Two decades ago, identifying a community bank was not difficult. It was a "brick-and-mortar" building that managed your checking account and gave you a bank book for your deposits. It was where you applied for your mortgage and were greeted by the bank manager, whose kid played on your kid's baseball team.

Today, identifying a community bank is more complicated. Your money comes from an ATM, you manage your checking account on a PC, your savings are in a mutual fund, you qualify for your loan electronically-and your kid plays soccer, not baseball!

Some say that our community banking system, like the local drugstore, is disappearing.

Perhaps we might be indifferent as to whether we are served by consolidated institutions or small community banks. Superregional institutions can and do meet many borrower and customer needs well.

However, we are still a nation that relies heavily on a decentralized retail delivery of credit through small financial institutions. More than 70% of commercial banks are those with assets of fewer than $250 million.

It is important to define what a community bank is. To answer this question we conducted an extensive review of published sources and held discussions with many industry and consumer representatives.

We found that there is no "bright line" test for a community bank by asset size or geographic service area. Most commenters defined a community bank as one that is locally owned and operated and has an inextricable relationship with its local economy.

Our respondents noted that because a community bank's policies are not developed from a distant headquarters there is greater responsiveness to local borrower and depositor needs.

Does government have an interest in community banks? Yes. Government has a role in encouraging the delivery of credit and account services nationally and in preserving locally responsive banking relationships. It has an interest in making sure that citizens have a place to do their banking under fair terms and reasonable costs. It has an interest in assuring that a small business has access to credit or that a family can obtain a mortgage or a car loan.

Small community institutions have demonstrated both profitability and the ability to retain customers. However, they also face many challenges, including the growing use of electronic technology and the need for additional funding sources.

Electronic banking technology is a positive development, promising to reduce costs to both lenders and borrowers. However, small community banks encounter cost and access barriers to electronic information systems.

As technologically advanced institutions expand their range of potential borrowers and select from those that appear to be the most secure or profitable, small banks could be left behind. We need to make sure that those borrowers or neighborhoods that do not meet the preferred criteria do not end up paying unjustifiably high costs or being cast aside.

In taking steps to modernize our present financial services industry, we must not fail to recognize a role for community banks and respond to the challenges they face. Financial modernization measures are essential because our regulated banking system needs to be competitive.

Equally important, however, is the preservation of a responsive retail delivery of credit. New sources of support must be found for small community banks. The Federal Home Loan Bank System could provide that support but must adapt its mission to present-day realities in order to do so. Balancing these goals will require our attention.

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