Banking in the Ninth

The Role of Community Banks

Ninth District Highlights - September 2011

Ron J. Feldman - Senior Vice President

Published September 1, 2011  |  September 2011 issue

Community banks are concerned that new consumer and safety and soundness regulations, along with potentially more intense supervision, will increase their costs without a commensurate increase in revenue. Some banks view this combination as an existential threat. To make this point, many bankers ask me if there is a “plan” to reduce their numbers.

Of course there is no such plan; bankers ask me this question out of frustration. In fact, the interest of the Federal Reserve Bank of Minneapolis lies in a vibrant community banking system. This interest does not arise out of self preservation—many reserve bank employees work exclusively on community bank issues—or an emotional connection to community banks (which I can attest many bank supervisors have).

Rather, the Minneapolis Fed recognizes the critical private market function community banks play. There are many small firms with good projects to finance. There are also lots of bad projects. It is very difficult to figure out which ones are good and worth financing from the outside. Through their relationship-lending model, community banks are better able to make that determination than other financial institutions. In doing so, they help GDP and employment grow faster. As such, Chairman Bernanke summarized earlier this year:

“Given the important role that community banks play in their local economies, we at the Federal Reserve are keenly interested in their health and their collective future. Local communities, ranging from small towns to urban neighborhoods, are the foundation of the U.S. economy and communities need community banks to help them grow and prosper” (Chairman Ben S. Bernanke, At the Independent Community Bankers of America National Convention, San Diego, Calif., March 23, 2011, online at federalreserve.gov).

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