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FDIC Study: Community Banks’ Role Is Bigger Than Their Asset Share

By: Bill Poquette

Good research on community banking is hard to find, FDIC Chairman Martin Gruenberg advised members of the Independent Community Bankers of America at their National Convention and Tech World last month in Las Vegas. “We surveyed the work that has been done on community banks over the years and found that there really was no comprehensive study of the sector covering the last 26 years or so,” said Gruenberg, who has served as board member, vice chairman, acting chairman or chairman of the agency since 2005.

“Our research division assembled 27 years of banking data and developed a new research definition of the community bank that is based not just on size but on the characteristics that define community banking, namely: traditional relationship lending, reliance on stable core deposit funding and a focus on a limited geographic community,” Gruenberg said.

Community banks made up about 14 percent of U.S. banking assets in 2011, he reported, but held 46 percent of all the small loans to businesses and farms made by FDIC-insured institutions. “What this tells you is that community banks play a role in our financial system that actually has consequences far beyond their share of total industry assets,” Gruenberg told the ICBA group.

“By its nature,” he continued, small business lending is often labor-intensive and highly customized, which is the kind of lending that community banks really are set up to do. By contrast, the very largest institutions are generally not so interested in such a customized approach and are looking to provide more standardized products that they can offer on a larger scale.

Click here to view photos from this convention.

“So it’s really not at all clear whether U.S. small businesses would have sufficient access to the type of credit they need if there were not a strong community banking sector to fill this critical niche in our financial system,” Gruenberg went on. “And that has implications not just for the banking system but for the economy and job creation as a whole. It’s really a critical point that I think has not been well appreciated.”

The FDIC study also found that of the more than 3,200 counties in the United States, more than 600 of them — almost 20 percent — have no FDIC-insured banking offices except those operated by community banks. “So from the standpoint of both filling a critical niche in our financial system and providing access to top mainstream financial services in communities all over the country, community banks are in some measure irreplaceable,” Gruenberg told his sympathetic audience.

The FDIC chairman also had some reassuring words about the pace of industry consolidation, which concerns many community bankers. Around half of the institutions that left the industry during the study period did so via voluntary mergers, he reported. The other half were almost entirely made up of failures and intra-company consolidations within existing holding companies.

“It seems to me that if we could manage to run our financial system over the next 20 years so that we have fewer crises and fewer failures, the pace of consolidation over the coming decade or two may not be nearly as fast as we’ve seen over the past 20 years, particularly in the community bank model,” Gruenberg said. “And we think that the basic business model that community banks adhere to remains not only viable but quite critical to the function of the banking system in the United States.”

As comforting as the FDIC chairman’s comments may have sounded at that moment, ICBA leaders warned that the association members’ battle for regulatory relief and a level playing field is far from won. In fact, regulatory relief will be the No. 1 goal for 2013-2014 Chairman Bill Loving, president and CEO of Pendleton Community Bank in Franklin, W.Va.

“ICBA developed and recently unveiled a new robust platform for the 113th Congress. This initiative, or ‘Plan for Prosperity,’ contains a dozen regulatory relief provisions that will better enable your bank to serve your community,” Loving said during his inaugural speech. “Regulatory relief is job No. 1, and I promise you we will not let up until Congress and the regulators understand that overregulation of community banks will destroy the very economies and jobs we seek to grow.”

In addition to working with Congress and regulators to foster regulatory relief for community banks, Loving said that throughout the next year he and ICBA will work on seeking solutions for numerous critical issues important to community bankers, such as complex accounting standards, mortgage rulemaking, Basel III, too big to fail, the brutal exam environment and blocking the credit union power grab for member business lending. He also asked community bankers to continue reaching out to Congress and regulators to ensure their voices are heard from every part of the country.

ICBA’s president and CEO, Cam Fine, emphasized that community banks have yet to achieve an environment where they can flourish and continue to serve their local customers and communities. “Rarely is there anything shaped specifically for a community bank without a fight,” Fine said. “But being the underdog also makes us strong and effective, because we are consistently underestimated by those who oppose us.”

Next year’s convention will be March 2–6 at the Hilton Hawaiian Village in Honolulu.

Bill Poquette is editor-in-chief of BankNews.

Copyright (c) April 2013 by BankNews Media