Alert October 08, 2013

FRB Governor Powell Delivers Remarks Concerning the Role and Regulatory Supervision of Community Banks

FRB Governor Jerome H. Powell delivered remarks on October 3, 2013 entitled “Community Banking: Connecting Research and Policy” to the Federal Reserve System/Conference of State Bank Supervisors, Community Banking Research Conference (the “Conference”) at the offices of the Federal Reserve Bank of St. Louis.  In his remarks Governor Powell stressed that community banks play a critical role in the U.S. economy and that although community banks “played no part in causing the [recent, major] financial crisis, [they] have been forced to fight to ensure that they are not swept up in a torrent of costly new regulations that were intended to address problems at those very large banks that did contribute to the crisis.”  Governor Powell stated that the FRB wants community banks to communicate their concerns about regulations and the costs of compliance to the FRB and noted that the FRB has established a community bank subcommittee of its Committee on Bank Supervision to see that regulatory proposals are “appropriately tailored for community banks.”

Governor Powell next discussed the research papers concerning community banks that have been presented at the Conference including papers entitled:

  • Community Banks Play a Role in New Firm Survival
  • Equipment Lease Financing: The Role of Community Banks
  • Bank Failure: Relationship Lending and Local Economic Performance
  • Small Business Lending and Social Capital:  Are Rural Relationships Different?
  • Financial Derivatives at Community Banks
  • Lessons from Community Banks that Recovered from Financial Distress
  • The Effect of Distance on Community Bank Performance Following Acquisitions and Reorganizations
  • Performance of Community Banks in Good Times and Bad Times: Does Management Matter?
  • Estimating Changes in Supervisory Standards and Their Economic Effects
  • The Impact of Dodd-Frank on Community Banks
  • Capital Regulation at Community Banks: Lessons from 400 Failures
  • Failure to Communicate:  The Pathology of Too Big To Fail

Governor Powell next stated that the FRB had recently launched an initiative to refine its examination programs by having its consumer compliance examiners “base the examination intensity more explicitly on the individual bank’s risk profile, including its consumer compliance culture and how effectively it identifies and manages consumer compliance risk.”  Governor Powell said the FRB plans to begin the new consumer compliance examination program for community banks in 2014.

Governor Powell next suggested that further research that could be useful might consider: (1) which regulations, whether new or existing, pose the heaviest regulatory burden on community banks and how that burden compares to the benefits derived from those regulations; and (2) can a regulatory agency modify a regulation or provide an exemption for community banks with respect to a specific regulation “without adversely affecting bank safety and soundness or financial stability?”

In concluding his remarks Governor Powell stated that community banks continue to do a good job of attracting stable and relatively inexpensive core deposits, but they face increased challenges.  He added that “as auto, mortgage, and credit card loans have become increasingly standardized, community banks have had to focus to a greater extent on small business and commercial real estate lending.”  These types of loans, noted Governor Powell, are not “cheap or easy to make.” It is critical, concluded Governor Powell, that the FRB and other bank regulatory agencies not adopt regulatory policies that exacerbate the regulatory burden and challenges to community banks unless the burden is outweighed by corresponding benefits.