Vendor Risks, M&A Protests and Economy Tagged as Bank Priorities

ST. LOUIS — Regulatory burden remains a big concern for community bankers, but it is far from the only worry they have right now.

The Federal Reserve Board and the Conference of State Banking Supervisors are hosting their third annual conference designed to give regulators a better understanding of community banking issues. A dozen academic papers — chosen from nearly three dozen submissions — will examine topics ranging from regulatory burden and nonbank competition to agricultural lending and stress testing.

Julie Stackhouse, head of supervision at the Federal Reserve Bank of St. Louis, has been a fixture at the conference in previous years. In a wide-ranging interview, she discussed her expectations for this year's summit, along with her views on consolidation, regulation and the compliance issues she thinks the most about.

Here is an edited excerpt.

What will make this year's conference different?
JULIE STACKHOUSE: In some ways, I think the difference is simple. The first year people said, "You're doing what?" This year, we're seeing more contributions from the commissioners and the bankers. It shows in the work on our survey. And we're seeing a strengthening in the quality of the academic papers. We knew it would take time to attract interest in this type of research and to simply get the repeat buy-in we needed to make this conference successful. This is the year where we're really starting to see that.

Is the conference hitting its stride?
I really think it is, now that it is starting to make a difference. I don't want to overstate what we've accomplished, but remember that last year much of discussion was on regulatory burden. Not that the world has changed, but a few things have changed. The small bank holding company policy statement has come out. We have proposed some changes to the call report, and there are other changes that will be discussed in upcoming months. … We knew last year that we weren't going to see a groundswell of change, but the fact that we had some change is a hallmark of having this conference.

What has changed for community banks in the last year?
The general health of the industry is somewhat better. That's in the numbers. But we're also another year farther into this extended low rate environment. It is just hard to make money. I'm not sure bankers would say that is the first challenge they have, but we hear it indirectly in discussions about things such as consolidation. So that is one factor.

Banks make money by making loans, so to some extent it is not just about the rate environment. It is also about the overall health of the economy and the demand for credit from businesses. It could take quite a bit of change in economic growth to get [meaningful improvement].

And there's a lot of competition, including from nonbanks.
The thing I'm starting to hear is that competition is not equal, meaning that it's not the same in every community. In St. Louis, you can't walk out the door without hearing a banker say that [competition] is too hot. Yet when you go out to some of these rural communities … it isn't quite the same. I think it is a real issue for markets where there are a lot of bankers. And the nonbank entry is just another factor.

What are your thoughts on nonbanks?
Some banks have decided to partner with those representatives. And we know that all of these financial services providers will need a bank somewhere within that chain. The question isn't, "Will there be a need for banks?" It should be, "How many banks will be needed?" All of this comes back to the consumer. If the consumer needs and wants the touch of a person, then there's a future for banks. And that is the way it still is in many communities.

What are the key topics for bankers?
The regulatory environment will probably be characterized as one of the chief risks. We understand that. Bankers question whether they are going to get any relief, and we really haven't been successful at answering that question. So we're back to whether there are pieces that we can continue to look at and reduce some of the effect.

It's a much harder business than it used to be, and we can't quite capture what that means. We know that, in some cases, there are individuals who thrive in a very competitive, challenging environment and there are others who want no part in it. So we realize that, in the comments that are being made about the challenges in the regulatory environment, there is probably some balance.

I think there's a place for community banks. It really depends on that partnership with the community, both with those individuals who want a relationship with deposits and lending, and the banks that want to engage and give to the community in a way that is more than perfunctory. It looks like those banks will still be there.

The notion of branching is intriguing as well. We recently went over to NewGround [which develops new branch designs for banks and credit unions]. It's not clear how [redesigned branching] is going to take off, but it is interesting. And Reliance Bank [in the St. Louis area] is doing branches with Tim Hortons cafes. I think that's a positive. Any time you see innovation — trial and error — that speaks to an industry that has a future.

What are you looking at from a supervisory perspective?
From the regulatory standpoint, where do I spend my time? Compliance. And usually it's not the run-of-the-mill compliance program issues. It deals more on an unusual program that a bank has gotten into, often utilizing a third party, the extent to which the bank is affiliated with that third party, and what consumer protections they need to provide.

We're going to have those on our radar screen at least for a few more years. [Vendor management] is definitely a space that is not mature. I think that's going to pose challenges for any bank looking to get into more nontraditional activities … that are associated with a nonbank player. It requires more responsibility to be sure you know what that vendor is doing.

I also like to think about what the industry is going to look like. That isn't meant to suggest we're going to have massive consolidation, but we're looking at physical maps of banking offices across the country. … When you look at the prolonged low interest rate environment and some talk of impatient shareholders– we hear some of that — it all that speaks to the fact that there's going to be more consolidation.

The intriguing piece of it though, which we'll hear more about in coming years, is how do you set price, particularly for smaller banks? How will the owners set price? Trying to bring that back to some type of intersection is going to be interesting.

As we go a little bit larger in [terms of deal] size, we've seen a slew of protests with merger proposals from community groups in the last few years. That poses challenges. So now you've gotten to a point where you've decided to buy or sell, you've figured out a price and filed an application and all of a sudden you have a consumer claim or protest. Many banks have not been through that process, so they may not be that well prepared for it.

I'm not sure we really advocate that much from a regulatory perspective. We just tell bankers to know what their deal looks like and think through how the process might appear to an outsider.