Fed Governor Addresses Sour Sentiment Among Community Banks

As the banking industry faces increasing regulation from the federal government, sentiment among some community bankers is sour. In a speaking engagement Tuesday at the University of Georgia, ""Federal Reserve"":http://www.federalreserve.gov/ Governor ""Elizabeth A. Duke"":http://www.federalreserve.gov/aboutthefed/bios/board/duke.htm addressed the plight of community bankers and maintained ""the future of community banking is bright.""

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Duke admitted the government has heard an outcry from community bankers who worry their banking model might not survive as new regulations severely limit their lending capabilities while also making lending much more costly.

She further admitted, ""Federal Reserve research over the years has confirmed that the burden of regulations falls disproportionately on smaller banks.""

However, she insisted community bankers' concerns are being heard, and the Federal Reserve is working to address the discrepancies.

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""I can't remember a time when I have seen more regulatory proposals drafted that differentiate between banks based on size or complexity,"" Duke stated.

One area of concern surrounds residential mortgage lending. While it is evident most community banks did not employ many of the risky lending practices for which the financial sector has been so disparaged, often, community bank loans did include high interest rates and balloon payments--characteristics of ""the subprime lending that proved to be so disastrous,"" Duke said.

Challenges fall to both regulators and community bankers in the current environment as regulators are charged with drafting rules that address risky lending without inhibiting responsible lending, while community banks must find a way to comply with regulations while continuing to conduct business in the residential mortgage market.

While community banks were exempt from many of the problems facing the residential mortgage market during the financial crisis, they did encounter problems in the commercial real estate market.

In 2006, the federal government distributed new guidance for commercial real estate lending. The Federal Reserve has continued to observe how community banks have fared in the market since that time.

""We now recognize the importance of the rapid growth criterion, which may have received less attention than the criteria for construction and overall CRE lending concentrations,"" Duke said, adding that the Fed will use what they have learned to further develop communication and training for bank examiners.

Duke admits ""the regulatory changes underway are not without costs to community banks,"" but reiterated ""the future for community banking is bright.""