their profit levels were slightly lower than those for larger community banks prior to the crisis, but they performed similarly until 2015, when banks of this size showed a decline in profits not experienced by any other size grouping of community banks. time will tell whether this is an anomaly or the beginning of a pattern. - 6looking at the smallest community banks, those with less than $ 100 million in assets, gives some hints for why their numbers have declined. the average roa for the smallest banks ( in purple, with circles ) has been consistently lower than that for the nextsmallest class of banks since 1995. the already lower level of profits for the smallest banks began to decline further in 2006. since 2009, profits for the smallest banks have increased slightly but remain below their levels of profitability prior to the recession and below the roa levels for larger banks. 5 data on nonperforming loans ( npls ) show a mixed picture. 6 a breakdown of community banks by size indicates that the ratio of npls to total loans peaked for every size category in 2010 ( figure 8 ). prior to 2007, the smallest community banks consistently had a higher ratio of npls than did larger community banks ; but from 2007 until 2013, their npl rate was below that of larger community banks. in the past two years, npls on the balance sheets of the smallest banks have declined more slowly than for larger banks so that banks with less than $ 100 million in assets once again have the highest npl ratio. let me turn now to consider changes in the number of community banks over the past 20 years at a more local level. for purposes of this discussion, i define local banking markets as counties in rural areas and as metropolitan statistical areas in urban areas. the patterns for return on equity ( roe ) are similar to those for roa, although community banks as a whole had negative roe in both 2009 and 2010. the largest community banks, with $ 1 billion to $ 10 billion in assets, suffered much greater negative returns on equity in these years than did smaller community banks. midsize community banks, with $ 300 million to $ 1 billion in assets, fared better than their larger and smaller counterparts. the smallest community banks showed an unusual pattern in their roes. ( it should be noted that, for banks of this size, roe can be a questionable measure of profitability because such banks tend to be either privately held or very thinly traded. ) these banks were in

##aging and paring of business lines – are likely to prove highly consequential to the near - term outlook for the real economy. changing forms of financial intermediation are expected, given higher volatility and less leverage, in some cases building on old - fashioned banking products. commercial and thrift deposits, for example, backed by a loyal customer base, may offer greater franchise value. investment banks may reconfigure capital structures and core trading businesses to maximize benefits in a higher volatility environment. asset - gatherers, whether in the form of traditional money - management firms or hedge funds, that survive this time of testing may rely more on term funding and seek equity returns across beaten - down classes of structured and debt products. and dependable, recurring revenues, even at lower levels, may warrant a premium valuation in the public markets. the case for opportunistic capital is improving. some curative steps by incumbent financial institutions are in the offing. financial institutions should continue to reassess their sources and uses of funding, their risk - management systems, risk tolerance, and human capital. generally, they should not hesitate to pare their dividend and share repurchase programs. and, they should raise new capital to strengthen their balance sheets. these actions, in my view, are important signs of strength, and will ensure that financial institutions thrive in the emerging financial architecture replete with new opportunities. these actions will have concomitant benefits on real economic activity. plot line 3 : federal reserve's policy formulation the central bank's responsibility is not to individual firms but to financial markets, and only then, to the extent that financial market stresses affect the real economy. given the fragility evidenced in financial markets, and the toll it is taking on real activity, the federal reserve agreed to take center stage. this is a role for which we did not volunteer, but one in which we are prepared to serve. the role has been thrust upon us by a loss of confidence in our existing financial architecture. hence, we should remain at center stage as long as is necessary, but no longer. the fed responded aggressively to mitigate spillovers to the real economy, exercising some authorities for the first time in decades. to prevent more serious financial fallout, the fed established and expanded various lending facilities to depository institutions and primary dealers. 7 some facilities allow daily access to variable amounts of funding, and others primary dealers are banks and securities broker -