Donald E. Powell
Chairman
Federal Deposit Insurance Corporation
Remarks Before The
Independent Community Bankers Association
March 16, 2004
San Diego, California
FOR IMMEDIATE RELEASE Media Contact:
PR-22-2004 (3-16-2004) David Barr (202) 898-6992
Good morning. It is, as always, a pleasure to be with you today. We appreciate the
friendship and support over the years provided by your organization. In particular, I am
personally grateful for Ken Guenther's service to the community banks of America. He
has been a stalwart friend and ally during my tenure in Washington and we wish him
well as he moves on toward a well-deserved retirement.
But as friends like Ken move on - and new friends like Cam Fine fill their shoes - many
of the fundamental trends in our industry remain with us. And many of these trends
could have profound consequences for your banks and your communities. The banking
marketplace continues to shift under your feet, and you have reason to be optimistic.
There are clear signs that community banks are transforming their businesses to meet
the needs of their communities in ways - and indeed in markets - you could not have
dreamed of a few short years ago. This is the wonderful, transformative power of the
American economy at work and you should be proud of what you've done.
And it is also important to realize that the survivors - those of you who will attend this
gathering ten years from now - will be those who recognized these shifts and followed
your customers and your markets toward the banking products and services demanded
by their communities. The American consumer is relentlessly leading businesses into a
world of high efficiencies, high productivity, and low costs. Fighting this is like trying to
hold back the tide, and I'm gratified by the work you're doing to improve your business
models, improve your banks, and add to the common wealth of your communities.
These are sometimes hard trends to spot when things are as good as they've been for
you over the past decade. Banks continue to return record profits to their shareholders.
Low interest rates have spurred customer demand for more products. Technology, and
the transformation in customer relationships it allows, has been demanding a lot of your
time. We know regulatory compliance consumes a lot of your attention. You face
renewed competition - both from large banking organizations eyeing your market share
on one side to other organizations like credit unions on the other.
And, by the way, I have a position on that issue: credit unions ought to pay taxes. The
playing field has shifted in recent years. We've gone from 20 credit unions with assets of
more than $1 billion ten years ago to 83 such institutions today. More and more we're
Chairman
Federal Deposit Insurance Corporation
Remarks Before The
Independent Community Bankers Association
March 16, 2004
San Diego, California
FOR IMMEDIATE RELEASE Media Contact:
PR-22-2004 (3-16-2004) David Barr (202) 898-6992
Good morning. It is, as always, a pleasure to be with you today. We appreciate the
friendship and support over the years provided by your organization. In particular, I am
personally grateful for Ken Guenther's service to the community banks of America. He
has been a stalwart friend and ally during my tenure in Washington and we wish him
well as he moves on toward a well-deserved retirement.
But as friends like Ken move on - and new friends like Cam Fine fill their shoes - many
of the fundamental trends in our industry remain with us. And many of these trends
could have profound consequences for your banks and your communities. The banking
marketplace continues to shift under your feet, and you have reason to be optimistic.
There are clear signs that community banks are transforming their businesses to meet
the needs of their communities in ways - and indeed in markets - you could not have
dreamed of a few short years ago. This is the wonderful, transformative power of the
American economy at work and you should be proud of what you've done.
And it is also important to realize that the survivors - those of you who will attend this
gathering ten years from now - will be those who recognized these shifts and followed
your customers and your markets toward the banking products and services demanded
by their communities. The American consumer is relentlessly leading businesses into a
world of high efficiencies, high productivity, and low costs. Fighting this is like trying to
hold back the tide, and I'm gratified by the work you're doing to improve your business
models, improve your banks, and add to the common wealth of your communities.
These are sometimes hard trends to spot when things are as good as they've been for
you over the past decade. Banks continue to return record profits to their shareholders.
Low interest rates have spurred customer demand for more products. Technology, and
the transformation in customer relationships it allows, has been demanding a lot of your
time. We know regulatory compliance consumes a lot of your attention. You face
renewed competition - both from large banking organizations eyeing your market share
on one side to other organizations like credit unions on the other.
And, by the way, I have a position on that issue: credit unions ought to pay taxes. The
playing field has shifted in recent years. We've gone from 20 credit unions with assets of
more than $1 billion ten years ago to 83 such institutions today. More and more we're
seeing credit union advertising touting the benefits of membership over doing business
with a bank. In my view, if they are going to compete with banks then we should do our
best to ensure that the competition is fair. Our back-of-the-envelope research shows
that taxing credit unions would bring in about $2 billion to the Federal Treasury - and
would eliminate a current credit union subsidy of between 33 and 36 basis points.
That being said, there are other issues you must consider. Consolidation has been
relentless. The number of community banks declined by almost half between 1985 and
2001. Market share dropped significantly. The hardest hit were banks with assets of
less than $100 million. But if you can pull back from this for a moment, and look at the
longer-term trends, there is a positive story in the numbers.
Community banks continue to maintain presence in all types of markets - urban,
suburban, and rural. They remain profitable in both regions of population growth and
population decline. Further, community bank performance is satisfactory when
compared to that of the largest banks. From 1992, ROA, for example, has been at least
100 basis points - and this remains true even in those markets experiencing population
declines.
Finally, the community bank business model is still sought-after as you follow your
customers into the suburbs and inner cities. We've seen more than 1,100 new banks
formed since 1992, and their continued strength in small business and neighborhood
lending has helped serve new customers, create jobs, bank the unbanked, and add to
the economic vitality of their communities.
As you take comfort in these trends, we know you are aware of the risks in the economy
and that you have controls in place to measure and manage them. By definition, these
controls are based on the world you're familiar with - the way things have been in the
past. I could list ten things you should look out for, but, really, your biggest challenge is
to know when your world might fundamentally shift. That is when your models and
controls will fail and you will be vulnerable to problems of a type and scale you never
thought possible.
I know this is true because I've lived it. When it came to oil, real estate and other
commodities in West Texas in the 1980s, the conventional wisdom - the notion that
"they're not making any more of it" - was deeply ingrained in our decision-making and it
was dead wrong. The more entrenched our wisdom became, the more we saw a herd
mentality develop. This allowed minor problems to assume a scale and scope large
enough to cause serious damage when these underlying assumptions were proved
wrong.
What about your business? Let's take a look at today's fads, where the herd is heading,
and see if there are weaknesses there we might be missing. Consumer mortgage
lending has been the saving grace for much of the banking industry over the last three
years as commercial loan demand remains weak. Early last year, for example,
mortgage lending made up 70 percent of the industry's asset growth. In the second half
with a bank. In my view, if they are going to compete with banks then we should do our
best to ensure that the competition is fair. Our back-of-the-envelope research shows
that taxing credit unions would bring in about $2 billion to the Federal Treasury - and
would eliminate a current credit union subsidy of between 33 and 36 basis points.
That being said, there are other issues you must consider. Consolidation has been
relentless. The number of community banks declined by almost half between 1985 and
2001. Market share dropped significantly. The hardest hit were banks with assets of
less than $100 million. But if you can pull back from this for a moment, and look at the
longer-term trends, there is a positive story in the numbers.
Community banks continue to maintain presence in all types of markets - urban,
suburban, and rural. They remain profitable in both regions of population growth and
population decline. Further, community bank performance is satisfactory when
compared to that of the largest banks. From 1992, ROA, for example, has been at least
100 basis points - and this remains true even in those markets experiencing population
declines.
Finally, the community bank business model is still sought-after as you follow your
customers into the suburbs and inner cities. We've seen more than 1,100 new banks
formed since 1992, and their continued strength in small business and neighborhood
lending has helped serve new customers, create jobs, bank the unbanked, and add to
the economic vitality of their communities.
As you take comfort in these trends, we know you are aware of the risks in the economy
and that you have controls in place to measure and manage them. By definition, these
controls are based on the world you're familiar with - the way things have been in the
past. I could list ten things you should look out for, but, really, your biggest challenge is
to know when your world might fundamentally shift. That is when your models and
controls will fail and you will be vulnerable to problems of a type and scale you never
thought possible.
I know this is true because I've lived it. When it came to oil, real estate and other
commodities in West Texas in the 1980s, the conventional wisdom - the notion that
"they're not making any more of it" - was deeply ingrained in our decision-making and it
was dead wrong. The more entrenched our wisdom became, the more we saw a herd
mentality develop. This allowed minor problems to assume a scale and scope large
enough to cause serious damage when these underlying assumptions were proved
wrong.
What about your business? Let's take a look at today's fads, where the herd is heading,
and see if there are weaknesses there we might be missing. Consumer mortgage
lending has been the saving grace for much of the banking industry over the last three
years as commercial loan demand remains weak. Early last year, for example,
mortgage lending made up 70 percent of the industry's asset growth. In the second half