Community Banks and the Fed: Working Together
by William G. Spaniel, Senior Vice President and Lending Officer, Federal Reserve Bank of Philadelphia and Chantel N. Gerardo, Senior Writing Center Specialist, Federal Reserve Bank of Philadelphia
Community banks and the Federal Reserve have a long-standing relationship through the Fed’s supervision and regulation activities, joint community development initiatives, and other important partnerships. The Federal Reserve values the role that community banks play within their local communities and the broader economy, often looking to community bankers for their input to help inform policy and for their service on Reserve Bank boards of directors and Federal Reserve System advisory committees. Through all of these efforts, community bankers’ intimate knowledge of consumer and community needs provides key insights for regulators and policymakers.
This article discusses some of the ways that community banks and the Federal Reserve have partnered over the years as well as recent initiatives the Federal Reserve has employed to better support community banks.
Ways Community Banks Provide Insight
Participating on Advisory Committees
One way that community bankers provide insights to the Federal Reserve is through their participation on advisory committees, which serve as forums for community bankers and the Board of Governors (Board) or Reserve Bank staff to have informative conversations about emerging issues. One of these committees is the national Community Depository Institutions Advisory Council (CDIAC), which was established by the Board in 2010 to “provide input to the Board on the economy, lending conditions, and other issues of interest to community depository institutions.”1 Each Reserve Bank also has a local CDIAC made up of representatives from commercial banks, thrift institutions, and credit unions who provide insights and advice to Reserve Bank leadership. Biannually, one representative from each Reserve Bank’s local CDIAC meets with the Board to continue conversations at the national level. Through these engagements, local bankers can inform Board members about matters that are of interest to them. Recently, for example, a discussion about a Bank Secrecy Act/anti-money laundering matter that surfaced during a CDIAC meeting was brought to the attention of Board members who took the conversation into consideration when crafting supervisory guidance, demonstrating how CDIAC conversations can help policymakers.2
In addition to the CDIAC, Reserve Bank staffs convene committees based on individual Reserve Bank priorities, such as diversity, equity, and inclusion; community development; and the overall economy. Many of these committees have representation from community bankers and other business leaders. For example, the Federal Reserve Bank of Philadelphia’s Economic and Community Advisory Council has business leaders from both the private and public sectors to allow for a broad range of perspectives and enhanced collaboration.3 Discussion topics can range from updates on local and national market conditions to feedback on proposed Reserve Bank initiatives. These local advisory committees are mutually beneficial: Community bankers and business leaders are able to share their experiences, and Federal Reserve staff have opportunities to hear firsthand about emerging concerns within their Districts.
Partnering on Community Development Initiatives
Local community development functions within each Reserve Bank provide another opportunity for Reserve Banks to work closely with community banks. The goal of community development is to promote economic growth and financial stability for low- and moderate-income (LMI) communities and individuals. Key focus areas include housing and neighborhood revitalization, small businesses and entrepreneurship, employment and workforce development, and community development finance. Partnerships between local Reserve Banks and community banks can lead to the creation of programs that meet a critical need within communities and can allow bankers to further develop relationships with the communities they serve.
In addition to partnering with community bankers on community development initiatives, the Federal Reserve oversees state member banks’ compliance with the Community Reinvestment Act (CRA). Feedback from bankers and community members made it clear that CRA regulations needed to be strengthened to better align with the CRA statute. External stakeholders also sought clearer evaluation standards from federal regulators.4 In September 2020, the Board issued an Advanced Notice of Proposed Rulemaking (ANPR) seeking public comment on modernizing the regulations that implement the CRA.5 The ANPR includes proposals aimed at addressing inequities in credit access and access to banking services for LMI and other underserved communities, thereby increasing financial inclusion for all communities. The ANPR also aims to provide more certainty about what types of activities qualify for CRA credit and the locations where these activities will qualify, increase transparency in how performance is evaluated and how ratings are assigned, and tailor the evaluation framework and data collection and reporting requirements based on bank size and business strategy. In addition, the proposal recognizes the need to update the regulation to reflect the changes that have happened in the banking industry over time.
Federal Reserve staff conducted 51 listening sessions with external stakeholders, including community bankers, in late 2020 and early 2021 to discuss the key objectives and policy proposals in the ANPR and to encourage organizations to submit comment letters with their feedback. The ANPR is a prime example of how feedback from external stakeholders, community needs, and public comment can come together to enhance the Federal Reserve’s supervision and regulation practices.
Additional Ways the Fed Engages Community Banks
Exploring Emerging Issues
The Federal Reserve also aims to stay apprised of emerging issues for community banks by encouraging research on these issues. Community bankers often support research efforts by providing data and participating in conferences, such as the annual Community Banking in the 21st Century research and policy conference.6 Recently, the Federal Reserve has begun to focus on innovation and launched a series of “office hours” to facilitate discussions with bankers and answer questions outside of the supervisory process.7 These office hours, along with standing annual research conferences and forums, demonstrate how community bankers and Federal Reserve staff are able to learn about emerging issues from one another.
In addition to researching and fostering conversations around emerging issues, the Federal Reserve continues to explore ways to be more responsive to community banks. In late 2020, the Federal Reserve developed a System-wide outreach community of practice, which is intended to provide a common framework for leveraging supervisory outreach activities across the Federal Reserve System. Board and Reserve Bank staff who are collaborating on this initiative are in the process of proposing helpful events and additional resources for community bankers, including a technical assistance program that will support both bankers and state supervisors.
Offering Local Supervision and Outreach
Although the Federal Reserve is the central bank of the United States, the 12 Reserve Bank Districts located throughout the country allow supervisory teams to focus and specialize on regional issues.8 This approach allows examination teams and analysts to better understand the unique market conditions, geographic distinctions, and needs within communities, which are all considered during supervisory events. Additionally, the local work and understanding of individual communities help inform national efforts and policy discussions.
The localized structure also allows Reserve Bank staff to have more in-person meetings with various stakeholders of a financial institution.9 Community banks have business models that emphasize relationship building with consumers, and, in turn, Reserve Bank staff aim to build and maintain relationships with community bankers. To that end, Reserve Banks often host outreach events that allow for in-person engagement activities between Reserve Bank and community bank leaders. Similar to the advisory committees, outreach events provide yet another opportunity for community bankers to provide input to Reserve Bank staff.
Federal Reserve outreach has both a local and national focus. For example, Governor Michelle W. Bowman, the first member of the Board of Governors to fill the community bank seat created by Congress, recently began an effort to have one-on-one phone conversations with leaders of state member banks across the nation. These personal interactions are important to maintaining and fostering the Federal Reserve’s relationships with financial institutions, as Reserve Bank staff want to serve as a resource for bankers’ questions and concerns. Governor Bowman’s individual phone calls, in addition to webinars such as Ask the Fed and Outlook Live, are other examples of methods the Federal Reserve uses to understand the challenges and issues that bankers face. The Federal Reserve also provides resources on some of these challenges by publishing resourceful articles within Community Banking Connections and Consumer Compliance Outlook.
Using Risk-Focused Supervision
Over the years, the Federal Reserve has aimed to employ risk-focused supervision to reduce unnecessary regulatory burden on supervised institutions, including community banks. In conjunction with existing risk-focused supervisory practices, the Federal Reserve began implementing the Bank Exams Tailored to Risk (BETR) program in 2019 for community and regional state member banks.10 The BETR program focuses on the most important risks faced by banks and uses a data-driven approach to measure these risks and tailor subsequent examination procedures accordingly.11 This approach allows the Federal Reserve to apply more streamlined examination work programs to banks with lower-risk profiles, meaning fewer hours are spent on the examination. Additionally, supervisory teams are often able to conduct their work offsite, reducing the amount of time spent onsite at an institution.12
Consumer compliance examinations are also conducted using a risk-focused approach, as consumer compliance examiners base examination activities on an assessment of an institution’s residual risk.13 This assessment balances the risks inherent in the bank’s operations and environment with the strength of the bank’s risk management controls. Through careful pre-examination risk assessments, the Federal Reserve can ensure that consumer compliance examination activities focus on the areas of highest risk for each individual institution, which thereby reduces onsite examination time and burden on banks and enhances the efficacy of the supervision program.
In addition to conducting risk-focused examinations, the Federal Reserve emphasizes risk management and controls during safety and soundness examinations and inspections, as these are often critical areas in which management wants to receive feedback. This approach allows supervisory teams to provide assessments on the current conditions of financial institutions while also considering how they can remain well positioned in the future. The emphasis on risk management and controls has also helped community bankers prioritize their own risk management practices. By conducting risk-focused examinations and emphasizing risk management and controls, the Federal Reserve has aimed to strike a balance between reducing unnecessary burden on community bankers and ensuring that bankers are prepared to operate safe and sound institutions.
During the COVID-19 pandemic, the Federal Reserve made several temporary changes to supervisory, regulatory, and reporting practices to better support and reduce unnecessary burden for financial institutions, especially for community banking organizations. For example, the Federal Reserve issued examiner guidance in June 2020 to promote flexibility in supervisory practices for institutions and borrowers affected by the pandemic.14 The federal bank regulatory agencies also recognized that due to participation in federal coronavirus response programs, many community banking organizations experienced size increases that could subject them to new regulations or reporting requirements. To address the situation, the federal bank regulatory agencies announced an interim final rule that generally gives community banking organizations until 2022 to “reduce their size or prepare for new regulatory or reporting standards.”15 This emphasis on flexibility and monitoring also allowed for increased conversations with management teams at supervisory institutions about the risks and challenges they were facing during the pandemic. In addition to conversations at the Reserve Bank level, the Federal Reserve hosted 42 Ask the Fed sessions related to the pandemic and the Federal Reserve’s response to the pandemic, a large increase in the number of Ask the Fed sessions from previous years.
Community banks and the communities they serve continue to be of critical importance to the Federal Reserve. Community banks are integral to the Fed’s supervisory program and vital to its understanding of local and national economies and conditions. The Federal Reserve aims to remain responsive to the evolving landscape for community banks through risk-focused and forward-looking supervisory programs. By continuing to focus attention on economic recovery from the COVID-19 pandemic and risk management in the banking sector, the Federal Reserve will continue to foster conversations about emerging issues within the community bank industry and the communities that they serve, enhance communications and outreach at all levels of the organization, and employ forward-looking, risk-focused supervision.
- 1 For an overview of the CDIAC, visit www.federalreserve.gov/aboutthefed/cdiac.htm.
- 2 See Scott Zurborg, “CDIAC: One Important Way the Board Takes the Pulse of Community Banks and the Economies They Serve,” Community Banking Connections, Third Issue 2020, available at www.cbcfrs.org/articles/2020/i3/cdiac.
- 3 To read more about the Philadelphia Fed’s Economic and Community Advisory Council, see www.philadelphiafed.org/about-us/economic-and-community-advisory-council-meetings-and-information.
- 4 See Governor Lael Brainard’s speech, “Strengthening the CRA to Meet the Challenges of Our Time,” presented at the Urban Institute, Washington, D.C., September 21, 2020, available at www.federalreserve.gov/newsevents/speech/brainard20200921a.htm.
- 5 Refer to the Board’s September 21, 2020, press release at www.federalreserve.gov/newsevents/pressreleases/bcreg20200921a.htm. Comments on the ANPR were due on February 16, 2021, and staff are now completing a review of these comment letters.
- 6 The annual Community Banking in the 21st Century research and policy conference — sponsored by the Federal Reserve System, the Conference of State Bank Supervisors, and the Federal Deposit Insurance Corporation — brings together community bankers, academics, policymakers, and bank regulators to discuss the latest research on community banking. Read more at www.communitybanking.org/.
- 7 To read more about the Innovation Office Hours Series, see www.federalreserve.gov/aboutthefed/innovation-office-hours-series.htm.
- 8 The Board of Governors delegates supervision and regulation activities to the Reserve Banks, including conducting examinations and inspections.
- 9 Due to the COVID-19 pandemic, formerly in-person outreach events have shifted to virtual offerings.
- 10 The BETR program applies to community and regional state member banks and is detailed in Supervision and Regulation (SR) letter 19-9, available at www.federalreserve.gov/supervisionreg/srletters/sr1909.htm.
- 11 See Vadim Bondarenko, Chris Henderson, and Matthew Nankivel, “Improved Risk Identification Helps Tailor Examinations to Banks’ Risk Levels,” Community Banking Connections, First Issue 2020, available at www.cbcfrs.org/articles/2020/i1/improved-risk-id.
- 12 Due to the COVID-19 crisis, examination activity has been conducted fully offsite since June 2020.
- 13 This approach applies to the supervision of community banking organizations, defined as institutions supervised by the Federal Reserve with total consolidated assets of $10 billion or less, and is detailed in Consumer Affairs (CA) letter 13-19, “Community Bank Risk-Focused Consumer Compliance Supervision Program,” available at www.federalreserve.gov/supervisionreg/caletters/caltr1319.htm.
- 14 From March to June 2020, the Federal Reserve implemented a pause in examinations. This pause allowed supervisory teams to focus on outreach and monitoring efforts to support financial institutions, including understanding the risks associated with the economic environment during the pandemic. See the Board’s press release “Supervisory and Regulatory Actions and Response to COVID-19,” available at www.federalreserve.gov/supervisory-regulatory-action-response-covid-19.htm.
- 15 See the Board’s November 20, 2020, press release “Agencies Provide Temporary Relief to Community Banking Organizations,” available at www.federalreserve.gov/newsevents/pressreleases/bcreg20201120a.htm.