Community banking
Before the Subcommittee on Financial Institutions and Consumer Protection, Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.
April 6, 2011
Chairman Brown, Ranking Member Corker, and members of the subcommittee, thank you for the opportunity to testify today on the challenges and opportunities facing community banks. As a former examiner and former head of banking supervision at the Federal Reserve Bank of Kansas City, which has one of the highest numbers of community banks in the Federal Reserve System, I am keenly aware of the critical role that community banks play in their local communities. Community banks also provide valuable insights into the health of their local economies, which the Federal Reserve finds invaluable in determining the appropriate path of monetary policy and in taking actions to preserve the nation’s financial stability. Accordingly, I and my colleagues at the Federal Reserve value our connection with community banks and take very seriously our responsibility for the supervision of these banks.
The Federal Reserve, in conjunction with our colleagues at the state banking supervisory agencies, is responsible for supervising approximately 830 state member banks. The vast majority of these banks are community banks1 that provide traditional banking services and loans to small businesses and consumers. In addition, the Federal Reserve supervises more than 4,700 community bank holding companies, which together control more than $2 trillion in assets and a significant majority of the number of commercial banks operating in the United States. Beginning in July 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) will transfer responsibility from the Office of Thrift Supervision to the Federal Reserve for the supervision of more than 425 savings and loan holding companies, most of which operate community thrifts. Given these supervisory responsibilities–as well as the Federal Reserve’s need to fully understand regional economic conditions–we closely monitor the condition and performance of community banks and appreciate the opportunity to discuss with you today some of the factors affecting their operations.
We gain considerable insight into community banking through our supervisory, research, and outreach activities both at the Reserve Banks and at the Board of Governors. Moreover, the Federal Reserve has undertaken several recent initiatives to better understand the perspectives of community banks and the challenges they face. The Board recently established a special supervision subcommittee of Board members that provides leadership and oversight on a variety of matters related specifically to our supervision of community and smaller regional banks.2 This subcommittee is chaired by Governor Elizabeth Duke, a former longtime community banker, and also includes Governor Sarah Bloom Raskin, previously the Maryland state banking commissioner. A key role of this subcommittee is to review policy proposals to better understand the effect that these policies and their implementation could have on smaller institutions, both in terms of safety and soundness and potential regulatory burden.
The Federal Reserve also has undertaken an initiative to formalize and expand its dialogue with community banks. In October 2010, the Board announced the formation of the Community Depository Institutions Advisory Council (CDIAC) to provide the Board with direct insight and information from community bankers about the economy, lending conditions, supervisory matters, and other issues of interest to community banks.3 Council members share first-hand knowledge and experience regarding the challenges they and their communities face, as well as their plans to address these challenges. Each Reserve Bank has its own local advisory council comprising representatives from banks, thrift institutions, and credit unions, and one member from each local council serves on the national council that meets with the Board twice a year in Washington. Each of the local advisory councils has held its first meeting, and the first meeting of the CDIAC with all of the members of the Federal Reserve Board took place on Friday, April 1. We expect these ongoing discussions will provide a particularly useful and relevant forum for improving our understanding of the effect of legislation, regulation, and examination activities on small banking organizations. (continued)
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