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The Examiner

"The more people who own little businesses of their own, the safer our country will be, and the better off its cities and towns; for the people who have a stake in their country and their community are its best citizens."
– John Hancock, born on this day in 1737

Simply Stated #16 - FDIC Chairman Jelena McWilliams - Community Banks, Supervision, And the Future

Supervising banks anywhere is hard work, but there’s an extra challenge when supervising institutions in the United States. The U.S. has more banks – operating under a greater variety of business models – than any other nation in the world.

These banks can be globally, nationally or locally-focused. Some of those most locally-focused banks are commonly referred to as “Community Banks.” Community banks have played an important role in serving rural areas, towns and cities for more than a century.

But supervising and truly understanding so many institutions with such diverse purposes and goals requires regulators and leaders truly “in the know” about America’s diverse localities.

On this episode of Simply Stated, I sit down with two of the most “in the know” people there are when it comes to community banks. How do we go about understanding them? How has what we’ve learned impacted our view of the nation’s financial system as a whole? What does a fintech-filled future hold for America’s uniquely-diverse banking system?

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CSBS Sets 2020 Legislative Priorities

Washington, D.C.: CSBS President and CEO John W. Ryan recently announced legislative priorities for state regulators. They are to:

  • Amend the Bank Service Company Act: H.R. 241, the Bank Service Company Examination Coordination Act, would enhance coordination between state and federal regulators of examinations of bank third-party service providers. As banks seek to innovate to better serve their customers, community banks in particular engage a variety of vendors. This bill makes the oversight of those vendors more efficient and effective. The House unanimously passed the legislation in September 2019. We encourage the Senate to take up this issue expeditiously.
  • Strengthen Bank Secrecy Act/Anti-Money Laundering reform proposals: Last October, the House passed by voice vote legislation to reform BSA/AML. Both the House passed bill (H.R. 2514) and the primary bill in the Senate under consideration (S. 2563) appropriately incorporate state regulators and their integral role in BSA/AML supervision.
  • Advocate that any data security proposals follow precedent of setting federal floor, not ceiling, so states can take further action: Any federal proposal relating to the collection, use and protection of consumer data must preserve the role for state leadership in the areas of data privacy, security and control.
  • Oppose federal legislation that preempts state licensing and/or supervisory authority over financial services: Any such legislation needs to recognize the role of state regulators and their responsibility for markets and consumer protection. The SAFE Act, for example, established a set of common standards for state implementation and ongoing oversight.
  • Support federal law regarding the nomination of someone with state bank supervisory experience to the FDIC Board: We will continue to ask Congress and the White House to uphold the Federal Deposit Insurance Act’s requirement that at least one member of the FDIC Board have state bank supervisory experience.

John Ryan: “CSBS and state regulators connect with members of Congress in both parties and both chambers on a daily basis. In the upcoming year, we will collaborate on legislative solutions that can strengthen our system of state financial regulation to more effectively oversee state-chartered banks and state-licensed nonbanks. A network of supervision is better for the financial entities we oversee and ultimately the communities we serve.”

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Wholesale Funds: Source of Growth or Regulatory Scrutiny?

By Thomas F. Siems, Ph.D., CSBS Senior Economist

When community banks utilize wholesale funds, is it to support loan growth or manage liquidity risk? The 2019 CSBS National Survey of Community Banks dove into wholesale funding strategies and identified seven possible alternatives to core deposits. 

Based on responses from 571 community banks, Table 1 shows the most frequently used wholesale funding source (ranked using the column heading “use and no change”) was public deposits (73%), followed by Federal Home Loan Bank (FHLB) advances (65%) and then a sharp drop to 42% for federal  funds purchased/repurchase agreements.

  Use and no change Use and increase Use but will drop No use and no plan to use No use but plan to use
Public Deposits 73 9 3 13 2
FHLB Advances 65 6 3 20 6
Fed Funds/Repos 42 2 2 48 7
Brokered Deposits 35 4 6 48 7
Other Borrowed Money 27 2 2 65 5
Listing Service Deposits 25 2 3 62 8
Discount Window 16 1 1 77 6

By matching individual bank survey scores with financial performance data on bank call reports, some usage patterns emerge for brokered deposits and FHLB advances. Larger banks (greater than $500 million in total assets) more frequently report using brokered deposits (48% versus 35% for all banks) and FHLB advances (77% versus 65% for all banks). Faster growing banks, based on total asset growth of more than 8% over the last year, more frequently report using brokered deposits (49% versus 35% for all banks). There is no apparent association between profitability and the use of any source of wholesale funds.

The use of wholesale funds could be related to impediments to attracting and maintaining core deposits. For example, if competition is an impediment, then wholesale funds could substitute for core deposits when profitable loan opportunities exist. However, none of the impediments in the survey (i.e., market competition, national rate cap, depopulation, capital constraints, or other changes in market demographics), were related to the use of wholesale funding.

Wholesale funding could also be related to a strategy where loan growth is favored over core deposit growth, especially if the bank is capital constrained. Yet, the results show the opposite, perhaps because rapid increases in the loan-to-core deposit ratio might attract regulatory scrutiny.

Chart 1 shows that banks that use brokered deposits and FHLB advances are more likely to prioritize a core deposit growth strategy over a loan growth strategy. The survey indicates that 35% of banks that use brokered funds (blue bars in Chart 1) report that they “usually” or “always” prioritize core deposit growth over loan growth versus 27% for all banks. Similarly, but much weaker for FHLB advances, 29% of the banks that currently use FHLB advances “usually” or “always” prioritize core deposit growth over loan growth compared to 27% overall.

liquidity risk core deposits loan growth

Chart 1 also shows that banks that do not use brokered funds or FHLB advances (red bars) are more likely to favor a loan growth strategy over a core deposit growth strategy. The survey shows that 39% of banks not using brokered funds report that they “never” or “rarely” prioritize core deposit growth over loan growth compared to 27% overall; for FHLB advances, the respective percentages are 46% and 27%.

This outcome may reflect a perception that the use of borrowed funds increases liquidity risk and the chance of a regulatory response. If so, growth of core deposits should reduce liquidity risk. The survey responses shown in Chart 2 appear to support this conjecture. Banks that use brokered deposits or FHLB advances more frequently report liquidity risk as a “very important” or “important” risk facing their bank today (blue bars). Indeed, 66% of banks that use brokered deposits report that liquidity risk is “very important” or “important” versus 57% overall; the respective percentages for FHLB advances are 64% and 57%.

liquidity risk wholesale funds

Another way to look at this association is to see whether the choice of a core deposit growth strategy is directly related to a high concern over liquidity risk, where bankers ranked how important liquidity risk is to their business from “very important” (23%) to “not important” (5%), as shown in Chart 3. For banks that “always” pursue a core deposit growth strategy, 74% see liquidity risk as “very important” or “important” (blue bars), compared to 57% for all community banks, and just 27% for banks that “never” pursue a core deposit growth strategy.

liquidity risk

Moreover, as shown in Chart 4, 37% of banks reporting that liquidity risk was “very important” or “important” reported they “always” or “usually” pursue a core deposit growth strategy (blue bars) compared to 27% overall. This result is consistent with a more risk-focused core deposit growth strategy.

liquidity risk wholesale funding

In conclusion, only two wholesale sources of funding, brokered deposits and Federal Home Loan Bank advances, showed any relation with a core deposit growth strategy. The use of borrowed funds to support a core deposit growth strategy over a loan growth strategy appears to be explained by the importance that banks place on liquidity risk. Bankers concerned more about liquidity risk more frequently report using both brokered deposits and FHLB advances. Banks using wholesale funds may be hedging this risk by emphasizing core deposit growth to maintain a desired balance between core and wholesale deposits.

This blog is the third post based on research from a recent CSBS working paper (co-authored with William C. Dunkelberg, chief economist at the National Federation for Independent Business, and Jonathan A. Scott, professor at Temple University). In the first post, community bank impediments to attracting and retaining core deposits was examined. In the second post, we explored factors driving banks to follow a core deposit growth strategy versus those that pursue a loan growth strategy.

We welcome comments on this research and the CSBS working paper, which can be directed to me at

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