of banks may turn out to be smaller – or, indeed, it might turn out be larger. tailoring community bank supervision i ’ ve already noted that it is a matter of considerable public policy concern if regulations, not market forces, are important causes of bank consolidation. federal reserve policymakers have recently discussed how better tailoring of supervision and regulation to community bis central bankers ’ speeches banks can be helpful in reducing the extent of this problem. 2 the federal reserve does some tailoring already, but i think we should do more. i ’ ll mention two examples of the kind of tailoring that i have in mind. i ’ ll then turn to two additional steps we might consider. on safety and soundness, the federal reserve and other agencies received excellent comments from community banks on the basel iii proposal. these comments led to changes to the proposed rule that reduce unnecessary burdens on smaller banks. 3 smaller banks can opt out from having their capital levels vary due to changes in particularly volatile aspects of income. the final rule also allows smaller institutions to continue to count certain types of stock or securities as capital, when larger banks cannot. i think the rule - making process worked well in this instance. issuing a preliminary rule and receiving comments from bankers allowed the final regulation to better address the actual risks posed by community banks. on the consumer side, the federal reserve has moved to a more risk - focused exam process, from the less flexible previous approach. the new framework allows our examiners to better tailor their exams to the consumer risks that a particular bank may actually pose. many banks that the minneapolis fed supervises do not engage in activities that pose a high risk to consumer protection. and many also have a strong, documented record of compliance and relatively little change in operations. under the new framework, examiners can more readily eliminate certain areas of review. the benefits of the new consumer program go beyond a more focused scope. the new framework encourages more of our supervisory work to occur off - site, thereby reducing the on - site burden we put on community banks. at the same time, where there are potentially risky activities, the new framework allows for a deeper dive. in sum, i think the new consumer exam framework epitomizes the tailoring we need. it ’ s based on an analytical approach aimed at improving supervision, and it also captures institution - specific details where appropriate. where can we engage in additional tailoring? governor daniel tarullo has noted potential benefits in reviewing statutes that apply new

consider a standard measure of problem loans : the ratio of noncurrent and delinquent loans to bank capital and the allowance for loan loss. in the first quarter of 2009, that ratio rose for all loans to 24 percent for the median minnesota bank, double the 25 - year median level of 12 percent. for commercial real estate loans, the problem loan ratio rose to about 9 percent, nine times higher than the 20 - year median of 1 percent. bis central bankers ’ speeches the problem loan story has changed completely. the ratio for total loans is at 9. 5 percent for the median minnesota bank, right around the 25 - year low. and the ratio for problem commercial real estate loans for the median minnesota bank is at 2 percent and rapidly returning to pre - crisis levels. these same general patterns hold for the nation ’ s banks. the low earnings and negative loan growth for the median minnesota bank have also improved, but not yet to pre - crisis levels. return on average assets, a standard measure of profitability, has been holding very steady for the past several years at just below 1 percent. this is clearly better than the trough of 0. 5 percent during the crisis. but the 20 - year median is 1. 15 percent. currently, the return on average assets of the median minnesota bank is at 0. 94 percent, which is at the 19th percentile for the past 20 years. year - over - year net loan growth for the minnesota median bank is at 4. 6 percent. again, this is much better than the – 4. 7 percent crisis trough ; indeed, negative growth persisted through the end of 2012. but the 25 - year median is nearly 6 percent for minnesota banks, while 4. 6 percent is at the 39th percentile. the nation ’ s banks show similar general patterns. so, yes, there has been recovery in important ways for community banks in the state. but other important measures continue to lag historical norms more than five years after crisis depths. this weaker - than - hoped - for performance is one factor raising concerns for community banks about the additional supervision and regulation burden that faces them post - crisis. i ’ d like to turn to those concerns now. post - financial crisis supervision and regulation of community banks low earnings levels have many potential sources. let me mention three. first, on the revenue side, weak loan growth naturally leads to more competition for available loans and drives down returns. second, if banks can ’ t make more loans,