Community Banking in the 21st Century
The third annual Federal Reserve System/ Conference of State Bank Supervisors Community Banking in the 21st Century Research and Policy Conference took place September 30 - October 1 at the Federal Reserve Bank of St. Louis. The research conference will brought together community bankers, academics, policymakers, and bank regulators to discuss the latest research on community banking.
The Federal Reserve/CSBS research conference presents an innovative approach to the study of community banks. Academics explore issues raised by the industry in a neutral, empirical manner and present their findings at the conference. Community bankers contribute through participation on discussion panels and feedback to the research presented, by contributing to an annual national survey, and by serving as keynote speakers at the conference.
Federal Reserve Governor Jay Powell gave opening remarks at the fourth annual conference. Other guest speakers included CSBS President and CEO John Ryan and Federal Reserve Bank of St. Louis President James Bullard.
The call for papers for the 2015 conference opened Feb 2, 2015.
For more information, please contact email@example.com.
Gateway Auditorium, 6th Floor | Federal Reserve Bank of St. Louis
September 30 - October 1, 2015
- Wednesday, September 30
Welcoming RemarksJulie Stackhouse
Executive Vice President, Federal Reserve Bank of St. LouisDavid Cotney
Commissioner of Banks, Massachusetts Division of BanksJames Bullard
President and CEO, Federal Reserve Bank of St. LouisJanet Yellen
Chair, Board of Governors of the Federal Reserve System
Research Paper Session 1Moderator: Ron Feldman
EVP and Senior Policy Advisor, Federal Reserve Bank of MinneapolisCommunity Bank Discussant: Megan Clubb
Chief Executive Officer, Baker Boyer National BankCommunity Bank Discussant PresentationThe Changing Role of Small Banks in Small Business LendingLamont Black and Michal KowalikLending on Main Street: Challenges and Opportunities for Community Banks – Before, During and After the Financial CrisisJulapa Jagtiani and Catharine LemieuxSmall Bank Comparative Advantage in Alleviating Financial Constraints and Providing Liquidity Insurance over TimeAllen N. Berger, Christa H.S. Bouwman and Dasol KimHow does Farm Credit System Lending Affect Competition in Banking Markets?Eric Hogue, Chuck Morris and Jim WilkinsonReaction to Small Business and Farm Lending SessionSmall Business and Farm Lending- Moderated Question and Answer Session
Presentation of Winning Video from CSBS' 2015 Inaugural Community Bank Case Study CompetitionNathan Ross
Director, Conference of State Bank Supervisors - CSBS
Reception and Dinner
Evening Keynote AddressLael Brainard
Governor, Board of Governors of the Federal Reserve System
- Thursday, October 1
Research Paper Session 2Moderator: Julapa Jagtiani
Special Advisor, Supervision, Regulation and Credit Department, Federal Reserve Bank of PhiladelphiaCommunity Bank Discussant: Charles "Chad" Paul, III
Director-member, North Carolina State Banking Commission; Managing Partner, Harbor Island Partners, LLC, Wilmington, N.C, North Carolina State Banking Commission; Harbor Island Partners, LLC, Wilmington, N.C.Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-1992 and 2007-13 Periods (PDF)Eliana Balla, Edward Simpson Prescott and John R. WalterFinancial Performance and Management Structure of Small, Closely Held BanksJohn M. Anderlik, Richard A. Brown, and Kathryn L. FritzdixonHow Vulnerable Are Agriculturally Concentrated Banks to a Fall in Agricultural Land Values?Ron Feldman and Jay SmithAn Historical Loss Approach to Community Bank Stress TestingTimothy J. YeagerReaction to Community Bank Performance session- Julapa JagtianiCommunity Bank Performance Moderated Question and Answer Session
Research Paper Session 3Moderator: Robin Prager
Senior Adviser, Board of Governors of the Federal Reserve SystemCommunity Bank Discussant: Steve Brown
President and CEO, Pacific Coast Bankers' BancsharesThe State and Fate of Community BankingRobert Greene and Marshall LuxAccounting for the Decline in the Number of Community Banks since the Great Recession; Explaining the Decline in the Number of Banks since the Great Recession (PDF)Roisin McCord and Edward Simpson PrescottThe Direct Costs of Bank Compliance around Crisis-Based Regulation for Small and Community BanksKen B. CyreePost-Crisis Residential Mortgage Lending by CommunityWilliam F. Bassett and John C. DriscollReaction to Community Banking: Pre- and Post-Crisis session Robin A. PragerCommunity Banking: Pre- and Post-Crisis Moderated Question and Answer Session
Afternoon Keynote AddressIntroduction: Charles Cooper
Commissioner, Texas Department of Banking
2015 National Survey of Community Banks: Presentation of ResultsAndrew Meyer
Senior Economist, Federal Reserve Bank of St. LouisMichael Stevens
Senior Executive Vice President, Conference of State Bank Supervisors - CSBSPresentation of Results2015 Community Banking in the 21st Century Research and Policy Conference Publication
Panel Discussion: Community Banking in the 21st Century - 2015 National Survey of Community Banks and State RoundtablesModerator: Eric Belsky
Director, Board of Governors of the Federal Reserve SystemPanelistsGilles Gade
Chairman, President and CEO, Cross River Bank, Teaneck, N.J.Richard Neiman
Head of Regulatory and Government Affairs, Lending Club, San Francisco, Calif.Ronald Pence
President and CEO, Kentucky Neighborhood Bank, Elizabethtown, Ky.Paul Sanford
Assistant Director for supervision examinations, Consumer Financial Protection Bureau (CFPB), Washington, D.C.
Research Papers, Authors and Key Findings
Research Paper Session 1
Community Bank Discussant Presentation
The Changing Role of Small Banks in Small Business Lending
Authors: Lamont Black, Driehaus College of Business, DePaul University Chicago, Illinois; Michal Kowalik, Federal Reserve Bank of Boston
Abstract: This paper studies the effects of competition from large banks on small banks’ lending to small business borrowers. Small banks are better at monitoring their borrowers, but large banks have lower financing costs. This study looks at bank balance sheet data broken down by bank size. The study’s findings indicate that single-market banks increase their shares of small business loans in the intermediate size category ($250,000 to $1 million) following large bank entry into the market.
Small Business Lending Challenges and Opportunities for Community Banks
Authors: Catharine Lemieux, Federal Reserve Bank of Chicago; Julapa Jagtiani, Federal Reserve Bank of Philadelphia
Abstract: The ongoing evolution of the small business lending sector presents both challenges and opportunities to community banks. Many argue that the recent financial crisis and subsequent changes to the regulatory environment have resulted in declines in small business lending both directly and indirectly, by accelerating the effects of other contributing factors. Community banks face greater competition as large banks have increasingly leveraged technology to compete for smaller commercial borrowers. Competitive pressures on community banks are also rising as many borrowers become more comfortable turning to nonbank lenders. These alternative lenders have begun to introduce sophisticated technologies and new underwriting methods to issue small business loans quickly and electronically. Meanwhile, more established businesses are expecting more from small banks in terms of new products, technology and customer services. However, concurrent post-crisis regulations have made community banks less flexible, especially relative to unregulated nonbank lenders.
Despite these challenges, community banks are seeing new opportunities as well. Demand is higher for Small Business Administration loans, which are profitable products for many community banks. Growing interest in unconventional, higher-margin loan products may fit well with community banks. Historically, small banks have been strong in qualitative borrower analysis and relationship lending. There are recent examples of banks partnering with alternative lenders to purchase qualifying loans originated by online platforms.
Small Bank Comparative Advantage
Authors: Allen Berger, Darla Moore School of Business, University of South Carolina; Christa Bouwman, Texas A&M University; Dasol Kim,
Abstract: This paper uses novel survey data on U.S. small businesses ranging from 1993-2012 to evaluate whether small banks, compared to large banks, provided better financial support to small businesses. The analysis concludes that small banks have a stronger comparative advantage when local economic conditions are worse. It also finds that this advantage has not diminished over time.
During the recent financial crisis, both types of banks reduced lending to small businesses. However, following the Lehman Brother failure, small banks provided more support in regions dependent on asset-backed commercial paper markets. The paper asserts that small banks were able to achieve this by providing liquidity insurance to relationship borrowers. Large banks are more reliant on transactional lending technologies, like credit scoring models, which can be less effective during periods of economic stress.
Competition in Agricultural Lending Markets: The Effect of Including the Farm Credit System
Authors: Charles Morris, Federal Reserve Bank of Kansas City; James Wilkinson, Federal Reserve Bank of Kansas City; Eric Hogue, Federal Reserve Bank of Kansas City
Abstract: In recent years, bank consolidations have led to measurable increases in banking market concentration, according to traditional metrics. However, standard deposit-based measures for banking market concentration and competition fall short regarding capturing the impact of competitive pressures from non-bank institutions. In rural markets, agricultural lending is a principal business activity, and the Farm Credit System’s Agricultural Credit Associations (ACAs) play an important role.
This paper examines the lending structures and practices in rural banking markets, as well as the trends amongst traditional bank and ACA lending. Using this analysis, the paper puts forth a lending-based measure of banking market concentration that includes ACA activities. The final section calculates market shares of individual lenders and market concentration ratios with the new model and compares them to the deposit-based measurements.
Reaction to Small Business and Farm Lending Session
Small Business and Farm Lending- Moderated Question and Answer Session
Research Paper Session 2
Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods
Authors: Eliana Balla, Federal Reserve Bank of Richmond; Edward Prescott, Federal Reserve Bank of Cleveland; John Walter, Federal Reserve Bank of Kansas City
Abstract: The banking problems in the late 1980s and early 1990s spurred two significant changes to banking supervision and regulation: the Basel 1 capital requirements and the prompt corrective actions (PCA) provisions of the FDIC Improvement Act (FDICIA). The PCA provisions, specifically, require regulators to shut down banks before book capital becomes negative.
To examine the impact of these reforms, this paper compares failures and FDIC losses on commercial banks in two different eras, the 1980-1990s, before the FDICIA and Basel 1 reforms, and then the recent financial crisis. The analysis uses a sample of community and mid-sized banks and shows that predictors of failure and high losses were matching across crises. The paper also finds that the failure rate in the recent period was driven more by severe economic conditions than by high concentrations in real estate lending.
While the PCA provisions and the increased capital requirements reduced the bank failure rate, they were less effective in mitigating FDIC losses. FDIC losses on commercial banks were 14 percent of failed bank assets in the first period, but rose to approximately 24 percent in the second period. The study found that neither variations in bank balance sheets, nor local economic conditions were able to explain variations in FDIC losses. However, “interest accrued, but not yet received”, a discretionary accounting variable, was predictive for both bank failure and higher FDIC losses.
Financial Performance and Management Structure of Small, Closely Held Banks
Authors: John Anderlik, Federal Deposit Insurance Corporation (FDIC); Richard Brown, Federal Deposit Insurance Corporation (FDIC); Kathryn Fritzdixon, Federal Deposit Insurance Corporation (FDIC)
Abstract: This paper examines the challenges and opportunities specific to closely held banks. It is based on a survey of bank examiners in three FDIC supervisory regions that is used to identify the ownership and management structure of over 1,400 institutions. Almost 75 percent of community banks in these regions can be regarded as closely held, typically on the basis of family or community ties. Closely held banks may face certain operational challenges in terms of raising external capital and recruiting future managers, especially in rural areas. At the same time, closely held banks may have certain operational advantages, including the ability to focus on long term goals and to minimize agency problems that may arise from the separation of ownership and operational control. The paper compares the performance of closely and widely held banks as identified in the survey and finds that closely held banks do not appear, on net, to have underperforming widely held banks in recent years. However, the results also point to the possibility that succession management may be a more difficult problem to them to resolve over the long term.
How Vulnerable Are Agriculturally Concentrated Banks to a Fall in Agricultural Land Values
Authors: Joseph "Jay" Smith, Federal Reserve Bank of Minneapolis; Ron Feldman, Federal Reserve Bank of Minneapolis
Abstract: Agricultural land values are currently at all-time highs, both in absolute terms and relative to the income they generate (e.g., price-to-rent ratio). This paper examines the determinants of performance of the agricultural sector and provides background on agricultural lending. Its focus is modeling the impact of a fall in land values on banks with large agricultural concentrations and exposure. Evidence indicates that the average agricultural bank would not suffer large loans losses. However, the subset of agricultural banks that are the most sensitive to land value declines would suffer substantial losses and reduced levels of capital.
An Historical Loss Approach to Community Bank Stress Testing
Author: Timothy Yeager, University of Arkansas
Abstract: This paper develops a stress testing model for community banks that uses an historical loss approach, subjecting banks to credit conditions from the 2008-2012 period. The model attempts to capture the resiliency of small banks to severe commercial real estate (CRE) downturns and/or recessions. The stress test utilizes the new loan categories that were added to the call reports in 2007.
The paper focuses its analysis on the performance of residential construction loans and owner-occupied CRE loans, which had perceived lower default risk ex-ante. In fact, default rates amongst these loan types were similar to rates for nonresidential and non-owner occupied loans during the sample period. Consequently, this provided fewer diversification benefits.
Reaction to Community Bank Performance session- Julapa Jagtiani
Community Bank Performance Moderated Question and Answer Session
Research Paper Session 3
The State and Fate of Community Banking
Authors: Marshall Lux, Harvard Kennedy School, Mossavar-Rahmani Center for Business and Government; Robert Greene, Harvard Kennedy School, Mossavar-Rahmani Center for Business and Government
Abstract: Community banks service a large number of key segments of the U.S. commercial bank lending market, including agriculture, real estate and small business loans. However, over the past 20 years, community banks’ market share of assets and lending has fallen from over 40 percent in 1994 to about 20 percent today. However, the passage of the Dodd-Frank Act seems to have accelerated this trend. Since its passage, around the second quarter of 2010, community banks’ share of U.S. commercial banking assets has fallen at a rate twice as quickly as compared to the previous four years. Community banks have also seen significant decreases in small business lending volume and incurred disproportionately large losses.
This paper aims to review the impact of regulation, consumer trends and other factors on community banks. It also examines the consequences of consolidation on U.S. lending markets and concludes with a discussion of policies to promote a more competitive and robust banking sector.
Accounting for the Decline in the Number of Community Banks since the Great Recession
Authors: Edward Prescott, Federal Reserve Bank of Cleveland; Roisin McCord, Federal Reserve Bank of Richmond
Abstract: Since the 2007-2009 financial crisis, there has been a significant change in the number of banks in the U.S. At the end of 2007, there were 6,153 commercial banks. By 2013, the number of banks had fallen to 5,317, a decrease of 13.6 percent. This article looks at the changes in the dynamics of entry and exit in the banking sector, as well as the fluctuations in market share of banks of differing sizes. According to the paper, measures of entrances by new banks have been inflated since the Great Recession because the majority of recent entrants have been spinoffs from larger holding companies and converted non-bank lenders. It examines the lack of de novo banks and posits two explanations for the dramatic decline in the influx of new banks since 2009: weak economic growth and restrictive banking regulations. The article concludes by discussing the implications that the current pace of decline of commercial banks could have if it continues.
The Direct Costs of Bank Compliance around Crisis-Based Regulation for Small and Community Banks
Author: Ken Cyree, University of Mississippi School of Business Administration; Director, Mississippi School of Banking
Abstract: This paper looks at the impact of regulatory policy changes and legislation from the past 25 years, the Dodd-Frank Act in particular, on compliance costs for community banks. The 2014 KPMG Community Banking Survey indicates that many bankers find the regulatory burden placed on community banks to be the largest constraint to growth.
This study looks at pre-tax return on investment and loans per employee as measures for banks’ performance and output. Salaries-to-assets, average pay, and technology and fixed assets are all used as measures for the changes in resource allocation and expenditure. The paper explores the reasons that changes in these variables following the Dodd-Frank Act deviate from patterns seen with several other major regulatory changes going back to 1991. Findings show that direct and indirect compliance costs have complex manifestations that go beyond hiring more people to perform additional regulatory and compliance tasks.
Post-Crisis Residential Mortgage Lending by Community
Authors: John Driscoll, Board of Governors of the Federal Reserve System; William Bassett, Board of Governors of the Federal Reserve System
Abstract: Since the recent financial crisis, policymakers have made several changes to the supervision and regulation of originations of mortgage loans with the intent of selling and securitizing them. Some banks and researchers have argued that these changes in the regulatory environment have restricted community bank activities in this market. This study looks at bank Call Reports to examine the profitability and participation of banks in mortgage sales and securitization. Analysis shows that community banks engaged in these activities have higher returns on assets and equity than larger banks. The paper argues that banks have not been, on net, deterred from engaging in these activities, have become a more important part of the market, and have profited from mortgage sales and securitization.
Reaction to Community Banking: Pre- and Post-Crisis session Robin A. Prager
Community Banking: Pre- and Post-Crisis Moderated Question and Answer Session
Speakers and Panelists
James Bullard is the president and CEO of the Federal Reserve Bank of St. Louis. In that role, he is a participant on the Federal Reserve’s Federal Open Market Committee (FOMC), which meets regularly to set the direction of U.S. monetary policy. He also oversees the Federal Reserve’s Eighth District, including activities at the St. Louis headquarters and its branches in Little Rock, Arkansas, Louisville, Kentucky, and Memphis, Tennessee. A noted economist and policymaker, Bullard makes Fed transparency and dialogue a priority on the international and national stage as well as on Main Street. He serves on the board of directors of the St. Louis Regional Chamber and the board of directors of Concordance Academy of Leadership, and he is a past board chair of the United Way U.S.A. Bullard is co-editor of the Journal of Economic Dynamics and Control, and a member of the Central Bank Research Association’s senior council. He is an honorary professor of economics at Washington University in St. Louis, where he also sits on the advisory council of the economics department and the advisory board of the Center for Dynamic Economics. A native of Forest Lake, Minnesota, Bullard received his doctorate in economics from Indiana University in Bloomington.
Catharine Lemieux is executive vice president in charge of supervision and regulation at the Federal Reserve Bank of Chicago. She directs the supervision and regulation of more than 800 banking organizations, including bank holding companies, state-chartered member banks, bank and savings and loan holding companies, financial holding companies and U.S. foreign bank branches within the Seventh Federal Reserve District. Additionally, she co-chairs the Supervision Performance and Planning Committee. Lemieux began her career with the Federal Reserve System at the Kansas City Fed in 1990. She joined the Chicago Fed as a senior examiner, and has assumed a number of management positions of increasing responsibility within the department. She has more than 30 years of experience in the industry, serving as a lender, professor, policy analyst and bank regulator. She holds a Ph.D. from Texas A&M University.
John W. Ryan is the president and CEO of the Conference of State Bank Supervisors, the national association representing state banking supervisors and the leading advocate for advancing the state banking system. Before being named CSBS president and CEO in August 2011, Ryan was CSBS's executive vice president, a position he had held since October 2003. He first joined CSBS in 1997 as an assistant vice president for legislative affairs. Prior to joining CSBS, Ryan worked at Newmyer Associates, a public affairs consulting firm, where he led the company's financial services consulting practice. Previous to his work at Newmyer Associates, Ryan spent four years as a professional staff member to the U.S. House of Representatives Committee on Banking, Finance and Urban Affairs. Ryan received a bachelor's degree in political science and economics from the University of California-Berkeley.
Julie Stackhouse is executive vice president and managing officer of supervision, credit, community development and learning innovation for the Federal Reserve Bank of St. Louis. Prior to joining the St. Louis Fed in September 2002, Stackhouse served as vice president and managing officer of the Risk Management department of the Federal Reserve Bank of Minneapolis. In addition, she was formerly an officer with the Federal Reserve Bank of Kansas City prior to relocating to Minnesota in 1995. She served in many capacities at the Kansas City Reserve Bank, starting as an examiner in 1980. Stackhouse holds a bachelor's degree in business administration from Drake University and is a graduate of the Wisconsin Graduate School of Banking. She currently serves as president-elect of the Board for National Charity League, Inc., a mother-daughter philanthropic organization, and as a member of the St. Louis Forum. In 2010, Stackhouse was named a St. Louis Business Journal “Most Influential Business Women” recipient, and in 2016, was recognized with the Delta Sigma Pi Lifetime Achievement Award.
Michael Stevens is the senior executive vice president at the Conference of State Bank Supervisors (CSBS). He is responsible for leading the organization's public policy, financial supervision, federal coordination, communications, industry relations and professional development functions. Stevens also serves as the principal deputy to the state banking member of the Financial Stability Oversight Council. Prior to his appointment in September 2011, he served as the senior vice president for regulatory policy, representing the state banking system in the development of policy in the areas of financial stability, prudential supervision and consumer protection. He joined CSBS in 1999 to work in all facets of CSBS's professional development division. Stevens is a frequent instructor and speaker on banking policy, examinations and financial analysis. He serves on the faculty of the Graduate School of Banking at Colorado and at Texas Tech University's School of Banking. He began his regulatory career as a bank examiner for the Iowa Division of Banking, where he served 11 years.