Statement of the
Federal Deposit Insurance Corporation
By
Richard A. Brown, Chief
Economist, on Lessons Learned
from the
Financial Crisis Regarding Community Banks
before the
Committee on Banking, Housing,
And
Urban Affairs, United States Senate;
534 Dirksen Senate
Office Building
June 13, 2013
Chairman Johnson, Ranking Member Crapo, and members of the Committee, we
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) regarding the state of community banking and to describe the
findings of the FDIC Community Banking Study (the Study), a comprehensive review
based on 27 years of data on community banks.1
As the Committee is well aware, the recent financial crisis has proved challenging for all
financial institutions. The FDIC’s problem bank list peaked at 888 institutions in 2011.
Since January 2008, 481 insured depository institutions have failed, with banks under
$1 billion making up 419 of those failures. Fortunately, the pace of failures has declined
significantly since 2010, a trend we expect to continue.
Given the challenges that community banks, in particular, have faced in recent years,
the FDIC launched a "Community Banking Initiative" (Initiative) last year to refocus our
efforts to communicate with community banks and to better understand their concerns.
The knowledge gathered through this Initiative will help to ensure that our supervisory
actions are grounded in the recognition of the important role that community banks play
in our economy. A key product of the Initiative was our FDIC Community Banking Study,
published last December, which is discussed in more detail below.
In my testimony, I describe some key lessons from the failures of certain community
banks during the recent crisis identified by the FDIC Community Banking Study.
Consistent with the studies performed under P.L. 112-88 by the FDIC Office of
Inspector General (OIG) and Government Accountability Office (GAO), the Study found
three primary factors that contributed to bank failures in the recent crisis, namely: 1)
rapid growth; 2) excessive concentrations in commercial real estate lending (especially
acquisition and development lending); and 3) funding through highly volatile deposits.
By contrast, community banks that followed a traditional, conservative business plan of
prudent growth, careful underwriting and stable deposit funding overwhelmingly were
able to survive the recent crisis.
Federal Deposit Insurance Corporation
By
Richard A. Brown, Chief
Economist, on Lessons Learned
from the
Financial Crisis Regarding Community Banks
before the
Committee on Banking, Housing,
And
Urban Affairs, United States Senate;
534 Dirksen Senate
Office Building
June 13, 2013
Chairman Johnson, Ranking Member Crapo, and members of the Committee, we
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) regarding the state of community banking and to describe the
findings of the FDIC Community Banking Study (the Study), a comprehensive review
based on 27 years of data on community banks.1
As the Committee is well aware, the recent financial crisis has proved challenging for all
financial institutions. The FDIC’s problem bank list peaked at 888 institutions in 2011.
Since January 2008, 481 insured depository institutions have failed, with banks under
$1 billion making up 419 of those failures. Fortunately, the pace of failures has declined
significantly since 2010, a trend we expect to continue.
Given the challenges that community banks, in particular, have faced in recent years,
the FDIC launched a "Community Banking Initiative" (Initiative) last year to refocus our
efforts to communicate with community banks and to better understand their concerns.
The knowledge gathered through this Initiative will help to ensure that our supervisory
actions are grounded in the recognition of the important role that community banks play
in our economy. A key product of the Initiative was our FDIC Community Banking Study,
published last December, which is discussed in more detail below.
In my testimony, I describe some key lessons from the failures of certain community
banks during the recent crisis identified by the FDIC Community Banking Study.
Consistent with the studies performed under P.L. 112-88 by the FDIC Office of
Inspector General (OIG) and Government Accountability Office (GAO), the Study found
three primary factors that contributed to bank failures in the recent crisis, namely: 1)
rapid growth; 2) excessive concentrations in commercial real estate lending (especially
acquisition and development lending); and 3) funding through highly volatile deposits.
By contrast, community banks that followed a traditional, conservative business plan of
prudent growth, careful underwriting and stable deposit funding overwhelmingly were
able to survive the recent crisis.
FDIC Community Banking Study
In December 2012, the FDIC released the FDIC Community Banking Study, a
comprehensive review of the U.S. community banking sector covering 27 years of data.
The Study set out to explore some of the important trends that have shaped the
operating environment for community banks over this period, including: long-term
industry consolidation; the geographic footprint of community banks; their comparative
financial performance overall and by lending specialty group; efficiency and economies
of scale; and access to capital. This research was based on a new definition of
community bank that goes beyond the asset size of institutions to also account for the
types of lending and deposit gathering activities and the limited geographic scope that
are characteristic of community banks.
Specifically, where most previous studies have defined community banks strictly in
terms of asset size (typically including banks with assets less than $1 billion), our study
introduced a definition that takes into account a focus on lending, reliance on core
deposit funding, and a limited geographic scope of operations. Applying these criteria
for the baseline year of 2010 had the effect of excluding 92 banking organizations with
assets less than $1 billion while including 330 banking organizations with assets greater
than $1 billion. Importantly, the 330 community banks over $1 billion in size held $623
billion in total assets – approximately one-third of the community bank total. While these
institutions would have been excluded under many size-based definitions, we found that
they operated in a similar fashion to smaller community banks. It is important to note
that the purpose of this definition is research and analysis; it is not intended to substitute
for size-based thresholds that are currently embedded in statute, regulation, and
supervisory practice
Our research confirms the crucial role that community banks play in the American
financial system. As defined by the Study, community banks represented 95 percent of
all U.S. banking organizations in 2011. These institutions accounted for just 14 percent
of the U.S. banking assets in our nation, but held 46 percent of all the small loans to
businesses and farms made by FDIC-insured institutions. While their share of total
deposits has declined over time, community banks still hold the majority of bank
deposits in rural and micropolitan counties.2 The Study showed that in 629 U.S.
counties (or almost one-fifth of all U.S. counties), the only banking offices operated by
FDIC-insured institutions at year-end 2011 were those operated by community banks.
Without community banks, many rural areas, small towns and urban neighborhoods
would have little or no physical access to mainstream banking services.
Our Study took an in-depth look at the long-term trend of banking industry consolidation
that has reduced the number of federally insured banks and thrifts from 17,901 in 1984
to 7,357 in 2011. All of this net consolidation can be accounted for by an even larger
decline in the number of institutions with assets less than $100 million. But a closer look
casts significant doubt on the notion that future consolidation will continue at this same
pace, or that the community banking model is in any way obsolete.
In December 2012, the FDIC released the FDIC Community Banking Study, a
comprehensive review of the U.S. community banking sector covering 27 years of data.
The Study set out to explore some of the important trends that have shaped the
operating environment for community banks over this period, including: long-term
industry consolidation; the geographic footprint of community banks; their comparative
financial performance overall and by lending specialty group; efficiency and economies
of scale; and access to capital. This research was based on a new definition of
community bank that goes beyond the asset size of institutions to also account for the
types of lending and deposit gathering activities and the limited geographic scope that
are characteristic of community banks.
Specifically, where most previous studies have defined community banks strictly in
terms of asset size (typically including banks with assets less than $1 billion), our study
introduced a definition that takes into account a focus on lending, reliance on core
deposit funding, and a limited geographic scope of operations. Applying these criteria
for the baseline year of 2010 had the effect of excluding 92 banking organizations with
assets less than $1 billion while including 330 banking organizations with assets greater
than $1 billion. Importantly, the 330 community banks over $1 billion in size held $623
billion in total assets – approximately one-third of the community bank total. While these
institutions would have been excluded under many size-based definitions, we found that
they operated in a similar fashion to smaller community banks. It is important to note
that the purpose of this definition is research and analysis; it is not intended to substitute
for size-based thresholds that are currently embedded in statute, regulation, and
supervisory practice
Our research confirms the crucial role that community banks play in the American
financial system. As defined by the Study, community banks represented 95 percent of
all U.S. banking organizations in 2011. These institutions accounted for just 14 percent
of the U.S. banking assets in our nation, but held 46 percent of all the small loans to
businesses and farms made by FDIC-insured institutions. While their share of total
deposits has declined over time, community banks still hold the majority of bank
deposits in rural and micropolitan counties.2 The Study showed that in 629 U.S.
counties (or almost one-fifth of all U.S. counties), the only banking offices operated by
FDIC-insured institutions at year-end 2011 were those operated by community banks.
Without community banks, many rural areas, small towns and urban neighborhoods
would have little or no physical access to mainstream banking services.
Our Study took an in-depth look at the long-term trend of banking industry consolidation
that has reduced the number of federally insured banks and thrifts from 17,901 in 1984
to 7,357 in 2011. All of this net consolidation can be accounted for by an even larger
decline in the number of institutions with assets less than $100 million. But a closer look
casts significant doubt on the notion that future consolidation will continue at this same
pace, or that the community banking model is in any way obsolete.