ben s bernanke : the financial crisis and community banking speech by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, at the independent community bankers of america's national convention and techworld, phoenix, arizona, 20 march 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * when i addressed this convention three years ago, with all of five weeks under my belt as chairman of the federal reserve board, i opened my remarks with three observations : that community banks played a critical role in the u. s. economy, that community banks were generally doing well, and that community banks faced a changing business environment that posed important challenges. i am struck that all three observations, at least to some degree, still hold true today. community banks continue to play a critical role in our economy and, in many cases, have an opportunity to step in and make sound profitable loans, where some competitors have pulled back. relatively speaking at least, community banks are doing better as a group than other segments of our financial system, but at the same time they are far from immune to current conditions. and, surely, it is still true that the business environment poses important challenges to community banks. in fact, i think it is safe to say that few of us in the convention hall three years ago envisioned the financial and economic environment we now confront. envisioning the conditions we will face three years from now is equally difficult, but it is my hope and expectation that those conditions will be significantly brighter. this morning, i'd like to spend some time reviewing the federal reserve's response to the financial crisis of the past 18 months, as well as the current challenges – and opportunities – facing community banks. in addition, i'll discuss two important steps that policymakers can and should take to improve the financial regulatory system that likely are of particular interest to you. the first step is the need to address the very real problem caused by institutions that are too big – or too interconnected – to fail in a disorderly manner. the second involves ways of making the system less procyclical, so that the financial system is less susceptible to exuberant booms and disastrous busts. in discussing the road back to financial stability and economic prosperity, i want to leave you with the idea that, yes, this is indeed a time of challenge for community

, under the current commission proposals – would be too heavy for the country. there is already a debt rule in the maastricht treaty! and experience demonstrates that it is necessary to enforce it, because excessive debt might trigger instability. a simple calculation shows that, assuming an inflation rate of below 2 %, but close to 2 %, as in the ecb ’ s definition of price stability, and a reasonable average yearly real gdp growth rate – for instance, slightly over 1 % – a balanced budget – which is the “ normal ” position according to the stability and growth pact – might reduce the debt outstanding as a proportion of gdp by more than 3 % each year for a debt level of around 120 % of gdp. by the way, the imf also says a reduction of public debt in a number of advanced economies is urgent. a balanced budget is the objective of the stability pact, but some euro area countries have never even come close. and the imf, while recommending debt consolidation, admits it will be very painful in the early years. we must take fully into account the confidence channel. when a country moves in the direction of fiscal soundness, this is not only good for growth from a medium and long - term perspective, but it might also be beneficial for growth in the short term. because it enhances confidence in segments of the economy that had lost some of their confidence, and that is good for consumption, investment and job creation. people would not engage in more consumption, entrepreneurs would not invest actively, and savers would not be forthcoming if fiscal stability was impaired or threatened. other choices could be painful. the bundesbank president, axel weber, some days ago hinted that a rise in interest rates could not be as far away as markets seem to think. as you know, i never comment on remarks made by fellow members of the governing council. what is important, of course, is that there is only one single currency ; there is one governing council, only one monetary policy decision, and one president, who is also the porte - parole of the governing council. at the last ecb press conference, i said very clearly that current interest rates are appropriate. the needle in our compass is price stability – annual inflation of less than 2 % but close to 2 % – and on this we have a very, very remarkable track record : a yearly average price increase of 1. 97 % in the 11½ years that the ecb has been in charge of monetary