‘10 miles is a long way by horse and buggy’: Fed studies rural branch closings

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For a regulator grappling with what is the right balance in big-bank supervision, the Federal Reserve is also trying to drill down on industry trends at the most micro levels.

The Fed's top regulatory official, Vice Chairman of Supervision Randal Quarles, gave wide-ranging remarks Thursday on the central bank's efforts to gather and understand data about the community banking sector.

But Quarles warned that quantitative studies don't always provide enough information about banking in the most rural areas, which lack access to technology and are not reflected in county-level research that "obscures community-level dynamics."

"Some communities within a county may have lost banks or bank branches, while others may have gained," Quarles said at a community banking conference, co-hosted by the Fed, in St. Louis. "In the rural Mountain West, where I grew up, a single county can be physically larger than some Eastern states. And the demographics of the communities — for example, high- or low-income — that have lost or gained are also not visible, but important."

Quarles discussed data showing how the path of urban community banks has deviated from that of rural community banks. But he also described takeaways from "listening sessions" that the Fed has conducted on a national level "to gather information from consumers and small- business owners in rural communities that have been directly affected by bank closures."

"We used data to identify rural towns that have experienced bank branch closures; in some cases, these towns lost the only bank in town and now have no remaining banks," Quarles said. "Then we convened local residents and small-business owners to ask them about what the loss of a bank meant to them and their community."

Technology that is taken for granted in a big city is not a given in some communities.

"Technology may be perceived as a threat or an opportunity, depending for example on whether the necessary infrastructure is available," he said. "In Nicholas County, Kentucky, which is located in Appalachia, many residents do not have access to high-speed internet; this lack of access has led most residents to travel outside of the county to conduct their banking needs."

Quarles said a lack of online access coupled with the lack of a bank branch pose particular challenges to elderly customers without a car or "busy small-business owners who do not have time to travel 25 miles each way to make change and deposit checks."

"In Centre County, Pennsylvania, we heard that the transportation challenge is particularly acute for the Amish — 10 miles is a long way to travel by horse and buggy," Quarles said.

The Fed will be conducting more listening sessions throughout the fall and plans to publish its findings from the exercise in a report due out early next year, Quarles said.

Meanwhile, Quarles highlighted broader data trends about community banks that suggest a promising future for smaller institutions.

“Urban and rural community banks face different challenges, but, on average, both seem to be faring well in the post-crisis period,” he said.

He noted that community banks continue to benefit from their localized approach. "That local knowledge, and the relationship-based lending that is the hallmark of community banking, can stem losses during downturns, as community banks may be able to work with borrowers to avoid losses," he said.

He pointed to deposits held by community banks trending upward, and loan growth at both rural and urban community banks.

“The fact that the average individual community bank has maintained or increased its deposit market share since 2008 suggests that community banks have been able to compete quite successfully with larger banks in both urban and rural markets during and since the recent recession,” he said.

Rural community banks are also performing surprisingly well, and are even competing at the same level as urban community banks, despite facing a more challenging economic market. In fact, the average number of banks in rural markets has actually increased in the last 20 years, said Quarles.

The listening sessions also included a trip to Clark, S.D., and Quarles said one will take place soon in Reynolds County, Mo.

In one of the Fed’s listening sessions, in Brushton, N.Y., residents said that when people leave the town to fulfill their banking needs, they are also likely to shop, eat and use services outside of the town, which hurts the small businesses in Brushton. And as the access to cash has decreased, credit card use has risen, making it more expensive to do business within the town.

“Residents of Clark spoke positively about the importance of the personal touch a local bank can provide,” Quarles said. “Residents liked familiar faces at the teller window and loan officers who understand the local economy when making small-business loan decisions.”

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