“ cause or effect : supervisory guidance and the collapse of commercial real estate, ” unpublished paper, board of governors of the federal reserve system division of monetary affairs, october. bis central bankers ’ speeches caps. moreover, it was apparent that banks that exceeded the criterion for construction and land development were far more likely to have failed over the period from 2007 to 2011 than were those banks that exceeded the criterion for overall cre exposures and portfolio growth. we now recognize the importance of the rapid growth criterion, which may have received less attention than the criteria for construction and overall cre lending concentrations. we intend to use the findings of this research to help clarify our communication and training for examiners and bankers around cre lending concentrations. small business lending there is probably no loan category in which community bankers ’ local knowledge and deep ties to the community are more important than small business lending. the federal reserve system has a project under way to try to improve our understanding of small business credit markets, which would of course include community banks. one challenge we have faced is that it is difficult to measure lending to small businesses precisely. for one thing, small business owners frequently tap their personal home equity, credit cards, or loans secured by commercial real estate that they own to finance their business operations, 17 which means such borrowing is not reported as small business lending. but there is also no definition of small business borrowers for the reporting of small business lending as a loan category. however, small loans to businesses – commercial and industrial loans and cre loans with original principal amounts of less than $ 1 million – are reported separately and can be used as a proxy for small business lending. using this measure, we can estimate the importance of small business lending to community banks and the importance of community banks to small businesses. as of september 2012, banks with $ 10 billion or less in assets accounted for more than 98 percent of all commercial banking institutions, but they held less than 20 percent of banking industry assets. however, they held more than half of outstanding small loans to businesses. for such institutions, these small loans to businesses represent nearly 20 percent of their total domestic lending and slightly more than 40 percent of their total commercial lending. small business lending is likely even more important to smaller banks than these statistics show because these loans are identified by the size of the loan rather than the size of the borrower. i believe it is probable that many of the larger business loans made by these smaller banks were also made to small business borrowers

confirming that management quality is particularly important during times of economic stress. factors outside the control of bank management, however, are also importantly related to profitability, particularly over the past several years. for instance, it is not surprising that community banks operating in markets experiencing high unemployment rates have been less profitable since the financial crisis. perhaps less obvious is that in urban markets, community bank profitability tends to decrease as the size of the market increases. one might suspect that this relationship derives from a more competitive landscape in larger urban areas ; however, no relationship between market concentration and profits is evident in urban markets. in contrast, in rural areas, higher market concentration is associated with higher community bank profitability throughout most of the study period. in addition, the study finds that community banks operating in rural markets consistently earn higher average rates of return than do community banks operating in urban markets. in a separate analysis of deposit market competition that may form the basis for a new research paper, one researcher has documented the competitive strength of community banks, especially in rural markets. although the nationwide share of total deposits held by banks with assets less than $ 10 billion has declined over the past decade, in rural markets, their deposit market share has increased slightly. moreover, banks with assets less than $ 10 billion retained their share of rural market deposits throughout the recent recession and recovery. at a more micro level, banks with assets less than $ 10 billion gained market share in more than two - thirds of rural banking markets and in nearly half of urban markets between 2003 and 2012. expansion of deposit insurance during the crisis likely helped all banks retain deposits and may have changed competition somewhat. deposit insurance has now been permanently increased from $ 100, 000 to $ 250, 000 per depositor, but the unlimited deposit insurance for noninterest - bearing transaction accounts was allowed to expire at the end of 2012. we are watching deposit movement carefully, but so far have seen little evidence of deposits moving out of the banking system or, as some had feared, moving from smaller banks to larger banks perceived as “ too big to fail. ” my own expectation is that, given all of the enhanced regulatory requirements that apply to larger banks, those larger banks will focus their efforts on large urban markets and that community banks will be even more competitive and more vital to the economic well - being of rural, suburban, and small urban markets. characteristics of thriving community banks researchers at the federal reserve bank of st. louis took a different approach to measuring community bank