Fed finds community banks face challenges after financial crisis

Community banks across the country have faced tough business decisions in recent years as they struggle to deal with regulations and low interest rates, a Federal Reserve survey found.

The National Survey of Community Banks cited burdens from complying with rules as the top reason the smallest institutions stopped offering specific products or services to customers

{mosads}Low interest rates and rising costs have also contributed to a challenging environment.

“Greater expenses to meet the demands of increasing regulations, the reduction of fees and interest rates to meet bank and nonbank competition, greater expenditures on cybersecurity” all “have reduced the profitability of the business,” said an industry member quoted in the survey, unveiled Thursday at a conference hosted by the Federal Reserve Bank of St. Louis.

While much of the focus after the financial crisis squared on reforming Wall Street banks, community banks also faced new regulations stemming from the 2010 Dodd-Frank Act.

Fed Governor Jerome Powell, who spoke at the conference, said a valuable lesson from the recession was that “one size does not fit all” when it comes to rulemaking for banks. He stressed that the agency will continue tailoring regulations for banks of different sizes.

“The Federal Reserve is committed to this approach to community bank oversight and to ensuring that new and existing regulations are not unduly burdensome,” he said Thursday.

Suffering the consequences.

The Fed defines community banks as those with less than $10 billion in assets. Together with regional banks, they make up the largest number of institutions supervised by the Federal Reserve.

Many more banks have exited the business than have entered in the last several years. Critics blame the cost of regulations, while policymakers often point to years of low interest rates.

The number of community banks operating in the United States fell from nearly 8,000 in 1995 to around 5,000 in 2015, according to research by the Fed. The drop in community banks after the financial crisis was notable but not as steep as the decline in the late 1990s, Powell said.

He added that the decrease over the past 20 years occurred almost exclusively among very small banks with less than $100 million in assets. Powell acknowledged the “loss of community banks may have caused some communities to suffer adverse economic consequences.”

More than 500 community banks in 29 states responded to the survey, which was coordinated by the Fed and state regulators. Community banks from highly populated states such as New York and California were not included in the survey, which focused on more rural towns. 

Cutting back the regulations.

Policymakers have faced criticism for the multitude of rules governing community banks.

Fed Chairman Janet Yellen sought to address those concerns when she told lawmakers on Wednesday that the agency is reviewing regulations that are outdated or unnecessary.

“The Federal Reserve views this review as a timely opportunity to step back and identify ways to reduce regulatory burden, particularly for smaller or less complex banks,” she said at a hearing.

Yellen also suggested that Congress consider legislation to remove community banks from two sets of Dodd-Frank Act regulations: the Volcker rule and incentive compensation limits.

“Community banks and supervisors would benefit from not having to focus on regulatory compliance for matters that are unlikely to pose problems at smaller banks,” she said.

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Updated on Sept. 30.