In recent months Congress, the Obama administration, regulators and the news media have rightfully joined the chorus of state regulators praising community banks for their role in stabilizing the financial services industry and the economy as a whole.
In good times and bad, the community banking system sparks economic development in towns and cities across the nation and stimulates the nation's economy. But what these new community bank advocates fail to discuss is the correlation between the state banking system and community banking.
Our nation's community banks, which have been so integral not only during this period of economic crisis, but during boom times, as well, would cease to exist under a system of consolidated federal supervision. Put simply, without state supervision, the United States would no longer have community banks.
Two years ago I was asked to meet with a Japanese college professor visiting Nebraska. The purpose of his visit to America was to study the concept of community banking. He related that all financial institutions in Japan are chartered and supervised federally. It blew him away that a community bank could be locally owned, make credit decisions locally and operate in the best interests of the community it served. Our visit reaffirmed for me the value of state supervision of community banks.
Our nation's unique dual banking system has encouraged the development of a diverse and broad industry that provides financial services to customers of all types in communities of all sizes in every corner of the United States. The presence of community banks in towns and cities nationwide means qualified borrowers were able to obtain credit while the nation's largest institutions were cutting back lending to preserve liquidity and capital when the markets crashed.
Community banks are also integral to the development and success of small businesses by providing them a valued source of credit. The community banking system enables our economy to sustain market booms and busts by continuing to spur economic activity and being responsive to local credit needs.
As Congress debates regulatory reform and quizzes Treasury Secretary Timothy Geithner on his department's proposal for restructuring, I encourage Congress and the administration to build upon the strengths of the dual banking system to preserve the community banks.
Consolidation of supervision into one federal regulator or setting the dual banking system on a path to extinction would result in industry consolidation and the destruction of the community banking system, which has proven itself so valuable during this economic downturn. We have been fortunate over the past tumultuous year that financial and credit decisions affecting our Nebraska economy have not been made in New York, Chicago or San Francisco.
State financial supervision is imperative to the existence, development and continued health of the community banking system within the United States. The overwhelming majority of community banks are state-chartered. State regulators are in closer physical proximity to the banks they supervise and are accessible to their supervised entities.
Perhaps the biggest benefit to state supervision is the knowledge my fellow state regulators and I have of the local and state economies and conditions that so greatly impact community banks. Agricultural price fluctuations may not impact Bank of America or Citigroup, but the price of corn can have a substantial impact upon the Nebraska economy and its banks.
This proximity and local expertise makes the state charter the charter of choice for nearly three quarters of all community banks. My department supervises 78% of Nebraska's commercial banks and 55% of its commercial bank assets. If we exclude the $10 billion of banking assets held by Nebraska's largest nationally chartered bank, First National Bank of Omaha, my department supervises 73% of the state's commercial banking assets.
One of the greatest strengths of the dual banking system is that each of our state-chartered banks also has a federal regulator, either the Federal Reserve Board or the Federal Deposit Insurance Corp. We work very closely with these agencies to be consistent in supervision of our banks, and we conduct joint or alternating examinations of all state-chartered banks.
Congress provided for coordination and communication among financial regulators in 1979, when it created the Federal Financial Institutions Examination Council for those purposes. The council consists of FDIC Chairman Sheila Bair, Comptroller John Dugan, Fed Gov. Daniel Tarullo, OTS Acting Director John Bowman, NCUA Chairman Michael Fryzel, and me as a representative state regulator.
The new financial regime that will emerge from regulatory restructuring should not be geared toward enabling the nation's largest institutions to remain systemically important to the detriment of our community banks. State supervision and regulation are essential to our decentralized and diverse system.
States have a unique perspective that is rarely shared at the federal level. The smallest bank failure in the smallest town may not impact the markets on Wall Street or policy debates in Washington, but they have a devastating impact upon the community the bank serves. By ensuring the safety and soundness of our local community banks, state regulators are also strengthening local economies, the engines that provide stability when one sector of the nation's economy or one area of the country is in financial turmoil.
