Chicago Fed Insights

Banking on the Future: 2021 Community Bankers Symposium, Part 1

November 29, 2021

The annual Community Bankers Symposium is an interagency event, hosted by the Federal Reserve Bank of Chicago, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and the Conference of State Bank Supervisors (CSBS). This year’s event, which focused on technology, security, and regulatory initiatives to prepare banks for the future, was held virtually on Friday, October 22, 2021.

In this blog post, we summarize the welcoming remarks, keynote address by Federal Reserve Board Governor Michelle (Miki) Bowman, and presentation by futurist author Brett King. In a follow-up post, we will summarize the view from the CSBS, expert perspectives on cyber security, the regulatory panel, and new initiatives from the FDIC, including an investment fund for mission-driven banks and their communities, presented by Chair Jelena McWilliams.

In welcoming remarks, Julie A. Williams, executive vice president of Supervision and Regulation at the Federal Reserve Bank of Chicago, highlighted the many challenges community banks have faced during the pandemic, including branch closures, limited onsite staff, navigating the risks of new technologies, and ensuring the safety of employees and customers. Among the most important, she noted, was the stress associated with Covid-19 and its impact on bank employees and customers, families, and communities.

In spite of the many challenges, there are some bright spots in the financial picture for community banks. According to Williams, returns on average assets (ROAA), an important measure of financial health, reached its highest level over the past five years as of the second quarter of 2021; asset quality trends have demonstrated improvements; banks with agriculture loan concentrations continue to perform well; and liquidity is robust. Granted, she said, net interest margins continue to be negatively impacted in the current low interest rate environment.

Williams also highlighted the value the Seventh District places on supervisory relationships with community banks and bank holding companies and its high-touch approach to the supervisory process. During the pandemic, supervisory managers were empowered to stay in regular contact with their respective portfolio of institutions to learn what was happening at the banks, as well as share information about key decisions bank supervisors had to make in real time to deal with uncertainties of the pandemic and overall bank supervision. Williams emphasized the importance of ensuring compliance with the Bank Secrecy Act and anti-money laundering law (BSA/AML) and managing risks related to increasingly sophisticated cyber attacks.

 Finally, Williams noted that staffing is among the challenges community bankers face as they work through strategic plans for 2022. The market for talent is becoming increasingly competitive, she said, while at the same time the sector is confronting the retirement of baby boomers.

Indeed, staffing issues are currently affecting all sectors of the economy. Anna Paulson, executive vice president and director of research, Federal Reserve Bank of Chicago, noted that there are approximately three million fewer people in the labor force than before the pandemic, and approximately five million fewer people are employed today than prior to the pandemic, as she also welcomed the symposium audience. Paulson explained that the labor force decline is due to several pandemic-influenced factors, including health concerns keeping some people from looking for work or returning to jobs in higher-risk industries, a surge in early retirements, and school closures and childcare concerns keeping some parents out of the labor force. To a lesser degree, she said, expanded unemployment insurance benefits and other fiscal supports may have reduced incentives for some workers to return.  

Banking on the Future: Keynote address

Federal Reserve Board Governor Michelle (Miki) Bowman focused her speech on the scarcity of de novo banks over the past decade and said the future of community banking is one of the Board’s highest priorities. She highlighted the importance of community banks in providing access to services, as well as their superior knowledge of their customers and skills in relationship banking using qualitative as well as quantitative lending models. She noted that community banks provided almost 60% of pandemic-era loan volume under the Paycheck Protection Program, including 87% of emergency loans to businesses owned by entrepreneurs from minority racial/ethnic groups, 81% to businesses owned by women, and 69% to businesses owned by veterans.

The community bank footprint has been declining due to ongoing merger activity; and only 44 de novo community banks have been chartered in the past ten years. Between 1990 and 2008, over 2,000 de novo charters were issued, averaging 100 per year. Only seven new banks were formed between 2009 and 2013 because of low interest rates and reduced demand for banking services, Bowman said. New bank formations typically increase in expansions and decline in contractions, she added, given capital raising requirements that average $30 million and a smaller margin of error in providing shareholder return. They also face growth pressures that could lead to riskier lending practices, an initial tier one leverage requirement averaging 8%, as well as a need to hire experienced staff to meet profit targets and handle regulatory burden, said Bowman. Non-regulated financial institutions have a competitive advantage, she noted, because investors can simply acquire an existing bank charter, branch, or nonbank financial firm subject to less regulation. While the loss of a small bank may not be systemically significant, Bowman said, it can have a devastating impact on a community by limiting access to the economy.

Bowman noted that policymakers are seeking to understand why there has been a decline in new bank formation and how it can be encouraged in this competitive environment. The Board will continue working to identify regulatory and policy constraints that limit bank formation. She also discussed cyber risk, which is an increasing threat to community banks and requires action plans and regulatory reporting.

Finally, Bowman discussed the growth of fintechs and the potential for them to partner with other financial institutions. The emergence of this technology-driven financial sector has led to interagency guidance on the adoption of artificial intelligence and the need for comprehensive financial due diligence, she added.

A view of the future from Brett King

Brett King, an international best-selling author, futurist and media personality, joined the symposium to share his vision of how the landscape of the financial services industry will change in the coming decades. King predicted that the banking industry will face disruption arising, in part, from an inevitable transition to digital services. As evidence, he cited record setting investment in fintech during the first two quarters of 2021. Rapid technological innovations, including the development of more sophisticated artificial intelligence (AI), will lower costs, improve security, and change how consumers conduct financial transactions, particularly payment activities, through the adoption of mobile wallets, King said.

During the pandemic, consumers became more accustomed to using virtual services, such as telemedicine, remote learning, and e-commerce, King noted, and that might help to open the minds of Americans who have been slower to embrace the use of mobile wallets than other countries, particularly in Asia. For example, King stated the use of currency as a mode of payment in China decreased from 98% in 2014 to 36% in 2020 due to the introduction and acceptance of mobile wallets.

Today 95% of Chinese consumers use a mobile wallet for day-to-day activities, and the global volume of mobile transactions is on a trajectory to triple that of traditional card payments. King said that security is often raised as a concern related to the use of mobile wallets; however, AI and increased technological capacity will enable the use of biometrics or the accumulation of behavioral data to more effectively identify and prevent fraud than the legacy identity infrastructure employed today, such as pin numbers or mother’s maiden name, he added. In fact, fraud arising from a “card not present” transaction is over ten times higher than fraud related to a mobile wallet transaction, King said, despite the rapid and instant nature of the latter.

Outside the United States and other Western nations, mobile wallets are the primary bank account for the majority of consumers, and by 2025, King predicted, there will likely be more bank accounts opened via a mobile wallet on a smart phone than in traditional banking offices. Technology will enable the mobile wallet to be a “smart wallet,” and in that context may be able to help consumers save money or ensure funds are available for key purchases by assessing the situation in real time using behavioral data to generate a warning or advisory. For example, a mobile wallet consumer entering a grocery store may be warned there are insufficient funds for a habitual shopping excursion. In King’s view, the ability to safely store and move money and access credit in real time will drive the financial services industry in the digital age.

These technological advances will not only apply to consumer accounts, but also to commercial customers. King said he expects commercial customers to demand seamless interaction with accounting and cash flow applications, which will facilitate instant access to commercial credit. Finally, King cautioned that the fastest growing financial institutions are all digital “fintechs” or “techfins.” If U.S. financial service providers do not respond by supporting development of a digital infrastructure and new identity mechanisms, he concluded, U.S. consumers may come to rely on a foreign underlying currency or possibly foreign cryptocurrency for their economic activities.

Our next post will cover updates from the CSPS, expert perspectives on security and regulation, and an overview of important new FDIC initiatives from Chair Jelena McWilliams.

The views expressed in this post are our own and do not reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System.

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