“Community Banks and Other Priorities of CSBS in 2014-15“
CANDACE A. FRANKS
BANK COMMISSIONER, ARKANSAS STATE BANK DEPARTMENT
CHAIRMAN, CONFERENCE OF STATE BANK SUPERVISORS
First National Bankers Bankshares, Inc. 2014 Annual Summer Conference
SANDESTIN, FLORIDA
June 17, 2014
Good morning and thank you for your kind invitation to speak. I’ve attended this conference
for several years now and have to admit that while it may be easier to wake up for a day of
work in Sandestin, this beautiful setting can make it harder to concentrate on work as the day
wears on.
That is not necessarily a good thing for a bank commissioner, who is expected to wear his or her
“game face“ for 24/7, all 365 days of the year.
Well, I’ve taken my “game face“ off for now, but I do want to talk about a serious topic – a topic
that’s important to everyone in this room, to the entire banking industry, to bank customers
and to the economy.
That topic is “community banking.“
For the past few years, preserving and enhancing the community banking system has been an
organizational priority of the Conference of State Bank Supervisors. In my role as chairman of
the CSBS Board of Directors over the next 11 months, one of my priorities will be to continue to
advocate aggressively for the community banking model.
You see, the community banking model is critical to preserving a diverse and dynamic banking
system. Allow me, please, to repeat that phrase: “A diverse and dynamic banking system.“
These are not merely words I use to serve my interest as the bank commissioner of a state of
predominantly community banks. On the contrary, I have some hard data to support my
statement.
For example:
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Community banks increased capital during years of strong economic growth, which left
them in a better position to survive the financial crisis than larger banks. In fact, during
the financial crisis, when the largest banks reduced lending to preserve capital and
survive, community and regional banks maintained the flow of credit, helping to prevent
a complete collapse of the economy.
Let’s take a look at my first slide to illustrate another benefit of a diverse banking
industry. As you can see, while commercial banks with $10 billion dollars or less in
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assets hold only 17 percent of system assets, 21 percent of loans and 18 percent of
deposits, these banks hold 56 percent of loans to small businesses and farms, and 40
percent of commercial real estate loans.
These loans put people – our bank customers – to work. According to the Small Business
Administration, small businesses generate 64 percent of net new private-sector jobs and
account for 43 percent of private-sector payroll.
The FDIC, which conducted a Community Banking Study that was released in December 2012,
found that community banks continue to play a pivotal role in our economy. As of 2011, the
FDIC reports, community banks made up 92 percent of FDIC-insured banks.
Furthermore, the FDIC found, community banks hold the majority of banking deposits in rural
and micropolitan counties, and that there are more than 600 counties that have no other
physical banking offices except those operated by community banks. That’s almost one out of
every five counties in the United States.
The loss of a banking office in any of these roughly 600 counties would create a vacuum of
banking products and services – including critical access to credit – for individuals and
businesses. These customers could have no choice other than to travel to a bank in a
neighboring county or to turn to a non-bank financial services provider that is not subject to
consumer protection oversight.
How are community banks faring? In terms of bank performance and condition, they are doing
well, as these next two slides show:
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This first slide tracks the trend for commercial banks nationally from the year 2007 to
March of 2014 in four performance and condition indicators: Return on Assets; Net
Charge-offs to Loans; Noncurrent Loans to Loans; and the Tier 1 Leverage Capital ratio.
On the left side of the table, for each indicator, the banks are stratified by size, from
smallest to largest.
The yellow highlighting represents the top performing size category for each indicator.
Visualizing the yellow highlighting as a trend line, you should note that for the last three
performance and condition indicators, the smaller banks have consistently
outperformed the larger banks across the time line.
The trend in Return on Assets is not as well defined, however. The smaller banks clearly
performed better during the financial crisis, but the larger banks have posted higher
aggregate ROAs coming out of the crisis and continuing through the most recent
quarter.
On this next slide, each group’s average rank is calculated in the far right column for
each of the four performance and condition indicators. An average ranking can range
from 1 to 6, with a lower number representing better relative performance.
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Again, as indicated on the previous slide, the smallest banks outperformed the largest
banks on the two measures of asset quality during the period and, with one exception,
had higher Tier 1 Capital ratios.
In contrast, the largest banks recorded the lowest average ranking for profitability,
indicating better relative performance.
In addition, in its Quarterly Banking Profile for March 31, 2014, the FDIC reported that the yearover-year percentage decline in earnings at community banks was notably lower than the
decline for the industry overall. Also, the FDIC reported, the noncurrent loan rate for
community banks is 78 basis points below the rate for the entire industry.
Clearly, there is a place for successful community banks in the $15 trillion dollar banking
system. There is no doubt that community banks add value, individually to each of their
communities and, in aggregate, to the national economy.
On an encouraging note, a more recent FDIC study finds that consolidation has had much less
impact on the community banking sector than is commonly believed. A key finding of the study
is that financial institutions with assets between $100 million and $10 billion have actually
increased in both number and total assets since 1985.
For its Community Banking Study, the FDIC defines “community banks“ in terms of how and
where they conduct business. Community banks tend to focus on providing essential banking
services in their local communities. They obtain most of their core deposits locally and make
many of their loans to local businesses. For this reason, they often are considered to be
“relationship” bankers as opposed to “transactional” bankers. This means that they have
specialized knowledge of their local community and their customers. Because of this expertise,
community banks tend to base credit decisions on local knowledge and non-standard data
obtained through long-term relationships and are less likely to rely on the model-based
underwriting used by larger banks.
You know, our industry is evolving at a frenetic rate. It is almost impossible to keep pace. Each
day brings something different.
Many of us in this room have been bankers for a number of years, perhaps longer than we care
to admit. Over those years – or, in my case, those decades – the scope of bank supervision, the
tools of bank supervision and the pace of bank supervision have changed.
Yet, in spite of the rapid evolution, regulators must not lose sight of the core basics of what
they do and what they’re trying to achieve. And regardless of the changes in the scope, tools
and pace of supervision, the basics of supervision have changed very little.
The goals and objectives of supervision – to create a sound financial services industry – are still
the same. I believe a sound financial services industry means a diverse industry – one marked
by banks and providers of all sizes, shapes, locations and business models. This diversity makes
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credit available in all corners of our country and across the globe. It also makes our financial
system and economy more resilient, as it guarantees the flow of credit in good times and bad.
This diversity, however, currently is under threat. The number of banks over the years has
continued to shrink, while consolidation of assets has grown. In an industry with more than
6,700 banks, the four largest banks hold 41 percent of total system assets. This is clearly not
consistent with a diverse industry. From a public policy perspective, we must determine if this
type of consolidation is in our nation’s best interest.
Unfortunately, the issue of “too big to fail” remains unresolved. The Dodd-Frank Act did much
to increase the cost of being too big to fail but, at the same time, the biggest banks have gotten
only bigger since the financial crisis. And due to their large market share, they often are able to
beat their competition based upon price.
Also, the largest institutions benefit from the public perception of an implicit government
guarantee. They enjoy access to cheaper funding channels. In fact, according to a report by the
International Monetary Fund, implicit government support of global systemically important
banks is valued at up to $70 billion in the United States.
But what might lie ahead longer term?
The Arkansas State Bank Department is celebrating its centennial in 2014. When Arkansas’s
first bank commissioner, John McKissick Davis, opened the doors of the department in January
1914, it is unlikely he could have predicted that 100 years later, a customer could deposit a
check in a bank thousands of miles away with a swipe of their finger across a mobile phone.
Like Commissioner Davis, I too am subject to the limits of foresight. I don’t know what the
Department, the industry or supervision will be like 100 years from today.
But I believe there are certain principles that stand the test of time. One can only assume that
the banking industry 100 years from now will continue to require prudent, proactive
management of risk. And if prudent, proactive management of risk continues to be a gold
template for banks in 100 years, then bank regulators will need to continue to exercise prudent,
proactive supervision, which includes anticipating emerging risks before they become systemic.
As I reflect upon our industry, I can’t help but wonder what it will look like 100 years from now.
I do believe we will continue to have a thriving community banking sector, though sustaining
the viability of the community banking business model will require community banks to
capitalize on their greatest strength – an intimate, relationship-based knowledge of their
customers and markets – while at the same time using the same product and service
technologies offered by bigger banks to attract and retain younger customers.
As a state bank supervisor, I think our response to sustain the viability of the community
banking model for the next 100 years will not have to vary much from what it is today:
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First, to serve as a regulator and as an advocate;
Second, to foster prudent innovation by our banks; and
Lastly, to optimize – not maximize – regulatory requirements.
It is an absolute privilege to be elected to serve as the Chairman of CSBS for the next year. I am
very confident in the future of this special organization. The commitment of my peers to CSBS
is very encouraging. Through their efforts on the Executive Committee, on the Board, on the
many committees, work groups, or task forces, or simply through participating in important
forums, CSBS is a strong and able organization because of the high level of engagement we get
from its members.
In 2014, the central priority of CSBS will be to continue to defend and advance the state
banking system and the overall role of the states in financial regulation, consumer protection
and local economic development. Our other priorities include:
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More effective coordination across the federal and state banking agencies, with the
desired outcomes being more efficient supervision, reduced burden for the industry and
improved consumer protection;
The allocation of considerable resources – including for more quality research – to
understand the challenges to the community banking model and to develop responses
to these challenges. For this purpose, CSBS and the Federal Reserve plan to host a
second community banking research conference in September, which follows an initial
conference in 2013 that garnered high marks from the regulators, bankers and
researchers who attended;
The continued utilization of emerging technology to bring state-of-the-art training and
education programs to state financial regulators in an expedited and efficient manner;
Putting to work the newly formed Emerging Payments Task Force to study the impact of
changing payment systems – including virtual currencies – on consumer protection,
state law and state banks;
To generate greater awareness among bank regulators and bankers alike of increasing
“cyber threat” and the importance of treating cybersecurity as a major component of
risk management that warrants the sustained attention of the CEO, in contrast to
automatically being pushed down to IT;
To continue to push for the nomination of individuals with community banking or
community bank supervisory experience to vacancies on the Federal Reserve Board.
This initiative gained traction on April 10 with the introduction by Senator Vitter of
Louisiana of a bill that would require the Board to – and I quote – “at all times have as a
member at least 1 person with demonstrated experience working in or supervising
community banks having less than $10 billion in total assets.”
And, finally, the priority to continue to advocate for what we call “right-sized“ regulation
and supervision based on a financial institution’s business model and risk profile.
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On this latter point, I am encouraged by Fed Chair Janet Yellen’s acknowledgement that a “one
size fits all“ approach to supervision often is not appropriate and by the Fed’s actions to tailor
supervisory expectations to the size and complexity of the banking organizations it supervises.
However, I agree with my predecessor at CSBS, Commissioner Charles Vice of Kentucky, that
more work needs to be done in this area.
As for me, I will rely on three time-tested core principles to guide my chairmanship at CSBS.
First, the Basics. I believe that regardless of the considerable changes in recent years in the
scope, tools and pace of supervision – and evolution within the industry itself – the basics of
supervision have changed very little. And the goals and objectives of supervision – including to
maintain a sound financial services industry – remain the same. But no matter the channel, the
forum or the tools supervisors and the industry use, we must seek to protect consumers,
ensure safety and soundness, and enable economic development. These basic goals will guide
us.
My second core principle is Business or, more specifically, how we conduct the business of
financial supervision. It is our responsibility to strive to be the best regulators we can be. We
should be ever cognizant of the impact our rules, regulations, guidance documents and
examinations have upon the industry. This can be accomplished through more effective
training and education; better coordination between state and federal bank regulatory
agencies; an improved dialogue with the industry and Washington, D.C.; and through better
applied research and technology.
The third core principle that will guide me as Chairman is yet another of three “Bs” – Balance.
As regulators, we cannot – and should not – regulate the risk out of the industry. Instead, we
must create a responsive and agile supervisory structure that enables financial institutions and
their customers to be profitable, thereby facilitating economic development and creating jobs
in their communities. Our job as supervisors is to ensure that regulated entities are effectively
managing their risks and protecting the consumer, then to just step out of the way and let them
do their job.
Ultimately, the goal of supervisors cannot be to regulate to prevent the last crisis, and we
cannot rest upon our laurels and declare “mission accomplished” when the industry fully
returns to health after a most challenging financial crisis. No, we must continue to seek a
balanced system of supervision and financial policy, and to evolve and improve our system of
supervision to ensure a resilient, dynamic and diverse industry.
Again, I would like to thank Joe Quinlan for asking me to share with you today my observations
of the industry and my plans as Chairman of the CSBS board. I promise to keep my “game face”
off for the rest of this wonderful conference, so please don’t be shy. Please come up to
introduce yourselves, to compare notes and to ask any questions you might have.
Again, many, many thanks.
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