Remarks by FDIC Chairman Martin Gruenberg at the 12th Annual Community Banking Research Conference

Introduction

Good afternoon. I appreciate the opportunity to address the 12^th annual Community Banking Research Conference today. This is a conference that the FDIC is pleased to cosponsor alongside the Federal Reserve System and the Conference of State Bank Supervisors. It provides an important opportunity for in-depth conversations between academics, bankers, regulators, and policy makers on the critical role of community banks in the U.S. financial system and economy.

In our 2012 Community Banking Study the FDIC created a research definition for community banks with the purpose of identifying the institutions that provide traditional banking services to their communities, specialize in relationship lending, rely on core deposits for funding, and whose offices are located in a relatively small geographic area.¹ By these criteria, community banks represent the most common business model in the banking industry, accounting for 90 percent of FDIC-insured institutions as of June of this year.²

As the primary federal regulator for the majority of community banks, the FDIC invests extensively in advancing our knowledge of these important institutions via outreach, supervision, and research. From our Community Banking Advisory Committee―which provides a forum for community bankers to regularly meet with FDIC board members and senior staff―to numerous reports and research studies―a few of which have benefited from data gathered by the CSBS annual survey that you heard about this morning—to sponsoring conferences―including this event―we strive to continuously improve our understanding of community banking and support its important role in the banking system. 

One of the reasons community banks are regarded as a foundation of support for their local communities is their strong ties to small businesses. A core function of many community banks, small business lending is of enormous economic importance. This is why today I am pleased to announce the release of the FDIC’s 2024 Small Business Lending Survey report and to share with you a few insights that I believe will help inform the discussion over the course of this conference, as you exchange views on the future of the community bank business model.

Banks and Small Business Lending

There is no universally accepted definition of a “small business,” but as of 2023, there were more than 33 million firms in the United States with fewer than 500 employees. According to the Small Business Administration, these firms represent 99.9 percent of all employer establishments in the country, more than 46 percent of private sector employment, and over 43 percent of gross domestic product.³ While these numbers demonstrate how vital small businesses are to the U.S. economy, small businesses thrive in no-small-part because of their access to credit for which banks are a primary source. Results from a 2022 Federal Reserve survey show that banks provide financial services to 87 percent of small firms and remain their most common source of credit among financial service providers.⁴ 

In recognition of the important interplay between banks, small businesses, and the economy, the FDIC undertook a voluntary survey of banks, with the aim to provide a more comprehensive view of small business lending. The FDIC Small Business Lending Survey (SBLS) was sent in 2022 to a nationally representative sample of 2,000 banks across the United States, large and small, containing detailed questions on the way banks approve and underwrite loans, their markets and competition, the use of financial technology, and their lending to start-ups. Approximately 1,300 banks responded to this request for an overall response rate of about 68 percent. It is these responses that serve as the basis of the analysis for the report of findings.⁵

With the remainder of my time, I want to discuss three key takeaways from the 2024 SBLS report covering the practices and experiences of the 94 percent of banks that engaged in small business lending in 2021 and I believe to be particularly relevant for community banks.

Technological Transformation Has Not Changed the Nature of Small Business Lending

The first finding from the 2024 SBLS report that I’d like to share with you is that advances in technology have not replaced the relationship-oriented and staff-intensive nature of small business lending. 

From the smallest to the largest banks, small business lending is generally underwritten and approved by people, and the resulting loans are held on the books. Engaging in fully automated underwriting is rare outside of business credit cards, and the 3 percent of banks that do fully automate the underwriting of some loans typically confine its use to very small loans. In this sense, small business lending at banks is one of the forms of lending that has remained the most consistent and “traditional” in how it is conducted. 

It is worth recalling that the survey was fielded in 2022―in the wake of the pandemic and the rapid adoption of remote communication. The 2024 SBLS report highlights that, despite these changes and the general adoption of new technology, small business lending still takes place largely in person, either at a bank branch or during an onsite visit. 

This doesn’t mean some things haven’t changed, particularly in the way that banks communicate with borrowers. For instance, the survey finds that a third of banks allow borrowers to complete at least some parts of a small business loan application online, whether consulting about products, submitting an application, or signing closing documents. However, only five percent of banks let borrowers complete the loan process entirely online. This fact, along with that of the majority of banks requiring a branch or site visit to complete the loan process, lends further support to the notion that the local branch is still a key part of small business lending.

To be clear, the 2024 SBLS report does show that banks are adopting new technologies, but these technologies are not generally replacing the traditional practices of small business lending. More specifically, the survey asked banks how they were using or considering using financial technology (FinTech) when making small business loans, from sourcing applications to underwriting credit to tracking performance. Thirty-one percent of banks, large and small, reported using financial technology in at least one stage of their small business lending processes, with an additional 22 percent still considering its use. However, when banks use financial technology, they typically employ it for the steps that occur after origination, such as for regulatory compliance, servicing loans, and portfolio analytics. As the 2024 SBLS report discusses more in depth, a key strength of banks in small business lending is their focus on delivering top customer service and developing long-term relationships; the industry does not see financial technology as eroding that nature but rather supplementing and supporting it.

Branches and Staff are Still Key Conduits for Relationships

The second takeaway from the 2024 SBLS report I want to discuss focuses on the key role of branches and staff in generating and maintaining relationships with small business customers. 

I have already spoken about the role the branch plays in completing the loan application process, which on its own points to the importance of branches for small business lending. Now I want to draw attention to the finding that the branch network is the dominant feature banks use when describing their market. In the survey, 80 percent of banks define their small business lending market as based on where their branches are located. For these banks, on average, their borrowers are typically found within 40 miles of their branches. Reinforcing previous findings, banks report the reason for not lending outside their geographic market to be largely related to forming those essential relationships with potential small business customers. Eighty-nine percent of banks say that potential customers outside their market prefer to borrow from a closer bank. Most banks also cite the challenge in developing relationships with customers beyond a certain distance from their branch, further highlighting the importance of maintaining a physical presence and having staff nearby.

It is worth noting that establishing relationships as part of small business lending is virtually universal in the banking industry. The 2024 SBLS report documents that when interacting with their small business customers, nearly all banks emphasize high-touch, staff-intensive practices: over 90 percent of banks say they participate in community events or ask staff to actively develop business relationships and share their expertise. Furthermore, 99 percent of banks say they rely on customer referrals in small business lending, with 93 percent deeming it a very important practice; and 97 percent make sure that a consistent group of staff are assigned to a given customer, with 92 percent regarding that as a very important practice. These and other similar findings in the 2024 SBLS report lead to the conclusion that the focus on staff interaction with small businesses remains a key strength of banks in the small business lending space.

Community Banks as Relationship Lenders

The third and final finding from the 2024 SBLS report I want to discuss relates to community banks as relationship lenders, a topic that also echoes the theme of research papers featured in the program. I just finished speaking about how all banks find it important to invest staff resources in developing and maintaining relationships with their small business customers. However, the 2024 SBLS report shows that small banks are more likely to take a comprehensive approach to underwriting and hence leverage the specialized knowledge obtained from their relationships to let them serve and provide credit to a wider set of small business borrowers. 

A hallmark of the community bank business model with respect to small business lending in particular is the ability to build relationships and capitalize on them in order to base credit decisions on a comprehensive look at the applicant that goes beyond credit scores and other standard data. Specifically, community banks hold an advantage in gathering and using “soft” information, defined as information that is difficult to quantify or transmit between individuals. Soft information, such as a loan officer’s assessment of an applicant or judgement on the quality of the applicant’s business plan, is closely tied to relationship lending. 

In this regard, our survey asked banks how they use specific types of information for a given size of loan, shedding light on this subject matter. For larger loans, $1 million or more, small and large banks look at similar types of information when underwriting. Yet, for smaller loans, below the $250,000 threshold, small banks consistently evaluate more soft information than large banks: for a loan of $25,000, small banks are nearly twice as likely as large banks to use the loan officer’s assessment of an applicant as part of their underwriting process, and for a loan of $250,000, they are more than twice as likely to consider the applicant’s business plan than large banks. 

Our survey finds another important characteristic that distinguishes community banks from large banks: they are much more likely to have decision-makers meet with small business applicants. About 90 percent of small banks typically have meetings between small business applicants and those who hold actual decision-making authority on loans, where the applicant can make their case in real time and the decision-maker can evaluate them comprehensively and gather the kind of soft information you cannot get from a spreadsheet. This is much less common at large banks. Well under half of large banks typically hold such meetings, and at the largest banks with over $50 billion in assets, it’s under a quarter.

Community banks are viewed as important competitors by not only other community banks but by the very largest national banks. Our 2024 SBLS report tells us that 63 percent of small banks say they have an advantage in lending flexibility over their competitors, something only 23 percent of large banks claim. They also hold an outsized share of commercial lending under $1 million.⁶ These findings help us understand why community banks appear to punch well above their weight in the small business lending space. The 2024 SBLS report shows that while nearly all banks prioritize relationships with their small business borrowers, not all banks are relationship lenders. Community banks are the ones that take the extra step to leverage those business relationships as part of the process of underwriting small business loans.

I want to take a moment to emphasize the important role that small business lending as conducted by community banks plays in improving their communities. The FDIC’s 2024 Economic Inclusion Strategic Plan identified small business lending from banks as one of the most important opportunities for households to build wealth and achieve longer-term financial security. The use of soft information by community banks in underwriting has direct implications for credit access: credit-worthy small business borrowers who cannot furnish the specific information that a large bank typically uses for underwriting loans may not be able to get traditional credit. Illustrating this point, our 2024 SBLS report indicates that while large banks tend to rely more heavily on the Small Business Administration and other government-guaranteed lending programs in order to make loans to start-ups, small banks are more likely to underwrite loans to start-ups using information gleaned in meetings and are less likely to need to seek a government guarantee. 

Conclusion

By accentuating these kinds of differences, the research presented during this conference along with the findings in our report provide a valuable perspective on the role of community banks in the U.S. economy. 

The 2024 SBLS report finds suggestive evidence that, in the six years between the 2016 and 2022 surveys, banks faced a sharp rise in competition for small business borrowers from credit unions and financial technology lenders. The ongoing consolidation within the banking industry and especially between community banks themselves further speaks to the pressures of being a small institution in the current environment. The pandemic and subsequent rise in interest rates tested the U.S. banking industry.  

Nevertheless, community banks have shown remarkable resilience during these challenging times. What the 2016 survey suggests, the 2022 survey affirms: the community banking model of small business lending remains highly competitive in today’s financial market, and is still vital for our communities. It is noteworthy that these critical ties to small businesses have survived the coronavirus pandemic, successfully navigated last year's banking industry turmoil, and continued to adapt to a changing competitive landscape. Our 2024 SBLS report helps us understand why. Being a community bank means embracing these comprehensive underwriting practices that set community banks apart. That is worth preserving and supporting. A failure to do so would undermine an essential pillar of our economy. 

I want to conclude by thanking Jim Fuchs of the St. Louis Fed and the entire conference organizing committee, including the outstanding administrative and technical teams that made this event possible once again. To the presenters, discussants, panelists, and conference participants: thank you for your involvement, your insights, and your commitment to furthering the exchange of ideas with productive discussions and stimulating conversations. For those of you in attendance at the conference, you will find copies of the 2024 SBLS report for you to take with you. Please do. Everyone else can access the report from our website, at fdic.gov, and I encourage you to take a look at it for a detailed account of small business lending by banks.

I especially want to thank the survey team at the FDIC who spent six years on this project, from working with banks and other experts to develop relevant questions to analyzing the results and writing the report. It takes a village to produce a report of this magnitude.

Finally, I want to thank our bankers, whose participation in our survey helped us deepen our understanding of their institutions. Thank you.