Chicago Fed Insights

2023 Community Bankers Symposium Recap

January 2, 2024

Entitled Back to the New Basics, the 17th annual Community Bankers Symposium focused on the current issues facing community bankers, ranging from cybersecurity to global crises to the importance of diversity in banking. The event, held on Friday, November 17, 2023, was hosted jointly by the Federal Reserve Bank of Chicago, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Conference of State Bank Supervisors.

Pre-symposium cyber workshop

Following on the cyber-focused theme of the 2022 Community Bankers Symposium, the Chicago Fed partnered with IBM and the Federal Reserve Bank of Richmond to offer an immersive simulation lab allowing participating bankers to walk through a cyber-attack and, with an IBM facilitator, learn what actions are necessary for managing such a challenge. Participants in this pre-symposium workshop discussed the lifecycle of a cyber attack at a community bank and explored how taking certain steps to identify, protect, detect, respond, and recover from an incident could be impactful. Participants learned it is important to have a plan ready to cover internal and external communication, regularly test the incident response plan, and, of course, maintain cybersecurity vigilance.

Symposium welcome

Julie Williams, executive vice president of Supervision and Regulation at the Chicago Fed, welcomed the audience of 250 community bankers, senior policymakers, and regulators. She said the theme for this year’s symposium, Back to the New Basics, is a reminder to stay focused on banking principles while using the new tools that have emerged over time. With this backdrop, Williams centered her remarks on the publicly announced plans to enhance Federal Reserve oversight of financial institutions that arose from Vice Chair of Supervision Michael Barr’s internal review of the Silicon Valley Bank failure in March and the role Fed supervision and regulation played in it. Barr’s two primary areas of focus, she said, were: 1) to improve the speed, force, and agility of supervision and 2) to raise the baseline for resilience. There are several efforts underway internally to determine the best options to address these areas of focus, Williams noted.

Austan Goolsbee: Remarks on the economy

“In 2023, we are on path to rival the 1982 record of how fast inflation came down, more than 4 percentage points, and this year the unemployment rate never rose above 4%,” said Austan Goolsbee, president and CEO of the Chicago Fed, delivering a summary of where the economy stands. Monetary policymakers have noted these are times unlike the past, Goolsbee said, with strong gross domestic product (GDP) growth in the most recent quarter, the unemployment rate at a very low 3.9%, and inflation having declined significantly since it peaked at 9.1% in June 2022.

Reasons a ”soft landing“ might be achievable, Goolsbee said, include healing of the supply chain disruptions caused by the pandemic, a strong rebound of labor supply, increased productivity growth, and market expectations of future inflation that did not go up as the actual inflation rate rose.

“If we can get back to trend, without a recession, that would be a major achievement,” he said, while noting he and his peers will continue to monitor “the real economy going forward.” While GDP has grown, consumer sentiment indicators have remained largely negative, said Goolsbee, who added that in the past, external shocks to the economy have disrupted anticipated “soft landings.” He emphasized that the continuing goal for core inflation stands at the Fed’s target of 2%, and the metric that will be key to achieving this goal is housing inflation.

The business case for diversity in banking

In a “fireside chat,” Jennifer Docherty, founding director and CEO of Bank on Women, and Bruce Lee, president and CEO of Heartland Financial USA, explored the importance of diversity in community banks and its critical role in leadership. “Leadership teams are needed that can think creatively, accommodate differences of opinion, and produce innovation,” Lee said.

To make the case, Docherty shared some statistics. Women in 2019 started almost 2,000 net new businesses a day, yet 73% of women remain dissatisfied with their financial services, she said. By 2045, the U.S. will be a majority minority country that is evolving very rapidly, so banks need to be thinking about a workforce that represents the future customer base, she added. Additionally, said Docherty, the younger generation wants to take their business to places that represent them, which they believe are committed to inclusion.

From a financial perspective, companies that have below-average diversity tend to produce about 26% of their revenue from innovative products projects versus 45% for companies with above-average diversity, she noted, and a bank’s hiring of diverse candidates has been tied to observed financial improvements in its respective markets. Being profitable while still managing risk requires people who see the world differently, said Lee, and different skill sets, backgrounds, and experiences are needed because groupthink is a direct challenge to effective risk management.

To make diversity, equity, and inclusion part of standard operating procedure, bankers must assess the demographic makeup of their community and how a bank serves that community, said Lee. Heartland includes 11 community banks, with 114 banking centers serving 83 communities and a significant number of Spanish-speaking people, he said. Improving diversity was part of senior leadership performance reviews, Lee said, and the company spent time educating hiring managers about the need for diversity.

Heartland Financial was able to create an inclusive environment by listening to its employees, which in turn led to a better customer experience and reduced turnover, which reduced expenses, he said. “We were able to meet the needs of the communities [Heartland serves], as it is not people sitting in the boardroom making decisions but rather thousands of employees making decisions on the best way to serve our communities,” said Lee.

Common sense strategic planning

Banking consultant J. Michael Woody, Sr., provided his perspective on developing a useful strategic plan and the challenges this task poses to financial institutions in the current banking environment. Woody, formerly president, CEO, and director for banks in Tennessee and Oklahoma, remarked on the many changes he has seen since he began working in banking in the 1970s and said the basics of banking should also evolve.

With a mission statement to “maximize safe and sustainable wealth for shareholders,” community banks should identify targets for earnings and growth while balancing risks in the areas of operations, asset quality, lender liability, and vendor management, he said, stressing that accurate loan file documentation will help manage risks.

Woody also emphasized that every strategic plan should hinge on a bank’s next safety and soundness exam, given the impact adverse ratings can have. Bankers crafting a strategic plan should understand supervisory ratings and the Uniform Bank Performance Report, including key financial ratios applicable to their bank, he noted, and they should be comfortable with reporting systems and procedures and ensure the independence of the audit committee. Regardless of these challenges, “What better business could you be in?” Woody asked. Working in banking is worthwhile, he said, because “it counts, it’s challenging, and you meet interesting people.”

Keynote: A tumultuous year in review and a look ahead

Over lunch, bank and capital markets risk consultant and trainer Mayra Rodríguez Valladares, managing principal at MRV Associates, discussed some of the significant events over the last year and some of the risks looming in the future. The Standard & Poor’s (S&P) Index for regional banks underperformed compared to the S&P 500 due to investor concerns over the regional bank failures that occurred early in the year, she said. However, earnings for all banks are at historically high levels, and net income for community banks also went up.

Geopolitical risk, including the Russian invasion of Ukraine, periodic tensions between the U.S. and China, and the Israel–Hamas war can affect oil prices and the agriculture industry, which can affect U.S. business activity, said Rodriguez Valladares.

Looking at the future for community banks, she noted that continued elevated interest rates will adversely impact net interest margins as very leveraged companies show a risk of rising defaults. “Inflation isn't domestic, it’s global,” she said, so geopolitical risks can affect domestic efforts to bring it down. Possible Basel III rule changes on capital requirements and potential anti-terrorism financing rules would be focused on large and regional banks but may spill over to community banks, Rodriguez Valladares said. And changes in commodity prices, cybersecurity events, supply chain disruptions, and possible civil unrest in the U.S. can affect borrowers at community banks and increase the risk of instability, she said, so all will need to be watched carefully.

The state of commercial real estate

Joesph Hoge, commercial credit lead expert within Community Bank Supervision at the Office of the Comptroller of the Currency (OCC), discussed the hot issue of commercial real estate (CRE) and how high refinance risk and the hybrid work environment have adversely impacted the office sector. Data show that numerous financial institutions in the Seventh Federal Reserve District exceeded interagency guidelines for higher risk designation, he said, and the post-Covid hybrid work environment has structurally shifted the market for commercial real estate. Return-to-work levels have been at 50% for the past year, said Hoge, and office vacancies are at 40-year highs in the District, which includes the cities of Chicago, Detroit, Indianapolis, and Milwaukee. These factors are part of the reason that repricing and refinancing risk are elevated, he said, adding that capitalization rates are expected to increase, which will lower collateral values and add further challenges to refinancing and managing potential problem loans.

Hoge shared a historical anecdote: In December 1863, he said, Hugh McCulloch, then Comptroller of the Currency and later Secretary of the Treasury, emphasized the need for national banks to diversify their loan portfolios or their customers will suffer due to the risk. “Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe,” McCulloch said. This advice remains largely unchanged in 160 years, according to Hoge, so identifying and managing concentrations of credit is paramount.

Concentrations of credit create pockets of risk that may lead to losses if not properly identified, quantified, and managed, said Hoge. This was a key lesson learned from the Great Recession (2007–09) crisis, he said: “The ‘music stopped’ for those banks with significant construction and development exposures in vulnerable markets; they ‘didn’t have a chair’ and, consequently, not only failed but accounted for 80% of FDIC [Federal Deposit Insurance Corporation] losses.” Among banks that fell under the designation of high risk—with total CRE in excess of 300% of capital, construction and development over 100%, and 50% loan growth over a three-year period—nearly one-quarter failed.

The main takeaway? “Do not put all your eggs in one basket and have prudent credit risk management practices,” Hoge said.

Public policy in uncertain times

Margaret Liu, executive vice president of strategic engagement at the Conference of State Bank Supervisors (CSBS), discussed congressional makeup and leadership and said collaboration between the political parties has mostly disappeared in recent years.

Legislation under consideration, Liu said, includes more independent oversight of bank regulators, clawback of bank compensation, removal or disbarment of ‘bad actors’ from bank management, and requirements of written ethics. The House Financial Services Committee drafted the McHenry Stablecoin bill, a crypto assets regulatory framework bill and a Digital Assets Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) bill, which would subject large parts of the crypto industry to Bank Secrecy Act (BSA)/AML regulations, she said. However, with an election year in 2024, little legislation is expected to pass in the coming year, said Liu.

Regulatory panel: Discussion of emerging issues and the new basics

This panel, moderated by Debbie Bush, an assistant regional director with the Federal Deposit Insurance Corporation, included representatives from the FDIC, OCC, Federal Reserve Bank of Chicago, and the Illinois Department of Financial and Professional Regulation, who spoke on current challenges in the regulatory environment and answered audience questions. Although regulatory perspectives and experiences can differ, certain common themes emerged, including a focus on liquidity and interest rate risks following the bank closings and related events in the first quarter of 2023 and the significance of outreach to and relationships with the banking industry.

Some of the key ideas brought up included the following:

  • Greater focus is being placed on the examination strategy surrounding liquidity risk and interest rate risk and how these components are related.
  • Regulators are keying in on asset/liability management, stressing the importance of formal planning and access to contingency funding, tracking deposit fluctuations, and recognizing the impact of interest rate increases on securities portfolios.
  • The FDIC is engaged in policy development to cover advisory changes in supervisory expectations of liquidity and interest rate risk and updating existing guidance in managing interest rate risk.
  • The Chicago Fed is engaging with bankers to encourage consideration of use of the discount window as a viable contingent funding tool.

And the panelists offered recommendations, including the following:

  • Coordination between the various regulatory agencies is critical in the current risk environment.
  • The ability to work together to have similar supervisory focuses, or “harmonization of supervisory approach,” will help to benefit the supervisory outcomes for institutions.
  • Overall, to cultivate a safe and sound banking environment, regulators and bankers need to remain in constant communication about business products offered, the strategy going forward, and more risky areas of operations.
  • And transparency throughout will ensure that bankers will get their questions and concerns addressed in a timely manner.

Closing remarks

At the close of the symposium, Bush shared her key takeaways from the day’s discussions. Diversity in banking has taken root in the composition of assistant general regional directors, she said. The strategic planning session made her reminisce about her prior career as a banker when she focused on “blocking and tackling” to ensure loan documents were in order and liens perfected, said Bush. Finally, she added, the geopolitical risks highlighted in the keynote address gave her greater perspective on the interconnectivity of events and organizations across the world. Bush expressed thanks on behalf of the interagency hosts to presenters and attendees and said she looked forward to seeing everyone at the 2024 Community Bankers Symposium.

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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