recovers. moreover, as banks book profits, deferred tax assets will shrink, reducing the magnitude of these future deductions from common equity. finally, it is important to note the significant potential earnings power of large u. s. banks, which have historically tended to have higher rates of return on their average assets relative to many of their foreign counterparts. banks that currently are short of the 2019 standard could retain these future earnings to build up their capital ratios. equity analysts project that the 20 largest u. s. banks will earn more than $ 80 billion in 2010, and consensus estimates expect that figure will increase to around $ 110 billion in 2011. of course, because these estimates are dependent on an economy that continues to recover, we need to be cautious about relying entirely on as - yet - unrealized earnings as the primary means to meet the higher capital standards. so what about the long - run consequences? it would be prudent to assume that requiring banks to hold more capital and higher cost capital is likely to result in somewhat higher lending spreads. bank managements will need to generate sufficient income to support the rate of return on equity at a sufficient high level so banks can continue to attract capital from investors. of critical importance is whether the increase in lending spreads is likely to be large or not. those who argue that the new capital standards will necessitate a large increase in lending spreads generally start with a rigid set of assumptions. these include : 1 ) return on bank equity is unchanged ; 2 ) the increase in bank equity does not affect funding costs ; and 3 ) there is no change in the banks ’ book of business or on banks ’ ability and willingness to adjust other expenses, such as compensation. such rigid assumptions are unrealistic. this is particularly important because each assumption is likely to be wrong in the direction that reduces the impact on lending margins. first, the necessary return on equity that banks will have to generate to be able to attract capital will likely fall. because banks with more capital should be safer and have less volatile earnings, investors should demand a lower return on equity than before. second, by increasing the soundness of banks, an increase in bank equity, everything else equal, should also reduce funding costs. third, higher bank lending spreads almost certainly will push some activity into the capital markets, constraining the magnitude of the rise in total lending costs. finally, banks may be forced via competitive pressures to lower their compensation levels. by cutting compensation costs

william c dudley : welcoming remarks at the community bankers conference remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the community bankers conference, federal reserve bank of new york, new york city, 18 april 2018. * * * thank you for joining us today for our 16th annual community bankers conference. this is my last opportunity to address this fine group of community bank leaders in my role as president of the new york fed. as always, what i have to say reflects my own views and not necessarily those of the federal open market committee ( fomc ) or the federal reserve system. 1 since becoming head of the new york fed in 2009, i have had the opportunity to watch the evolution of community banking up close. i observed the resilience of community banks at the height of the financial crisis and how your organizations managed during those turbulent times. i also have had the privilege of meeting with many of you during my regional visits, and i remain impressed with how small banks remain important pillars of economic support for their communities. the past decade has seen significant change for your industry. there has been significant consolidation among institutions and the remaining community banks are much healthier. back in 2009, there were 191 community banks in the second district with an aggregate of $ 223 billion in total assets. in contrast, there are 135 community banks today. despite this contraction in number, the remaining firms have continued to grow and thrive, and now have assets totaling $ 291 billion, which is an increase of about 30 percent. community banks are much stronger financially today. in 2009, troubled assets were 26 percent of capital, primarily reflecting a large volume of construction lending. that ratio has declined significantly, to 8. 5 percent today — demonstrating that community bank leaders have the capacity to take action, effectively work out troubled assets, and generate capital. these data tell a welcome story regarding your ability to successfully conduct business through the economic recovery. so, where does the industry go from here and what challenges lie ahead? that is the theme of today ’ s conference, and i expect a robust and enlightening series of discussions from both panelists and presenters. from my perspective, there are two challenges that i would highlight : ongoing advances in technology, and interest rate risk. first, major technological changes are compelling banks to embrace technology to better meet the needs of their customers. today ’ s customer expects increased digital access, and a bank ’ s failure to advance technologically would