Community Banking Connections

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President Esther George Reflects on Her 40-Year Career at the Fed and the Importance of Community Banks

Esther L. George, president and chief executive officer of the Federal Reserve Bank of Kansas City, represents the 10th District on the Federal Open Market Committee (FOMC), which has authority over U.S. monetary policy. President George started her career at the Kansas City Fed in 1982 as a bank examiner and spent much of her career in the Reserve Bank’s Division of Supervision and Risk Management. Prior to becoming president, she served as the officer-in-charge of supervision for the 10th District, overseeing the supervision of state member banks and financial holding companies.¹ Given her mandatory retirement in January 2023, staff at the Federal Reserve Bank of Kansas City interviewed President George to learn about her 40-year career at the Federal Reserve and to hear about her views on the outlook for community banks.

Career Retrospective

I was working for Dun & Bradstreet as a business analyst when I applied for a position at the Kansas City Fed. After interviewing, I received an offer for a bank examiner trainee position with an annual salary of $9,600. That position led to a series of assignments that shaped my perspective in important ways.

As a bank examiner, your job is to identify risks and to explain them clearly to a banker and to your boss. Being curious and asking the right questions are more important than having all the answers. Sometimes the banker disagrees with your judgments and is unhappy with the outcomes of the exam. That’s not easy when you’re 24 years old and sitting across the desk from someone with three decades or more of experience. So, you learn to do your homework, to think hard about the consequences, and to listen carefully to make sure you understand. You have to rely on other members of the exam team — each contributes to some part of the exam with different expertise and experience. Sometimes you work all day to analyze an issue and are sure you have it nailed down, only to get some new piece of information the next morning that makes you rethink your conclusions. Generally speaking, critical thinking, and the process of really understanding deeply an individual institution’s business operations and strategy, taught me a tremendous amount about risks and incentives in banking. Those early experiences as an examiner continue to shape my thinking as a leader and as a policymaker.

When I came to work for the Kansas City Fed, I found it to be a welcoming environment with supportive team dynamics and career opportunities. I benefited enormously from that culture. Now, as the Bank’s president and CEO, I think about how important that culture is to the success of the entire organization. The Bank’s performance demands that we attract the best available talent from the broadest pool of applicants and ensure that the organization is a great place to work, so we can retain that talent. Finally, to be credible as an organization that serves the public, we want our employee demographics to reflect the demographics of the region we serve.

An inclusive culture begins with me as the CEO. I am accountable for actions within my sphere of influence and for the results in my organization, including its culture, its hiring philosophy, and its public engagement. Inclusivity is embedded in our values, but my role is to clearly communicate this expectation and lead by example. As with any objective, progress requires continuous advocacy and monitoring. Importantly, the value of inclusivity is everyone’s job, it’s how we do business, and it has made the Bank successful.

Community Banking

Community banks are essential to the U.S. economy through their provision of credit and leadership in the areas they serve. Community banks provide approximately 40 percent of small business loans and 90 percent of small farm loans, a significantly outsized level relative to their share of U.S. bank deposits. During the 2020 pandemic, community banks extended $335 billion in government-backed loans to thousands of small businesses.

As relationship lenders, payment providers, and deposit safekeepers, community banks are integral parts of the thousands of cities, towns, and neighborhoods they serve across the country. They also fill key leadership roles in their communities, providing the basis for the relationships that generate new business for the bank and open up credit to the community.

The banking industry broadly faces challenges from a rapidly evolving financial services sector. In particular, technology-enabled platforms designed by nonbanking firms are disaggregating traditional banking functions. Nonbank firms have established internet-based lending services, while other nonbank firms have developed online applications to facilitate person-to-person payments. These platforms have developed outside the existing legal and regulatory framework for banks, though banks are rapidly adopting these capabilities.

In this landscape, the benefits of improved delivery speeds and convenience are facilitated by scale. While the nation’s largest banks with half of all deposit accounts and a nationwide/global reach can achieve scale benefits, community banks and the customers they serve cannot. As a result, in 2019, the Federal Reserve Board determined that the Reserve Banks should offer an instant settlement service for retail payments to ensure broad and efficient access across secure rails for the nearly 10,000 financial institutions connected to our network. This new payment rail, known as the FedNow Service, is scheduled to be implemented next year.

When I joined the Kansas City Fed in 1982, there were over 14,000 banks, and the small, midsize, and large banks held relatively similar market shares. Today, there are fewer than 5,000 banks, and the five largest banks have 40 percent of the nation’s deposit market share. Unsurprisingly, few new bank formations have occurred over the past decade.

Community bankers have long understood that to stay relevant in a dynamic economy, they must adapt to a changing financial services landscape. Even as consumer and business preferences evolve, community banks are well positioned to exploit a business model that emphasizes relationship lending and strong local connections. To do so, community banks are looking at strategies that make them relevant and competitive in today’s environment. For example, many are pursuing avenues for deploying new technology that has become central to how people use financial services. Strategies for attracting, developing, and retaining the talent needed to deliver their services to customers and provide for succession will also be important.

Bank supervisors play an important role in assuring the public has access to fair credit and a trusted banking system. Effectively calibrating supervisory approaches that achieve this goal in today’s financial services industry remains challenging. For example, supervisors for some time have embraced a risk-based approach to evaluating the safety and soundness of banks, but it will likely take more work in today’s highly concentrated industry, where the failure of one of the largest banks has far more significant consequences to the public than the failure of a community bank. Getting the balance right will certainly matter to the viability of community banks. I think there are a couple of areas where regulators can better serve the public’s interest in a competitive financial services landscape that includes community banks.

First, regulators must continue to tailor the work examiners are asked to do in evaluating compliance and risk at a bank. Our regulatory framework can unintentionally favor the largest banks, where complexity can be managed with extensive resources. For example, these advantages can be seen in the differences in regulatory capital between G-SIBs (global systemically important banks) and community banks. Staff at the Kansas City Fed regularly analyze these differences in a semiannual Bank Capital Analysis,² which shows that the community bank leverage ratio is nearly 300 basis points higher than that of the nation’s largest banks.

Second, in a quickly changing world, regulators’ clarity of message is essential to defining regulatory expectations for community banks. This is particularly important in today’s evolving financial services landscape. Community banks are looking at strategies that allow them to innovate and compete, and clear communication from bank supervisors can allow such decisions to be made prudently as they deploy capital, either internally or through third-party relationships. Addressing these issues would help to level the playing field between community banks and their larger peers, as well as nonbank competitors.

Serving on the FOMC

My work as a bank examiner introduced me to the plumbing of the financial system and its key role in the economy. Understanding the end-to-end process of a bank’s operations — from deposit taking to lending — helped me connect the intermediation process to macroeconomic outcomes. That experience has served me well at the FOMC, where monetary policy and financial stability affect our ability to achieve mandated objectives for the U.S. economy. We saw firsthand during the Global Financial Crisis how financial vulnerabilities and inadequate bank capital can devastate the broader economy. The lessons from that episode and others are reminders that monetary policy depends on a stable and sound financial system to achieve its desired outcomes. Examiners play a key role in assessing risks at banks — not just through complex models and data analytics, but also through applying supervisory judgments about incentives and management practices.

The Future of the Economy and Banking

Over the past 40 years, we’ve witnessed tremendous changes in the U.S. economy and the banking industry. Global connections have grown, and technology has allowed for innovation to touch nearly every aspect of our lives. No one at the Kansas City Fed used the internet when I started; today it has become an essential foundation for our daily lives and how we conduct business. Technology has also fundamentally shifted the ways in which banks conduct their business and interact with customers. Nowhere has that been more dramatic than in our payment system. In 1989, the Fed processed more than 4 billion checks each quarter. Today, we process less than a quarter of that. Digital payments and the emerging technologies associated with digital assets will continue to shape banking and the broader economy, too. Policymakers will need to consider how financial services changes comport with existing legal and regulatory frameworks and financial stability. For community banks, the opportunity to leverage the enduring advantages of attracting low-cost, stable deposits and providing local access to financial services will continue to benefit the country’s economic health.

• ¹ The 10th District supervises state member banks and holding companies in Colorado, Kansas, Nebraska, Oklahoma, Wyoming, western Missouri, and northern New Mexico.
• ² See www.kansascityfed.org/research/bank-capital-analysis/.