, 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

, than in continental europe, where relationship lending is thought to be prevalent. it may also imply that the role of banks in the transmission of monetary policy differs in continental europe and in the us or the uk. in continental europe, banks would insulate the firms from the effects of changes in the market interest rates to a larger extent than us or uk banks would, because of the larger proportion of loans granted through relationship lending. but, as i will argue, current trends in bank structure and competition seem to be putting pressure on banks to limit the scale of their relationship lending activities. 2. what then are the main characteristics and trends of the european banking sector? let me briefly touch upon some aspects that have been addressed in the papers by dermine and by rajan and zingales. these papers stress that competition, both among banks and from other financial intermediaries, has led to the consolidation of the european banking sector and to a diversification of the financial services proposed by banks. first, there has been significant consolidation of the banking sector, including a sharp fall in the number of banks. overall, the number of banks in the euro area decreased by about a third in the last fifteen years. second, financing through issuance of market instruments, which has historically played a minor role for euro area corporations, has become more important since the start of stage three of economic and monetary union. due to the monetary union, large issuers can more easily go abroad if their domestic financial markets are not sufficiently developed. and european banks have been confronted with competition from non - european investment banks in the issuance - underwriting business. third, traditional deposit - taking activities have been challenged by the emergence of assets management companies and mutual and pension funds. these bank competitors have boomed in the last decades, accentuating the competitive pressure on the traditional banking business. fourth, retail lending, and especially lending to smes, remained untouched from the competition of either other financial intermediaries or foreign banks. however, given the over - capacity of most domestic banking sectors of euro area, retail lending is likely to undergo intensified competition among domestic banks. like any business that is confronted with new competitors, banks reassess their activities. for instance, we observe in most countries that banks have been able to generate income by entering into the business of their competitors. banks actually have offered mutual funds and other portfolio management services to the customer network acquired via their traditional deposit taking and lending activities. now, many economists have asked whether