risk, but it is not possible to fully manage it away. thus, the fortunes of communities and their banks tend to rise and fall together. community banks must also manage concentration risks arising from their specialization in certain categories of lending. for example, larger banks have used their scale to gain a pricing advantage over community banks in volume - driven businesses such as consumer lending. this strategy, in turn, has exacerbated a long - standing trend toward a greater concentration of community bank lending in certain areas less dependent on volume, such as loans secured by commercial real estate. community banks will need to continue their ongoing efforts to prudently diversify their revenue sources. for purposes of these remarks, the terms “ community bank ” and “ community banking organization ” will be used interchangeably to refer to both banks and bank holding companies with total consolidated assets of $ 10 billion or less. bis central bankers ’ speeches like larger banks, community banks are also being affected by the state of the national economy. despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending. as i will discuss later, actual and prospective changes in the regulatory landscape have also raised concerns among community bankers. these headwinds notwithstanding, measures of the financial condition of community banks appear to have strengthened somewhat, suggesting that, for the most part, the industry is meeting its challenges. profits of smaller banks have risen for the past several quarters. although the ratios of nonperforming assets remain high in many cases, asset quality appears to be stabilizing, and bank provisions for loan losses are decreasing. in addition, capital ratios are steadily improving at community banks, in part due to increases in retained earnings and a greater ability to raise new capital. let me take this opportunity to mention one concern that is of particular relevance to the federal reserve : a common complaint on the part of some community bankers is that very low interest rates hurt their profitability by squeezing net interest margins. since the onset of the financial crisis, the federal reserve ’ s monetary policy has been accommodative, as you know. in particular, the federal funds target rate, which stood at 5 - 1 / 4 percent in mid - 2007, was lowered to a range of 0 to 1 / 4 percent by the end of 2008 and has since remained at that level. although these policies do not seem to have led to much change in aggregate measures of net interest margins, at least thus

ben s bernanke : community banking speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the future of community banking conference, sponsored by the federal deposit insurance corporation, arlington, virginia, 16 february 2012. * * * it is a pleasure to speak at the federal deposit insurance corporation ’ s ( fdic ) conference on the future of community banking. this conference is indeed an important and timely one. community banks make a critical contribution to the prosperity of both their localities and the nation as a whole, which is why we at the federal reserve and the other banking agencies are acutely interested in their long - term strength and viability. 1 today i will discuss the role community banking organizations play in supporting the health of our economy, as well as some of the challenges they face. because we greatly value our ongoing dialogue with community banks, i will also speak about the federal reserve ’ s efforts to improve our understanding of the pressures affecting community banks and to foster constructive supervisory relationships. the role of community banks in a challenging economy although community banks provide a wide range of services for their customers, their primary activities revolve around the traditional banking model – specifically, taking shortterm deposits to fund longer - term investments, such as small business, agricultural, or commercial real estate loans. accordingly, risks at community banks tend to arise from their lending, in the form of credit risk, interest rate risk, or concentration risk, rather than from the trading, market - making, and investment banking activities associated with the largest banks. however, by taking on and managing the risks of local lending, which larger banks may be unwilling or unable to do, community banks help keep their local economies vibrant and growing. importantly, community banks are well positioned to go beyond the standardized credit models used by larger banks and consider a range of factors when making credit decisions. in particular, they often respond with greater agility to lending requests than their national competitors because of their detailed knowledge of the needs of their customers and their close ties to the communities they serve. while community banks have certain natural advantages, they also face an array of challenges, stemming from both the current economy and, to some extent, from their business model. the close ties of community banks to local economies is a source of strength, as i mentioned, but those close linkages have drawbacks as well, most notably the resulting concentration of exposures to those same local economies. strong community banks take measures