Fed Governor Duke: Community Banks Key to Economic Growth

Fed Governor Duke: Community Banks Key to Economic Growth

The recent financial crisis highlights the important role of community banks in providing credit to local businesses and households, said Federal Reserve Governor Elizabeth Duke in a recent speech.photo of Fed Governor Duke

Although financial markets have stabilized, banking conditions remain weak, and many businesses are still having trouble getting credit. Indeed, the amount of loans outstanding for banks fell during 2009, a decline likely caused by a number of complicated factors affecting supply and demand for loans, Duke said at the Western Independent Bankers Conference in late March.

Balance needed in bank lending, supervision
To ensure that its supervision and examination policies do not inadvertently constrict the flow of credit to businesses and households, the Federal Reserve, along with other banking regulators, has issued lending guidance stressing the need for balance from lenders in making new loans and examiners in reviewing loans.

Of particular concern to community banks is the deterioration in commercial real estate (CRE) loans, which make up more than 30 percent of community bank assets, Duke said. The October 2009 CRE guidance from banking regulators "urges both lenders and examiners to take a balanced approach in assessing borrowers' debt-servicing capacity and to make realistic assessments of collateral valuations," she said. However, the most important factor in increasing the flow of credit to communities is a sustainable economic recovery, added Duke.

Bank supervision a window into financial system
At the end of 2009, the Fed supervised nearly 5,000 top-tier bank holding companies and more than 800 state member banks, which ranged from the smallest community banks to those with assets above $100 million. "Having a window into such varied parts of our financial system is important," said Duke. "It would be a mistake to focus Fed supervision on only the largest companies."

Importantly, the Fed's supervisory responsibilities provide key insights for its other roles, such as monetary policy, where lending has been a central issue. In its efforts to stabilize financial markets, the Fed loaned nearly $2 trillion, which has now been paid down to less than $100 billion, Duke noted. "We never could have done that as quickly, as smoothly, or with zero loss without extensive knowledge of the industry and its institutions, as well as staff across the country with banking expertise."

April 26, 2010