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The Importance of Community Banks to the U.S. Financial System and Economy

Remarks by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation

By Gainey Business Bancorp | Monday, October 23, 2017

On October 23, 2017 the FDIC Chairman, Martin J Gruenberg, spoke at the “Day With the Secretary” Event hosted by the Illinois Department of Financial and Professional Regulation’s Division of Banking and the Conference of State Bank Supervisors in Springfield, IL.

Mr. Gruenberg began by stating, “Community banks have always carried out the banking core functions: gathering core deposits and making loans to individuals and small businesses. But unlike larger noncommunity banks, community banks have the local focus to give the detailed attention critical to the small business sector.”

We have extrapolated some of the most important statements of the chairman’s remarks below.

“…traditional community banks remain vitally important to our financial system and our economy.”

“Community banks hold 43 percent of all small loans to businesses and farms in the United States – more than three times their 13 percent share of industry assets.”

“The median age of community banks is 94 years, compared to 39 years for noncommunity banks.”

“…the median asset size of community banks has more than quadrupled since 1985, from $40 million to more than $170 million.”

“Amid all of the institutional and technological changes we have seen during the past 30 years, community banks remain the single-most important source of credit for small businesses and of banking services in general to non-metro areas.“

“Despite the rise of new competitors and the long-term consolidation in banking, no single competitor has emerged that can replicate or replace the mix of services that community banks provide.”

Total loans and leases held by community banks have grown by more than 8 percent in each of the past three years — extending to many segments of the loan portfolio. This growth has exceeded the pace of nominal growth in the U.S. economy.

In each of the past four years, community bank loans have grown faster than loans held at noncommunity banks in: 1- to 4-family mortgages, commercial real estate loans, and commercial and industrial loans.

In each of the past three years, annual growth in community bank net income has equaled or exceeded growth at noncommunity banks.

Net interest income is the foundation of community bank profitability. It has traditionally accounted for around 80 percent of net operating income for community banks, versus two-thirds at noncommunity banks. But the net interest margin for community banks today is lower than it was prior to the crisis. This decline in net interest margin has progressed over time as the period of zero or near zero interest rates has persisted. It far exceeds any other factor in holding back a full recovery in community bank profitability in the post-crisis period. No other factor comes close.

While community banks largely have recovered from the crisis and are exhibiting solid financial performance, there are challenges ahead. Among the more important challenges are: (1) The costs of regulatory compliance; (2) Responding effectively to changes in information technology; and (3) Managing succession planning and recruitment.

The federal banking agencies are currently following through on burden-reduction commitments made in the FDIC’s report to Congress earlier this year pursuant to the Economic Growth and Regulatory Paperwork Reduction Act. These actions include expanding the asset threshold for eligibility for the 18-month examination cycle, reducing the content required in quarterly Call Reports, increasing appraisal thresholds, and simplifying small bank capital rules. We have already taken steps in each of these areas to reduce burden, and we are working to do more.

Their role is inextricably connected to the small business sector where most new jobs are created. And community banks have been essential in providing banking services to local communities that often are not served by larger banks or non-bank financial institutions.

The strong post-crisis performance of community banks underscores their vitality and the critically important role that they play and will continue to play in the financial system and economy of the United States.

You may read the entire speech here: The Importance of Community Banks to the U.S. Financial System and Economy

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