for release on delivery 9 : 15 a. m. edt ( 8 : 15 a. m. cdt ) october 4, 2018 trends in urban and rural community banks remarks by randal k. quarles vice chairman for supervision board of governors of the federal reserve system at “ community banking in the 21st century ” sixth annual community banking research and policy conference, sponsored by the federal reserve system, the conference of state bank supervisors, and the federal deposit insurance corporation st. louis, missouri october 4, 2018 good morning. i want to thank the conference organizers for inviting me to speak to you today. 1 it is an honor and a pleasure to be part of this unique annual event that brings together bankers, bank supervisors, and researchers to discuss the latest community banking research, recent trends in community banking practices, and policy issues that are on the minds of conference attendees. i want to start, first, by conveying my own perspective on the importance of community banks. community banks have a long history of providing essential financial services to households, small businesses, and small farms in communities across the united states. their ability to effectively provide these services speaks to the strength of the community banking business model - - that is, establishing and maintaining local relationships, and offering customers a face - to - face interaction with a local banker. and it is something i have observed firsthand, especially for community banks in rural communities. growing up in rural colorado and utah, i saw the importance of community bankers having local knowledge and being personally invested in the same communities that they serve. that local knowledge, and the relationship - based lending that is the hallmark of community banking, can stem losses during downturns, as community banks may be able to work with borrowers to avoid losses. indeed, research has shown that small business lending at small banks declined less severely than at large banks during the last recession. 2 at the same time, i have seen the challenges that many the views i express here are my own and not necessarily those of the board of governors of the federal reserve system. while small banks reduced small business lending by roughly 13 percent between 2009 and 2011, large banks reduced lending by nearly 30 percent. see rebel a. cole ( 2012 ), how did the financial crisis affect small business lending in the united states? report developed under contract with the u. s. small business administration, office of advocacy ( washington : sba, november ), available at https : / / www. sba. gov

at the extreme, they could even be seen as raising questions about the integrity of the wider financial system. let ’ s look at the problems that have arisen. libor first, let ’ s take libor. libor emerged as the eurodollar markets developed in london in the late 1960s and 1970s. in particular, it was developed in response to the rise in the syndicated eurodollar loan market and demand for tools to manage risk exposures, including those that arose from bis central bankers ’ speeches making those loans. these tools, known today as interest rate derivatives, needed a common benchmark so that they could be commoditized more easily, and libor was this common rate. libor was first officially published on new year ’ s day in 1986. as an interest rate benchmark, libor is used as a measure of prevailing interest rates in a range of major currencies for maturities from overnight to one year. and, although originating in loan markets, it has come to be the dominant benchmark in a wide range of cash and derivatives markets. libor – and its equivalents in some other currencies, collectively known as “ ibors ” ( interbank offered rates ) – is used to determine the floating rate paid on over us $ 500 trillion dollars of interest rate derivatives contracts, as well as many trillions in floating - rate loans and securities. libor is calculated based on submissions from a panel of banks : each bank is responsible for estimating the cost at which it could borrow in the unsecured interbank market from other banks, at various maturities and in various currencies. libor is calculated as an average of these estimates, after dropping the highest and lowest figures. banks ’ individual quotes are also made public – to deter anyone from submitting a wild number to influence the average. the important thing to remember about libor is that not every submission is based directly on actual transactions. for example, during the global financial crisis in 2008, when the interbank market essentially dried up, especially at longer maturities, banks still had to contribute to the benchmark. now let me turn to the problems that have emerged regarding libor. the first is signalling. in circumstances such as those during the height of the recent crisis, when interbank credit conditions were becoming increasingly difficult, a bank could become reluctant to report higher estimates than its peers for fear this would be interpreted as a signal that its own creditworthiness was deteriorating