CSBS creating index to gauge health of small banks

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For the past five years, the Conference of State Bank Supervisors has been surveying community bankers to gauge the current environment that small banks are operating in and the risks they face.

Now the organization of financial regulators intends to parlay that data into an index that measures the health of the community banking sector.

The group envisions the Community Bank Sentiment Index being used by industry watchers, policymakers and bankers so that these constituencies have a better understanding of the health of the country’s local economies. The new index is also intended to bring attention to market conditions and how they impact community bank growth prospects.

The organization of financial regulators announced plans for an ongoing sentiment index of community bankers in a press release on Thursday.

Michael Stevens, senior executive vice president at CSBS, said in an interview that community bankers have a unique vantage point when it comes to understanding the health of local economies.

"These are people assessing risk and putting real money into the hands of businesses and consumers, so I would say how they feel really matters and should be a good indicator of economic growth and loan growth in the future," Stevens said.

William Dunkelberg and Jonathan Scott, economists at Temple University, wrote a paper outlining how CSBS would build the index. Dunkelberg is chief economist for the National Federation of Independent Businesses and a former chairman of Liberty Bell Bank.

This is the fifth year that CSBS, in conjunction with the Federal Reserve, has conducted its annual survey of community bankers. Stevens said the organization thought it was time to consider other ways it could use the data from the surveys. The Temple economists suggested that CSBS tweak some of the questions to gain better insight into the sector.

The index “will show how bankers are feeling about the future and provide us with an important barometer of the state of the industry,” Stevens said in the release. “That is important, as community banks are key instruments of the economy, especially when it comes to small business and agriculture lending.”

CSBS and the economists are still working out how often it will publish the index. They are considering updating the index more regularly by using quarterly call report data. The organization is requesting comments and input from bankers and industry watchers.

CSBS noted in the paper that small businesses and local economies depend on community banks, which have dropped in numbers over the last 30 years to fewer than 5,000 from around 14,000.

“Given the indispensable role community banks play nationwide, concern has grown about how continued consolidation will impact credit availability and local economies,” the paper says.

The 2018 survey delves into the current operating environment for community banks and the issues they face, such as intensifying competition, regulation and pressures to merge.

The survey of hundreds of banks from around the U.S. found that younger CEOs are usually more optimistic about the future. The survey also found that profitability and bank growth don't necessarily correlate with banker optimism.

“We believe the development of a measure to indicate the sentiment of community banks will provide valuable insights into the outlook of community banks and the economy,” the economists wrote. “We will be working with the CSBS over the next few months to develop questions for the national survey of community banks that will more effectively provide the sentiment of community banks.”

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