Add “small but mighty” to the attributes of community banks, those financial institutions that have seen their ranks eroded by decades of consolidation, declining rural populations and, more recently, increasing regulatory oversight.
That was one takeaway from a Friday morning discussion at Creighton University about the future of smaller local banks, led by Esther George, president and CEO of the Federal Reserve Bank of Kansas City.
George, a longtime employee of the central bank, oversees activity in the Fed’s 10th District and is also a member of the Federal Open Market Committee, the body charged with steering U.S. monetary policy.
Balancing the paramount implications of policy decisions she helps to shape, George said the nation’s smallest banks retain a pivotal role in the vitality of communities they serve.
“You often get the question of whether community banking is some kind of a nostalgic notion, but the U.S. economy depends heavily on the kind of lending that community banks are involved with,” George told a gathering of the Omaha Business Ethics Alliance on Friday.
That kind of lending — to small businesses and farmers, in particular — is especially critical in the states included in the Fed’s 10th District, which stretches from Wyoming through Nebraska to Oklahoma.
George emphasized the “real economic impact” of community banks that help fuel the nation’s agricultural economy while keeping local communities alive. Eight of the top 100 farm lenders in the country are based in Nebraska.
Community banks like York’s Cornerstone Bank and Midwest Bank in Pierce find themselves among ag-lending heavyweights that include First National Bank of Omaha, Bank of the West and Wells Fargo, the runaway No. 1.
“When you think about the ag economy, we are disproportionately blessed with that in this part of the country, and you’ll find that community banks are significant lenders in that space,” George said.
Community banking dominated the morning discussion, but George responded to various questions from audience members.
» On the Fed’s low-interest rate policies: “Cheap credit is designed to get people to borrow, to buy, to get the economy going, but it also has side effects. It punishes savers in the process. If you do that for a year, 18 months, two years, some would argue that balances out. When you do it for six or seven years, it creates concerns.”
» On volatility in the agriculture sector: “It’s likely we see some softening in the regional economy but we’ll see how it plays out. I’m not panicked that we won’t be able to adjust to this. ... This is a history of how ag works in the U.S.”
» On the ramifications of technology: “Technology allows us to do things in a different way, and I would argue it has really outpaced how we understand its consequences. There are people today that don’t want to walk into a physical facility. ... But there are issues that come with that, and you see that as soon as people have a problem and they immediately want help.”
» On “too big to fail” institutions: “We have yet to assure ourselves that institutions are not too big to fail in this country and we saw what it cost. It cost us millions and millions of jobs in this country and lost productivity and growth. ... We know that in a capitalistic system, if we’re going to have the kind of market-based economy that allows winners and losers, you can’t codify too big to fail. I think that remains an outstanding issue and we have to address that for the health of the economy going forward.”
Bankers in attendance said institutions serving rural communities feel the same pains as businesses and schools working to stay vital.
Depopulation not only stresses balance sheets and enrollment figures, it also puts a strain on recruiting and retaining banking talent, said Robert Dalrymple, executive vice president of the Midwest division of San Francisco-based Bank of the West.
More than half of all rural counties in the U.S. lost population between 1980 and 2010, according to a recent report by the Federal Deposit Insurance Corp. The Great Plains region, which includes Nebraska, has been the most adversely affected by the trend.
In many places like Newman Grove, a town of about 725 residents in northeast Nebraska, a single bank serves the entire community.
Just as rural business owners struggle to find and hold on to successors lured away by the trappings of metropolitan areas, so do bankers.
Jeffrey Gerhart, chairman of the Bank of Newman Grove, said his bank’s succession plan is on solid ground. “But that’s not the case for all banks,” he said.
The Fed’s George knows rural issues. She grew up in rural Faucett, Missouri, an unincorporated community between Kansas City and St. Joseph. And she spent much of the 1980s as a bank examiner for the 10th District during the financial crises of that era.
Her proximity to community banks throughout her life has helped influence her outspoken policy opinions on matters like the central bank’s interest rate actions following the most recent financial crisis.
“Certainly, your experiences influence your views. I’ve seen how banks serve communities and how those communities are affected when they fail,” George said. “Smaller banks need the same discipline as the largest banks, but you don’t want to increase consolidation through more regulations. That’s not an outcome we want.”
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