Banks as Vital Infrastructure for Rural Communities

On December 5th, Federal Reserve Bank Vice Chairman for Supervision, Randal K. Quarles, gave a speech at the Stanford Institute for Economic Policy Research titledBanks as Vital Infrastructure for Rural Communities of the West”. While his speech focused on the western states, the fundamental points are relevant to community banks and rural markets across the U.S. The following are some of the key points from his speech:

What was said regarding importance of Community Banks to rural markets:

  • In any community, access to credit is essential for economic growth. In any community, but especially in rural communities, small businesses are key drivers of growth. Small businesses heavily rely on banks for funding, and community banks, those with less than $10 billion in assets, account for a disproportionate share of bank lending to small businesses.

  • But across the country, the number of community banks has fallen by half over the past 20 years, mostly due to consolidation.

  • Faster and more efficient electronic payments hold some promise to bridge these gaps, eventually, and the Federal Reserve is working hard on this and making significant progress.

  • But one thing that technology cannot do is replace the knowledge and perspective of a local banker who is part of the community. Relationship-based lending that is the hallmark of community banking can stem losses during downturns, since community banks may be able to work with borrowers to avoid losses. Research has shown that small business lending at smaller banks declined less severely than at large banks during the last recession.

  • Community banks face considerable competition. One of the reasons that community banks continue to succeed in many places is their understanding of their customers' needs and opportunities to invest in families and businesses. The loss of this relationship, for a community, means that needs will go unmet, and opportunities will be lost.

Smaller, rural markets are predominantly served by Community Banks as shown in this graphic. It is Community Banks that are headquartered in counties with populations of less than 50,000.

But, as the Fed indicates in the speech, there continues to be a decline in the number of banks serving these smaller, rural markets.

What is Federal Reserve and other regulators doing to help Community Banks:

  • Recent regulatory focus has been aimed at streamlining regulations and reducing the regulatory burden on smaller and regional banks.

  • Proposed a community bank leverage ratio that is designed to simplify significantly the standards banks must abide by for holding capital. As a result, qualifying community banks will only need to calculate and meet a single measure of capital adequacy, rather than multiple measures.

  • Proposed a reduction in the burden of reporting requirements for community banks.

  • For a subset of the smallest banks - those with less than $5 billion in total assets - regulators have also lengthened the amount of time between supervisory examinations and expanded eligibility of small bank holding companies that qualify for an exemption to the Federal Reserve's capital rules, a policy that was designed to promote local ownership of small banks and to help maintain banks in rural areas.

This trend - decline in number of community banks - is expected to continue. Actions such as these regulatory relief measures are important steps toward slowing that decline. But it will take a concerted effort by community bankers, their communities, community bank trade groups such as the Independent Community Bankers of America (ICBA) and bank regulators to identify the additional actions necessary to slow this declining trend. Community banks play such a critical role in supporting rural markets and their economies.

For further information and data on trends in community banks, go to tab titled: Community Banks: Number by State and Asset Size.