Banking Research and Analysis

CEO Succession and Performance at Rural Banks (PDF)

This paper finds that CEO replacement at rural banks, relative to urban banks, does not require compromises that are evident in subsequent declines in performance as assessed by regulators. These results are inconsistent with the notion that rural banks are threatened by “talent migration” and therefore are unable to replace CEOs with the same effectiveness as urban banks.

Compliance Costs and Economies of Scale and Compliance Performance (PDF)

Regulatory burden consistently tops polls that ask bankers about their greatest challenges. The costs of compliance are especially burdensome for smaller banks. Regulators and legislators are working on ways to lessen the load. One impediment to regulatory relief has been a lack of evidence as to the extent of the problem, especially for smaller institutions. This paper quantifies the relationship between bank size and compliance costs, using a unique set of survey data collected over a three-year period.

The Federal Reserve and Its Efforts to Reduce Regulatory Burden

The Fed recognizes the need to promote and ensure an efficient and effective supervisory function. In an effort to tailor supervision and reduce regulatory burden, the Fed has taken several actions, including: streamlining the applications and reporting process; improving coordination with other regulators and using a more tailored approach.

Rules and Judgment in the Oversight of Bank Accounting Practices (PDF)

The authors analyze how banks of different size adhere to ostensibly “one size fits all” accounting guidelines prescribing that provisions for loan losses anticipate subsequent charge-offs. They find that correlations of provisions and charge-offs are lesser for smaller banks, which they interpret as consistent with a hypothesis that bank regulators are able to reconcile rules and judgment by “tailoring” their supervisory practices to the unique characteristics of community banks. They also find that the exercise of judgment may be associated with greater lending as well as with a greater vulnerability to potential failure.

Bank Size, Compliance Costs and Compliance Performance in Community Banking (PDF)

Economies of scale in satisfying regulatory requirements were evident in a sample of 469 community banks surveyed in 2015. Higher (lower) compliance expenses, moreover, did not necessarily lead to better (worse) regulatory ratings.

The Future of Community Banks: Lessons from the Recovery of Problem Banks (PDF)

This paper identifies the essential factors for regaining health after suffering significant safety-and-soundness problems. The authors identified a sample of 1,376 commercial banks under $10 billion in assets that were downgraded to a CAMELS rating of either 4 or 5 during the sample period of 2006 to 2011.

The Future of Community Banks: Lessons from Banks that Thrived During the Recent Financial Crisis

The authors study the distinguishing features of community banks that maintained the highest supervisory ratings during the recent financial crisis (2006 to 2011). They identify balance sheet and income statement ratios that separate these thriving banks from other community banks and supplement that analysis with detailed interview evidence from a sample of thriving banks. They conclude that there is a strong future for well-run community banks and that the banks that prosper will be the ones with strong commitments to maintaining risk control standards in all economic environments. There is no one-size fits-all strategy, however, and each bank must develop a business plan that works in its market.

Big Banks in Small Places: Are Community Banks Being Driven Out of Rural Markets? (PDF)

The shares of total U.S. banking assets and deposits held by the very largest banking organizations have increased markedly over the past 25 years, while the shares held by small “community” banks have declined. Advances in information technology may have reduced the advantages of small scale, close proximity, and local ties that traditionally have given small, community-focused banks a competitive advantage in lending to small businesses and other “informationally opaque” borrowers. This article examines trends in deposit shares of banks of different sizes in rural U.S. counties. If the community banking model is to remain viable, it is likely to be in rural markets with (i) a relatively high percentage of informationally opaque borrowers and (ii) relatively low costs of acquiring qualitative information about potential borrowers. The authors find that rural deposit shares of both the smallest and very largest banking organizations changed little between 2001 and 2012, despite the upheavals of the financial crisis and recession, and in contrast to the 1980s and 1990s, when the shares held by the smallest banks declined markedly. The evidence suggests that well-managed community banks remain competitive, at least in rural markets, where their niche is most likely stronger than in urban markets