A Message from Governor Bowman
by Governor Michelle W. Bowman
As 2020 draws to a close, I wish you all a happy, healthy, and safe holiday season. The end of the year is a time to reflect, take stock of the year past, and plan for the year ahead. I would first like to recognize the tremendous efforts of community bankers serving their communities. While 2020 will be remembered for the pandemic, natural disasters also affected many areas of the country. In the face of all this adversity, community bankers responded to meet the needs of their customers and communities, and as a nation, we have been successful in adapting to and evolving through the significant changes in our lives.
Conversations with Community Bankers
Conversations with bankers and industry outreach have been a critical aspect of my approach to remain in touch with industry trends over the past 10 months. These conversations ensure I am informed of bankers’ operating challenges and shape my priorities as the Chair of the Subcommittee on Smaller Regional and Community Banking.
My goal is to meet with the CEOs of each community bank supervised by the Federal Reserve. While the pandemic curtailed in-person meeting plans, I have spoken with Fed member bankers from each of our Reserve Bank Districts and met with many more bankers through virtual meetings involving national and state bankers associations. As of December, I have individually met with nearly 150 CEOs of community banks supervised by the Fed. If we haven’t yet had the opportunity to meet, I look forward to our conversation.
Economic and banking conditions related to the pandemic response have been the focus of these conversations with bankers, specifically the pandemic’s effect on community banks and their customers, and banks’ participation in recovery programs. The effects of the pandemic have varied regionally, with some bankers reporting little negative impact to their communities, while others experienced more severe impact to their local economies. Bankers recounted stories about how they are working with customers and borrowers affected by the pandemic, offering loan modifications and payment deferrals. Bankers also mentioned that they are keeping a careful eye on customers with business operations that have been adversely affected by pandemic service limitations or closures, such as hospitality and travel, restaurants, entertainment and recreational venues, and universities and colleges. In turn, I reaffirmed the Board’s public statement that Federal Reserve examiners will not criticize a bank for working with borrowers in a safe and sound manner.1
Community bankers also shared concerns about regulatory compliance burden being among the greatest threats to the community banking industry. Specifically, bankers noted concerns about the addition of further regulations, as well as mortgage lending process complexity, and the implementation of the new accounting standard for credit losses (current expected credit losses [CECL] methodology).
Competition from credit unions and nonbanks was another area of concern for some community bankers. Finally, larger community banks with bigger staffs and therefore a greater capacity to manage regulatory compliance may drive further consolidation in the banking industry.
Community Banks Faced the Challenge and Kept Serving Their Communities
Although the pandemic has dominated the headlines, there is “good news” to highlight. In particular, community banks were early movers, demonstrating their banking responsibility and resilience. Many communities benefited from their ongoing relationships and close ties with their community bankers. For example, I heard from a few bankers that early in the pandemic, they contacted every single one of their business and consumer customers, taking the time to individually check in with their customers to see how they were doing and what they needed.
The significant role of community bankers in supporting the Small Business Administration’s Paycheck Protection Program (PPP) was critical to getting funds directly to small businesses. Community banks with $10 billion or less in assets made approximately 40 percent of the overall number and value of PPP loans. While providing credit to existing customers, I heard from bankers that they gained many new customers who were unable to obtain a PPP loan from a larger institution. These PPP statistics and anecdotes reinforce my view on the importance of community banks, the value of the relationship banking model, and the role that community banks serve in providing credit to small businesses in communities across the country.
Federal Reserve’s Supervisory and Regulatory Actions in Response to COVID-19
The Federal Reserve took swift and bold actions to address the crisis early in the pandemic. We created emergency facilities, used our monetary policy tools, and adjusted regulatory and supervisory frameworks where possible. Of particular note for community banks, the Federal Reserve provided temporary relief on the community bank leverage ratio (CBLR) and deferral of certain appraisal regulatory requirements.2
As the Federal Reserve resumes examinations, I have emphasized to our examiners that their current role is to promote the resilience of financial institutions while not impeding the flow of credit that is vital for economic recovery. The focus for supervisory activities is on evaluating a bank’s capital and liquidity resiliency, as well as the effectiveness of a bank’s risk management and responsiveness to changing economic and market conditions.
Besides these crisis-related measures, the Federal Reserve has worked to develop initiatives in support of community banks and their efforts to integrate new technologies. In remarks delivered at a conference in February, I spoke about the value of integration of financial technology into the community bank business model, which enables community banks to enhance the effectiveness and timeliness of their services.3 A technology strategy can help community banks achieve market reach and operational efficiencies, as well as improve organizational agility.
The Federal Reserve has undertaken several initiatives to support community banks in developing a technology strategy. First, we are holding Innovation Office Hours that serve as a valuable resource for banks to learn more about bank and fintech partnerships.4 Federal Reserve staff is also developing a white paper on community bank and fintech partnerships. And finally, recognizing the importance of third-party risk management in engaging a technology service provider, I have encouraged Federal Reserve staff to work with their interagency colleagues to develop a vendor due diligence handbook for community banks. This handbook could assist bankers in performing their due diligence of a fintech company or a service provider while being mindful of a bank’s operational capacity.
A Look Toward 2021
Both policymakers and bankers are continuing to adjust and evolve in the face of the pandemic. The banking sector is well positioned to overcome the challenges and navigate the uncertainty. I am confident that community banks will continue to perform a vital role in our economic recovery.
Although responding to evolving crisis conditions will remain our top supervisory priority, we are considering a number of initiatives that will provide greater transparency and simplicity in our regulatory and supervisory regimes. This includes the interagency effort to further clarify the role of guidance in the supervisory process.5 I also hope that the banking agencies can simplify risk management requirements for third-party service providers and that such guidance appropriately reflects the present-day business realities of a community bank. My Board colleagues and I are also looking forward to hearing from the industry on our proposal for Community Reinvestment Act (CRA) reform. I will be especially interested in understanding the implications of a potential rulemaking on smaller banks.
In closing, I would like to extend my best wishes for a happy and healthy 2021. Please take care and stay safe as you celebrate the holidays with family and friends.
- 1 Refer to the Board’s April 7, 2020, press release at www.federalreserve.gov/newsevents/pressreleases/bcreg20200407a.htm .
- 2 For the CBLR, refer to the Board’s August 26, 2020, press release at www.federalreserve.gov/newsevents/pressreleases/bcreg20200826a.htm .
- For the appraisal regulation deferral, refer to the Board’s September 29, 2020, press release at www.federalreserve.gov/newsevents/pressreleases/bcreg20200929a.htm .
- 3 See Governor Michelle W. Bowman’s speech, “Empowering Community Banks,” Conference for Community Bankers sponsored by the American Bankers Association, Orlando, FL, February 10, 2020, available at www.federalreserve.gov/newsevents/speech/bowman20200210a.htm .
- 4 For additional information, refer to the Federal Reserve’s “Innovation” web page at www.federalreserve.gov/innovate .
- 5 Refer to the Board’s October 29, 2020, press release at www.federalreserve.gov/newsevents/pressreleases/bcreg20201029a.htm .