, community bankers today confront a frustratingly slow recovery, stiff competition from larger banks and other financial institutions, and the responsibility of complying with new and existing regulations. some observers have worried that these obstacles – particularly complying with regulations – may prove insurmountable. my colleagues at the federal reserve and i understand these concerns, and we are committed to crafting supervisory policies and regulations that are appropriately scaled to banks ’ size and complexity. and we have confidence that the remarkable resilience of america ’ s community bankers will enable them not only to survive, but also to thrive in the years ahead. the best way to understand the challenges that community bankers face is to talk to the bankers themselves, and we at the federal reserve do that regularly. for example, to ensure that we remain mindful of the unique characteristics of community banks, the federal reserve board established the community depository institutions advisory council. this council is composed of representatives of community banks, thrifts, and credit unions from each of the 12 federal reserve districts. members of the council meet with the board twice a year, bringing to us the views and concerns of their colleagues back home. our meetings bis central bankers ’ speeches with the council have been extremely informative and have improved our ability to understand and respond to community bank concerns. of course, understanding those concerns is of limited value unless we use what we have learned in the process of rulemaking. to make that connection, we also established a subcommittee of the board that reviews all regulatory and supervisory proposals for their potential effects on community banks. the subcommittee also has worked toward communicating more effectively with the industry regarding the extent to which new rules and guidance do, or do not, apply to community banks. i hope those efforts are helping community bankers avoid spending time trying to understand rules that do not apply to them. one of the strengths of the federal reserve system is the quality of the research done by our economists and other professionals. the research we do on community banking helps guide our thinking on regulatory matters and on broader economic trends. in particular, the board ’ s subcommittee on community banking is regularly briefed on relevant research being conducted across the system. thus, research findings inform policy, and policy concerns guide research. in fact, after learning about several research projects, the subcommittee suggested that the staff hold a community banking research conference – a suggestion that brought all of us to st. louis today. the range of topics that will be covered over the next day and a half is impressive

very flexible and inexpensive short - term financing offered by triparty repos to be extremely attractive. to the extent that this borrowing appeared riskless to lenders, broker - dealers were potential suppliers through triparty repos of the safe, liquid assets that were in such demand. broker - dealers who borrow in the triparty repo market want to have access to their securities for routine trading purposes – for example, to make deliveries to clients during the day. to allow for that, the market developed a critical operational feature called the “ daily unwind ”. each day, the clearing banks “ unwind ” all repo trades, returning securities to borrowers and cash to lenders, even for longer - dated term transactions. however, the securities still require financing during the day. to this end, borrowers rely on intraday overdrafts at the two major clearing banks. at the end of the day, the transactions are “ re - wound ”. thus, the risks associated with the portfolios of securities are fully transferred twice each day. the lenders in this market widely believed that the two clearing banks would always unwind their maturing trades in the morning, returning cash to their account, despite no contractual provision requiring that the clearing banks do so. the fact that lenders believed they were protected in this way by the clearing bank helped perpetuate the illusion that, particularly when lending overnight, they were invested in a money - like asset that would always be highly liquid and safe, even though in reality the borrower was usually an entity that could go bankrupt. this illusion faded as the financial crisis progressed. significant strains were created by concerns about the financial strength of the broker - dealers, uncertainty about the value of the underlying collateral, and belated recognition that the clearing banks were not contractually obligated to unwind maturing trades. only when the prospect of dealer failures became very real – for example, in the case of countrywide ’ s broker - dealer affiliate in august 2007 and bear stearns in march 2008 – did the lenders appear to see these risks clearly. in addition, the presumed stabilizing function of collateral was weakened, since a default by a dealer or clearing bank could leave lenders with securities posted as collateral that they had no desire, operational capacity, or even, in some cases, legal authority to hold, or at least liquidate in an orderly way. the response at that point was to flee, ignoring the protection putatively afforded