Opening Quote: “Dewey defeats Truman,” Chicago Tribune, before all the votes were counted on this date in the 1948 presidential election.

FDIC: Community Bank Lending to Small Business Understated

This week, the FDIC released a preview of a survey that underscores the importance of community banks in lending to small business. The survey, issued during the FDIC Community Bank Advisory Committee on Community Banking, contains these findings: 

• Relying on Call Reports understates small business lending by about $38 billion annually, largely by excluding certain commercial and investment lending above $1 million and the use of residential mortgages in certain transactions
• Most community banks lend to start-ups, especially outside urban centers
• Customer relationship is the greatest competitive advantage of community banks
• “Small banks customize; large banks standardize”

The results largely track with the 2017 survey of community banks conducted by CSBS and the Federal Reserve, which found that community banks finance roughly the same dollar amount of small business loans as larger banks.

The survey is the foundation of a research report on small business lending by community banks, which will be released next year.  

Powell Nominated to Chair Fed Reserve

President Trump this week nominated Federal Reserve Governor Jerome Powell to chair the Federal Reserve Board, and take the helm from current Chair Janet Yellen in February when her term ends. Powell, a Republican, is expected to receive Senate confirmation. Powell was nominated to the Board by President Barack Obama in 2012 and again in 2014. Powell currently is chairman of the Federal Reserve subcommittee on smaller regional and community banking.

Prior to serving on the Board, Powell was a visiting scholar at the Bipartisan Policy Center, and undersecretary of the Treasury to President George H. W. Bush. He also worked at the Carlyle Group.

In 2016, Powell delivered remarks at the CSBS-Federal Reserve community bank research conference. His remarks focused on community bank performance over a two-decade span, and explored possible reasons for the decline in the number of these institutions nationally.

Relationship Lending Model at Risk?

CSBS is concerned that a proposed CFPB rule could erode the relationship lending model that community banks use with small business. That’s the view we recently relayed through a formal comment letter to the Bureau.

To implement one part of Dodd-Frank, the CFPB would begin collecting data from lenders on small-business loans, with the acknowledgment that more kinds of data might be required down the road. The concern of state regulators: if banks responded to CFPB scrutiny by making loan decisions based on an ever-expanding checklist, then the relationship lending model community banks have long used would begin to wither. And some loans that are made today to small businesses would not be made in the future. 

In many states, state regulators are responsible for promoting local economic development in addition to protecting consumers and the safety and soundness of financial institutions. Among state-chartered banks, 93 percent are community banks who are responsible for more than 45 percent of small loans to business. And long-term relationships are the core of a community bank’s lending model to small business owners, as reflected in the 2017 survey from CSBS and the Federal Reserve.

The U.S. Department of Treasury has voiced concerns about the proposed CFPB rule, and called for Congress to repeal the relevant section of Dodd-Frank. CSBS has asked the CFPB to delay implementation of its proposed rule until Congress has an opportunity to respond. 

CSBS CEO: Modernizing State Regulation through Technology

State regulators are using technology developed by CSBS to modernize how they license and supervise fintechs and other non-banks. It is allowing them to increase the quality of supervision while at the same time decrease the burden, President and CEO John Ryan tells finance innovation thought leader Jo Ann Barefoot in a recent podcast. “This is a special moment,” he says. “Technology is making supervision more robust.”

Technology performs a central role in CSBS’ Vision 2020, a series of initiatives designed to move towards an integrated, 50-state system of licensing and supervision. For instance, one initiative involves developing the next generation Nationwide Multistate Licensing System to introduce more automation and information sharing, and span regulatory activities from licensing through supervision.

Barefoot on CSBS’s approach: “On Vision 2020, let me say that CSBS’s innovativeness amazes me. I think the 2020 effort deserves its ‘visionary’ labeling…Other regulators can learn a lot from watching this model, both in how to design new systems and how to build buy-in from a complex set of stakeholders.”

Ryan offers wide-ranging advice to community lenders, including:

• On bank culture: “Adopt innovation cultures. I think it’s going to be a survival skill to be good at innovating. And it’s not that easy.”
• On staying current with technology-savvy customers: “Be in tune with what technology your customers are using elsewhere in their lives. They may not be asking you for it, but someone else may offer it, and you will never know why you lost them.”
• On the human dimension in lending decisions: “Managing the credit that small businesses receive and the ability to walk through the problems when they inevitably come up is critical. That is a value that a community bank has, and needs to continue to deliver on, if it is to be relevant in the future.”

Closing Quote:

“With some exceptions, the cutting edge of innovation is not in the banking system (partly because banks are so highly regulated), but rather in the nonbanks -- the startups and some of the large tech firms. And those are all almost entirely regulated by the states.”

– Jo Ann Barefoot, Barefoot Innovation Group