Julie Stackhouse admits that some regulators once questioned the need for community banks in the economy — but no more.
Stackhouse, head of supervision at the St. Louis Fed and the master of ceremonies for the central bank's first conference on community bank research, said she and her colleagues have seen concrete analysis that cements the need for smaller institutions.
There is also a desire to hear more from community bankers about the regulatory challenges they face.
In a wide-ranging interview, Stackhouse discussed ways the regulator is looking to improve the bank examination process and the importance of having good management teams.
Here is an edited transcript.
What have you discovered from the research featured at this conference?
JULIE STACKHOUSE: I learned that there's a need for community banks. Maybe that was one of the things that so many of us questioned, especially in light of a lot of the regulation that's been introduced in the last few years.
It is clear that community banks … meet lending needs that are often tailored to their communities. Our eyes are wide open. There are many challenges ahead for community banks. Their number of lending opportunities is diminishing as others get to compete for their traditional loans. We introduced regulation — and community banks don't know how to respond. And I can say with certainty that we will see additional consolidation in community banking in the years ahead.
Bankers appreciated efforts by the Federal Deposit Insurance Corp. to listen to their concerns. Do you expect similar goodwill from this conference?
There have been some very intentional changes made [already]. The Fed introduced the Community Depository Institution Advisory Council. The chairs meet with the Board of Governors at least two times a year and their voice is brought forward very clearly. In addition, at the Board of Governors, a committee that used to focus only on large banking issues developed a subcommittee that [looks at] community bank issues.
Governor [Jerome] Powell chairs that committee. It also looks … at the regulations being produced by the Fed to understand what the impact would be on community banks.
What you'll typically see in regulations that are issued today, versus ones from just a few years ago, is a statement about the applicability of the regulation to banks with under $10 billion in assets. That's a very material and well-intentioned change.
You're involved in several initiatives at the St. Louis Fed. Let's discuss those?
I'm giving state member banks an opportunity each quarter to talk about issues they've seen in recent examinations. They're not really prime-time issues, but you never know when an issue is going to be meaningful to the next bank. And that has been very well received. I have seen a massive change in the last years in how we look at the regulation of community banks.
What is the Fed doing in the area of examiner training?
We're doing a massive overhaul of our basic examiner commissioning program, to modernize it. Modernize it not only by introducing of technological tools to make it more flexible … but to also make sure we can maintain it all the time. In the past, it has been a process that occurs once a year or over 18 months. We want to build a program we can maintain and update all the time as changes occur. That reboot, which is about a three-year project, is almost two-thirds of the way through. We'll be very thrilled about a year from now.
We're not stopping there. We are also looking at training [for] examiners who will be looking at larger institutions. It is a different process. Not everybody starts at the bottom and works their way up to the larger institutions. … So we're looking at the right way to bring training resources to them.
How do these efforts make things better for small banks?
Training is only the start. It is not the solution, but you have to train to reach a solution. We're now better equipped to train everyone who is involved in the relevant examination process. We've also introduced horizontal reviews that are typically handled by staff at the Board of Governors. They're looking at components of our examination process to see whether we consistently applied guidance as administered by the Board.
In the past, you have discussed the importance of good management. How does the research back that view?
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