for release on delivery 10 : 00 a. m. edt ( 9 : 00 a. m. cdt ) october 22, 2021 the lack of new bank formations is a significant issue for the banking industry remarks by michelle w. bowman member board of governors of the federal reserve system at 2021 community bankers symposium : banking on the future federal reserve bank of chicago chicago, illinois october 22, 2021 good morning. i appreciate the opportunity to be part of this symposium on “ banking on the future, ” especially since the future of banking is one of the highest priorities in my work at the board. today, i will focus my remarks on the importance of community banks to our financial system and the challenges they face. in particular, i will focus on the formation of new banks and pose two key questions concerning the recent scarcity of these “ de novo ” banks. 1 the first question : why have there been so few de novo bank formations over the last decade? and second, what can be done to encourage more de novo banks? i will begin with some background on community banks and bank formations. the importance of community banks by serving communities, households, and businesses that may be underserved by larger institutions, community banks play a key role in advancing diversification in the u. s. banking system. first and foremost, community banks provide critical financial services to their communities and to many customers who might have limited geographic access to banking services. because community bankers are active participants and leaders in their communities, they typically know their customers and their needs better than a banker at a branch of a larger institution. community banks draw upon this knowledge and conduct “ relationship ” lending versus relying on automated underwriting models that are typical in larger institutions. therefore, community banks are more willing to underwrite loans to creditworthy customers based on an assessment of qualitative factors that automated models do not consider. since community bankers are part of the fabric of their communities, they better understand the local market and economic conditions in the area compared to larger institutions that are not resident within the community. in general, an insured depository institution is in the de novo phase if it has been operating for three years or less. collectively, community banks are critical in advancing the health and stability of the u. s. economy as evidenced by their participation in the small business administration ’ s paycheck protection program ( ppp ). community banks made 4. 7 million ppp loans, totaling $ 429 billion, which accounted for

countries that are linked through trade flows. the model is calibrated so that either type of policy action keeps the home country ’ s gdp at baseline. - 6policy to return output to potential. if the central bank chooses to use the short - term interest rate as its active policy tool, and keeps its balance sheet on hold, the current and expected path of short - term interest rates rises, putting upward pressure on long - term bond yields and causing the real exchange rate to appreciate. the stronger currency coupled with some initial expansion of domestic demand in turn cause a deterioration in real net exports. turning to the effects abroad, the decline in domestic real net exports corresponds to an increase in foreign net exports, which will tend to boost foreign gdp, other things being equal. how this affects a particular foreign economy will depend on its circumstances and the corresponding policy response of the foreign central bank. in the case where the foreign economy is pinned at the effective lower bound, the increase in net exports will provide a welcome boost to aggregate demand. by contrast, if foreign output is already near potential, the foreign central bank will need to respond by tightening policy in order to keep its economy in balance. now, let ’ s instead consider tightening through the balance sheet. if the same amount of policy tightening in the country experiencing a positive demand shock is achieved exclusively through a reduction in the balance sheet, while keeping the policy rate unchanged, the exchange rate would appreciate to a smaller degree, reflecting the lower assumed sensitivity of the exchange rate to the term premium than to policy rates. net exports would decline by less - - reflecting both the smaller exchange rate appreciation and the smaller rise in domestic demand - - and similarly this would result in smaller crossborder spillovers to foreign gdp. - 7thus, for a foreign economy that is at the effective lower bound, tightening in the home country through balance - sheet policy will be less welcome than through short - term rates. the foreign economy will experience less exchange rate depreciation, and so less of a boost to net exports. in addition, the stimulus to the foreign economy could be further diluted to the extent that the balance sheet policy boosted term premiums on its long - term bonds and hence tightened financial conditions, although this effect has not been built into the simulation model. by contrast, for a foreign economy that is close to potential, adjustment through the balance sheet in the home country will mean less of a need for the foreign central bank to respond by tightening policy