Academic journal article Chicago Fed Letter

Community Banking: A Time of Promise and Challenge

Academic journal article Chicago Fed Letter

Community Banking: A Time of Promise and Challenge

Article excerpt

The conference's speakers focused on the current state of the economy, updates on regulatory changes, common supervisory findings, baseline risk-management expectations, leading industry practices, and efforts to reduce regulatory burdens. Additionally, panels of regulators and banking professionals discussed material risks to financial institutions, including credit risk and collaborating with financial technology companies (fintech).3

In his welcoming address, Richard Brunskill, vice president, Federal Reserve Bank of Chicago, highlighted the symposium's theme: a time of promise and challenge. Brunskill noted improved financial trends in the industry and strengthened risk management demonstrated by community banks, as well as innovations in technology that have brought a wider variety of product and service offerings. However, he added, the same technology advancements allowing community banks to generate more revenue are also allowing larger banks, credit unions, and fintech companies to compete more effectively in the traditional community bank space. Brunskill summarized Federal Reserve Governor Lael Brainard's recent speech4 on the increased availability of artificial intelligence (AI) algorithms, processing power, and big data to all firms from the smallest start-ups to the bigger financial players. He cautioned that challenges facing community banks are not limited to a changing technology landscape, but also include difficulties in attracting the next generation of community bank leaders.

A Chicago Fed perspective on community banking

Charles Evans, president and CEO, Federal Reserve Bank of Chicago, began his remarks by discussing the importance of the collaborative working relationship between the regulatory agencies and community banks. He emphasized that the long-term success of community banking organizations is closely tied to the strength of their local relationships. Evans went on to describe the solid financial performance of community banks by highlighting improved earnings performance, robust loan growth, strong credit quality metrics, high capital levels, and a relatively low number of problem banks5 in the Seventh Federal Reserve District's portfolio.

Emerging risks cited by Evans included the challenges in agricultural markets, core deposit competition, and cybersecurity. He noted the agricultural industry remains under pressure due to lower crop prices over a sustained period, constraining cash flows for many producers. He noted that farmland values are holding up comparatively well and allowing farmers to use land as collateral to secure borrowing needs. Still, Evans noted agricultural land values tend to be somewhat volatile and farmers' ability to prudently refinance carryover debt6 could diminish if property values significantly decline. He said bankers will need to monitor the effect of rising interest rates on depositor behavior, given growing competition for deposits in certain markets. In addition to interest rate movements, Evans noted increasing deposit rates have influenced a shift in customer deposit preferences away from lower-costing nonmaturity deposit products to higher-yielding time deposit accounts, although at this point time deposit balances as a percentage of the balance sheet for community banks remain well below pre-recession levels. Nevertheless, Evans said, the shift in liability mix could reduce earnings or increase liquidity risk for financial institutions. Finally, Evans discussed cybersecurity, an area of significant concern for all financial firms. Cyberattacks can be far-reaching and highly destructive. Addressing cybersecurity risk will take efforts on several fronts, Evans said, including public-private partnerships, actions to mitigate vulnerabilities, and regular employee training. He noted that the regulatory agencies continue to monitor these risks and assess their impacts on Seventh District banks.

Evans concluded by elaborating on the interagency regulatory relief for community banks provided by the passage of the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act. …

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