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?
When we look at the thriving and surviving people, we looked at banks that maintained very high supervisory ratings throughout the crisis. Subsequently, we conducted interviews with a number of CEOs at those banks. They told us that it is about management. Now the words they used were a little different strategic planning, careful risk management, sticking to core competencies but it was all ties back to management.
More recently, we took a look at the banks that had the lowest supervisory ratings and have since become healthy. We were looking at what characteristics existed. No doubt, capital was important at many banks, but management was important in nearly all of them. I think that is a very useful supervisory tool because it isn't always easy for banks to make the decision that they need to supplement or make a management change when they face problems. Now we have some research that shows how beneficial that is.
What should people take away from this conference?
There are several things that will need follow-up. I think one of the areas for additional consideration is how do you right-size compliance so that you can keep a sustainable community bank model but also provide reasonable protection for the consumer. I hope we can get that question more focused.
I'm pretty sure we spurred some interest in areas of research that maybe academics hadn't thought about. To the extent that we can encourage more unbiased studies of these issues, then we will have had a very successful conference.
Will research come from academics, bankers or both?
All of the above. I think we need the academic piece to bring in an outside bias.
One could argue that bankers, if they were to conduct [the research], would hire someone who gives them the answer that they want. But if were to sit down with a banker, it is easier to be able to say here is what we know rather than [focus on] simply on regulatory direction.
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