WASHINGTON, D.C. — Several key takeaways and common themes emerged from the fourth annual community banking research and policy conference, recently hosted by the Federal Reserve System and the Conference of State Bank Supervisors (CSBS). The conference, Community Banking in the 21st Century, was held Sept. 28-29 at the Federal Reserve Bank of St. Louis. The conference brought together academics, community bankers, and federal and state policymakers from across the country to discuss the latest research and trends in community banking.
The research and discussions centered around three main focal points: the continuing relevance of the community bank business model, the relationship between bank size and performance, and bank regulatory issues. In addition, state regulators in 29 states held interviews with community bankers in their states. These interviews, referred to as “Five Questions for Five Bankers,” provided qualitative insights into the data collected as part of a national survey of more than 550 community banks, which was administered prior to this year’s conference.
Common Themes of the Banker Interviews & National Survey
- Community banks maintain a close, critical relationship with small businesses. Community bankers lent $275 billion to small businesses last year, an amount that, while slightly lower than previous years, is higher than the amount extended by larger banks.
- Community banks continue to emphasize their concern with regulatory burden, but data suggest a possible plateau in regulatory costs. Explicit compliance costs remain relatively unchanged from one year prior, mortgage lending (an area traditionally seen as too heavily regulated) expanded, and opinions on regulatory burden seemed no worse than prior years. However, mortgage regulations remain difficult and complicated for community banks.
- New technology remains both a challenge and opportunity, and community banks are constantly exploring the best options for their consumers. Community bankers are also split on whether to view new technologically-savvy market entrants, particularly marketplace lenders, as competitors or partners.
The Continuing Relevance and Importance of the Community Bank Business Model
- Banks with business models normally associated with community banking—that is, those that emphasize relationship loans, core deposit funding, revenue streams from traditional banking products and physical branches--were less likely than other banks to fail, be acquired or absorbed into parent holding companies, 1997 to 2012. The survival advantage was accentuated during the financial crisis.
- Community banks are major economic drivers for their local communities, both through contributions to lending and liquidity, and in their philanthropic contributions.
- Even as the number of minority-owned depository institutions (MDIs) grows, black-owned MDIs have decreased in number and have become more concentrated in high-poverty communities.
The Relationship between Community Bank Size and Performance
- Among publicly-traded companies, evidence suggests that there are incentives for banks to grow larger to exploit economies of scale. Larger banks seem to spend proportionally less on regulatory compliance and have improved credit-risk monitoring.
- Compliance costs increase, but at a decreasing rate, with bank size. Relative regulatory burden, in relation to non-interest expenses, triples with decreases in bank size when comparing banks with less than $100 million in assets with banks with $1 billion-$10 billion in assets.
- Data suggest that large community banks could improve their financial importance by increasing their ratio of small business loans to assets, while small community banks might achieve better performance by reducing this ratio.
Community Bank Regulatory Issues
- Looking at the tiered implementation of capital requirements in the early 20th century, evidence suggests that capital requirements alone are not an effective tool for promoting bank stability.
- The Dodd-Frank Act changed assessments for deposit insurance, decreasing assessments for banks which rely more heavily on deposits as a source of funding. The change provided a net benefit to community banks of $3.6 billion since implementation.
- As a community bank increases its concentration in a particular industry, the bank is less likely to request audited financial statements from the borrower. This suggests that banks rely on their industry expertise as concentration grows.
More information about the conference, including the research papers that were presented and keynote speaker remarks, is available at https://www.communitybanking.org. Videos of the presentations and remarks will also be made available for viewing.