Federal Reserve System and the Conference of State Bank Supervisors

Community Banking in the 21st Century

October 3, 2013, Federal Reserve Bank of St. Louis

Robert Moore, Capital Regulation at Community Banks: Lessons from 400 Failures

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Robert Moore, an assistant vice president at the Federal Reserve Bank of Dallas, presents his paper “Capital Regulation at Community Banks: Lessons from 400 Failures,” co-written by Michael Seamans, a financial industry analyst at the Dallas Fed. The authors find that the majority of failed banks were considered well capitalized even two years prior to failing. In general, banks started seeing significant drops in capital about four quarters before failure.

Capital Regulation at Community Banks: Lessons from 400 Failures(PDF)

Abstract: We draw on data from the recent financial crisis and its aftermath to examine factors underlying community bank performance, failure and regulation. In particular, we investigate the failure of some 400 community banks from 2008 to 2013, with a focus on the ability of two measures of capital, tier 1 capital to assets and tier 1 capital to risk-weighted assets, to explain and forecast these failures. Both measures of capital provide useful information for explaining failures in-sample. For predicting failures out-of-sample, we find that both measures have similar Type I error rates for given Type II error rates, particularly if variables beyond the capital ratios themselves are included in logistic failure models. Our results accord well with those of Estrella, Park and Peristiani (2002) who examined an earlier failure wave, and with Haldane and Madouros (2012) who brought a different approach to examining the recent failure wave. Consistent with this previous research, our results support keeping capital requirements for community banks simple.

Conference Videos

Welcome & Overview (Oct. 2)
Moderator: Julie Stackhouse (5:29)

Opening Remarks
John Ryan (4:58)
James Bullard (4:39)
Ben Bernanke (8:40)

Research Session 1: The Role of Community Banks
Research Session 1 Moderator: Scott E. Hein (5:35)
Do Community Banks Play a Role in New Firm Survival? (Smith Williams) (18:27)
Equipment Lease Financing: The Role of Community Banks (Mohammed Khayum) (13:24)
Equipment Lease Financing: The Role of Community Banks (Charles Kelly) (14:03)
Small Business Lending and Social Capital: Are Rural Relationships Different? (Kenneth Spong) (25:08)
Bank Failure, Relationship Lending and Local Economic Performance (John Kandrac) (22:32)
Q&A (16:07)

Evening Keynote Address
Dorothy Savarese (38:04)

Community Banking Performance (Oct. 3)
Moderator: Richard Brown (5:07)
Financial Derivatives at Community Banks (Shelly Shen) (11:12)
Lessons from Community Banks that Recovered from Financial Distress (Andrew P. Meyer) (22:40)
The Effect of Distance on Community Bank Performance Following Acquisitions and Reorganizations (Timothy J. Yeager) (20:43)
Performance of Community Banks in Good Times and Bad Times: Does Management Matter? (Dean F. Amel) (17:02)
Research Session 2 Question and Answer Period (21:41)

Supervision and Regulation of Community Banks
Moderator: Lamont Black (4:09)
Estimating Changes in Supervisory Standards and Their Economic Effects (William F. Bassett) (17:23)
The Impact of Dodd-Frank on Community Banks (Tanya D. Marsh) (15:39)
Capital Regulation at Community Banks: Lessons from 400 Failures (Robert R. Moore) (14:39)
A Failure to Communicate: The Pathology of Too Big to Fail (Harvey Rosenblum) (18:15)
Research Session 3 Moderator Wrap-up (14:43)
Audience Question and Answer Session (14:46)

Afternoon Keynote Presentation
Federal Reserve Governor Jerome Powell (28:27)

Panel Discussion and Presentation of Results from Town Hall Sessions
Presenter: Mike Stevens (13:20)

Panel Discussion: Community Banking in the 21st Century: Opportunities, Challenges and Perspectives
Moderator: Charles A. Vice (13:32)
Curt Hecker (7:38)
Bobby P. Martin (12:24)
Thomas E. Spitz (8:30)
Claire W. Tucker (9:14)
Community Banking Panel Question and Answer Period (1:04:29)
Julie Stackhouse, Closing Remarks (11:13)

Conference of State Bank Supervisor