Bernanke’s speech on community banking

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I’m glad to have the chance to speak again to the Independent Community Bankers of America, even if it’s by way of prerecorded remarks. This will be the first time in quite a few years that I haven’t been with you in person, but, as you may know, the Federal Open Market Committee met just yesterday in Washington, so I am unable to join you in Nashville. I have very much enjoyed attending these annual ICBA get-togethers, especially since I get the chance to hear directly from you about what’s happening in your local economies and in community banking more generally. It’s a tradition I hope to reestablish in the future.

The Role of Community Banks in a Challenging Economy
Community banks remain a critical component of our financial system and our economy. They help keep their local economies vibrant and growing by taking on and managing the risks of local lending, which larger banks may be unwilling or unable to do. They often respond with greater agility to lending requests than their national competitors because of their detailed knowledge of the needs of their customers and their close ties to the communities they serve.

As you well know, however, community banks are also facing difficult challenges. Their close ties to local economies are, on balance, a source of strength, but a drawback of those ties is that the fortunes of communities and their banks tend to rise and fall together. Another concern for community banks is the narrowing of the range of their profitable lending activities: Because larger banks have used their scale to gain a pricing advantage in volume-driven businesses such as consumer lending, community banks have tended to specialize in other areas, such as loans secured by commercial real estate. That said, I know that community banks are continuing to look for ways to prudently diversify their revenue sources.

Like larger banks, community banks are also being affected by the state of the national economy. Despite some recent signs of improvement, the recovery has been frustratingly slow, constraining opportunities for profitable lending. And, as I will discuss momentarily, actual and prospective changes in the regulatory landscape have also raised concerns among community bankers.

The good news is that, for the most part, community banks appear to be meeting their challenges. Profits of smaller banks were considerably higher in 2011 than in the previous year, nonperforming assets were lower, provisions for loan losses fell appreciably, and capital ratios improved.