Statement by
Doreen R. Eberley, Director
Division of Risk Management Supervision on Examining
The State Of Small Depository Institutions
Before the
Committee on Banking, Housing, and Urban Affairs
US Senate; 538 Dirksen
Senate Office Building
September 16, 2014
Chairman Johnson, Ranking Member Crapo and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) on the state of small depository institutions. As the primary federal
regulator for the majority of community banks, the FDIC has a particular interest in
understanding the challenges and opportunities they face.
My testimony will highlight some findings from our community bank research efforts and
discuss some key performance statistics for community banks. I will describe the FDIC's
oversight of community banks and how it differs from our supervision of large banks and
will touch on some of our outreach and technical assistance efforts related to
community banks. Additionally, I will discuss how the FDIC has taken the characteristics
and needs of community banks into consideration in the drafting of regulations. Finally,
as you requested in your letter of invitation, I will discuss some important factors for
consideration when analyzing regulatory relief proposals.
Community Bank Research Agenda
FDIC Community Banking Study
Since late 2011, the FDIC has been engaged in a data-driven effort to identify and
explore issues and questions about community banks – the institutions that provide
traditional, relationship-based banking services in their local communities. Our research
is based on a definition of community banks that goes beyond asset size alone to
account for each institution's lending and deposit gathering activities, as well as the
limited geographic scope of operations that is characteristic of community banks.
Our initial findings were presented in a comprehensive Community Banking Study
(Study) published in December 2012.1 The study covered topics such as structural
change, geography, financial performance, lending strategies and capital formation, and
highlighted the critical importance of community banks to our economy and our banking
system.
While community banks account for about 14 percent of the banking assets in the
United States, they now account for around 45 percent of all the small loans to
businesses and farms made by all banks in the United States. In addition, the Study
Doreen R. Eberley, Director
Division of Risk Management Supervision on Examining
The State Of Small Depository Institutions
Before the
Committee on Banking, Housing, and Urban Affairs
US Senate; 538 Dirksen
Senate Office Building
September 16, 2014
Chairman Johnson, Ranking Member Crapo and members of the Committee, I
appreciate the opportunity to testify on behalf of the Federal Deposit Insurance
Corporation (FDIC) on the state of small depository institutions. As the primary federal
regulator for the majority of community banks, the FDIC has a particular interest in
understanding the challenges and opportunities they face.
My testimony will highlight some findings from our community bank research efforts and
discuss some key performance statistics for community banks. I will describe the FDIC's
oversight of community banks and how it differs from our supervision of large banks and
will touch on some of our outreach and technical assistance efforts related to
community banks. Additionally, I will discuss how the FDIC has taken the characteristics
and needs of community banks into consideration in the drafting of regulations. Finally,
as you requested in your letter of invitation, I will discuss some important factors for
consideration when analyzing regulatory relief proposals.
Community Bank Research Agenda
FDIC Community Banking Study
Since late 2011, the FDIC has been engaged in a data-driven effort to identify and
explore issues and questions about community banks – the institutions that provide
traditional, relationship-based banking services in their local communities. Our research
is based on a definition of community banks that goes beyond asset size alone to
account for each institution's lending and deposit gathering activities, as well as the
limited geographic scope of operations that is characteristic of community banks.
Our initial findings were presented in a comprehensive Community Banking Study
(Study) published in December 2012.1 The study covered topics such as structural
change, geography, financial performance, lending strategies and capital formation, and
highlighted the critical importance of community banks to our economy and our banking
system.
While community banks account for about 14 percent of the banking assets in the
United States, they now account for around 45 percent of all the small loans to
businesses and farms made by all banks in the United States. In addition, the Study
found that over 600 of the more than 3,100 U.S. counties – including small towns, rural
communities and urban neighborhoods – would have no physical banking presence if
not for the community banks operating there.
The Study highlighted some of the challenges facing community banks in the present
environment. Beyond the high credit losses that were experienced as a result of the
recession, community banks have also experienced a squeeze on net interest income
during the protracted period of historically low interest rates that has followed. Also,
while the available data do not permit a breakdown of regulatory versus non-regulatory
expenses, a number of community bankers interviewed as part of the Study stated that
the cumulative effect of regulation over time has led to increases in expenses related to
complying with the supervisory and regulatory process.
Nonetheless, the Study also showed that the core business model of community banks
– defined around well-structured relationship lending, funded by stable core deposits,
and focused on the local geographic community that the bank knows well – actually
performed comparatively well during the recent banking crisis. Amid the 500 some
banks that have failed since 2007, the highest rates of failure were observed among
non-community banks and among community banks that departed from the traditional
model and tried to grow faster with risky assets often funded by volatile brokered
deposits.
Our community bank research agenda remains active. Since the beginning of the year,
FDIC analysts have published new papers dealing with consolidation among community
banks, the effects of long-term rural depopulation on community banks, and on the
efforts of Minority Depository Institutions to provide essential banking services in the
communities they serve.2
Community Bank Performance and the New Community Bank Quarterly Banking Profile
Another important development in our research effort has been the introduction this
year of a new section in the FDIC Quarterly Banking Profile, or QBP, that focuses
specifically on community banks.3 Although some 93 percent of FDIC-insured
institutions met our community bank definition in the first quarter, their relatively small
size (encompassing only 14 percent of industry assets) tends to obscure community
banking trends amid industry aggregate statistics. This new quarterly report on the
structure, activities and performance of community banks should provide a useful
barometer by which smaller institutions can compare their own results. This regular
quarterly report is an important and ongoing aspect in the FDIC's active program of
research and analysis on community banking.
Our most recent QBP shows that community bank loan balances grew by 7.6 percent in
the year ending in June, outpacing a 4.9 percent rate of growth for the industry as a
whole. All major loan categories increased for community banks. One-to-four family
mortgages increased by 4.6 percent over the year. Small loans to businesses—loans to
commercial borrowers up to $1 million, and farm loans up to $500,000—totaled $297.9
billion as of June 30, an increase of 3.1 percent from a year ago. Almost three-quarters
communities and urban neighborhoods – would have no physical banking presence if
not for the community banks operating there.
The Study highlighted some of the challenges facing community banks in the present
environment. Beyond the high credit losses that were experienced as a result of the
recession, community banks have also experienced a squeeze on net interest income
during the protracted period of historically low interest rates that has followed. Also,
while the available data do not permit a breakdown of regulatory versus non-regulatory
expenses, a number of community bankers interviewed as part of the Study stated that
the cumulative effect of regulation over time has led to increases in expenses related to
complying with the supervisory and regulatory process.
Nonetheless, the Study also showed that the core business model of community banks
– defined around well-structured relationship lending, funded by stable core deposits,
and focused on the local geographic community that the bank knows well – actually
performed comparatively well during the recent banking crisis. Amid the 500 some
banks that have failed since 2007, the highest rates of failure were observed among
non-community banks and among community banks that departed from the traditional
model and tried to grow faster with risky assets often funded by volatile brokered
deposits.
Our community bank research agenda remains active. Since the beginning of the year,
FDIC analysts have published new papers dealing with consolidation among community
banks, the effects of long-term rural depopulation on community banks, and on the
efforts of Minority Depository Institutions to provide essential banking services in the
communities they serve.2
Community Bank Performance and the New Community Bank Quarterly Banking Profile
Another important development in our research effort has been the introduction this
year of a new section in the FDIC Quarterly Banking Profile, or QBP, that focuses
specifically on community banks.3 Although some 93 percent of FDIC-insured
institutions met our community bank definition in the first quarter, their relatively small
size (encompassing only 14 percent of industry assets) tends to obscure community
banking trends amid industry aggregate statistics. This new quarterly report on the
structure, activities and performance of community banks should provide a useful
barometer by which smaller institutions can compare their own results. This regular
quarterly report is an important and ongoing aspect in the FDIC's active program of
research and analysis on community banking.
Our most recent QBP shows that community bank loan balances grew by 7.6 percent in
the year ending in June, outpacing a 4.9 percent rate of growth for the industry as a
whole. All major loan categories increased for community banks. One-to-four family
mortgages increased by 4.6 percent over the year. Small loans to businesses—loans to
commercial borrowers up to $1 million, and farm loans up to $500,000—totaled $297.9
billion as of June 30, an increase of 3.1 percent from a year ago. Almost three-quarters