Boosting Community Banks: Regulatory Clarity & Tech Pave the Way

Community banks, long considered the backbone of the U.S. economy, currently find themselves at a critical juncture. Despite their intrinsic value in fostering local economic growth and serving communities often overlooked by larger financial institutions, they face immense pressure to adapt and modernize. This challenge is exacerbated by fierce competition from both established national banks and agile FinTech innovators. At the esteemed Federal Reserve's 2025 Community Bank Conference, a trio of influential financial leaders—Treasury Secretary Scott Bessent, Federal Reserve Vice Chair for Supervision Michelle W. Bowman, and Governor Michael S. Barr—collectively underscored the pivotal role of technology, transparency, and appropriately tailored regulation in enabling these banks to not only survive but thrive in the contemporary financial ecosystem.

The Imperative for Regulatory Modernization

A recurring theme from the conference was the undeniable need for a fundamental re-evaluation of the existing regulatory landscape. Vice Chair Bowman, in her remarks on October 9, emphasized that genuine support for community banks extends beyond mere rhetoric; it demands "specific actions that right-size regulation and apply appropriate supervisory standards." She highlighted a significant flaw in current regulatory practices: fixed asset thresholds. These thresholds, Bowman argued, "fail to account for economic growth and inflation over time," inadvertently subjecting stable and well-managed community banks to increasingly intricate and burdensome regulatory requirements as they naturally expand.

Streamlining Regulatory Processes

Bowman advocated for a comprehensive overhaul of the regulatory application process, labeling the solution as "simple." She called for a system where regulatory application reviews are "effective, timely and efficient," ensuring banks possess "a clear understanding of the information they must provide." Crucially, she asserted that regulators must be prepared to act on complete applications within statutory timeframes, eliminating the "opacity of the status quo" that hinders progress and modernization efforts.

Addressing the Regulatory Burden

Echoing Bowman's sentiments, Treasury Secretary Bessent, also speaking on October 9, articulated how years of "layered regulation" had progressively "suffocated" community banks. These institutions, he noted, are often "closest to the men and women who work the jobs, pay the bills, and take out the loans that fuel growth in small-town America." Bessent presented sobering statistics, revealing that since 2010, the U.S. has witnessed the disappearance of "3,600 community banks, a reduction of over 45%," concurrently with their share of total bank assets plummeting from 23% to 15%. This data starkly illustrates the detrimental impact of overly complex and ill-suited regulations on a vital sector of the economy.

Embracing Technology While Mitigating Risks

Beyond regulatory reform, the integration of technology emerged as a critical determinant of community banking's future. Governor Michael S. Barr, in his address on October 8, stated unequivocally that technology "is a big part of what will determine the future of community banking." He cited the 2025 Conference of State Bank Supervisors survey, which indicated a significant surge in interest for artificial intelligence (AI) in customer support, with 31% of respondents focusing on it, a figure that jumped to 47% in the latest survey.

AI's Dual Role: Efficiency and Threat

While AI promises substantial gains in operational efficiency and enhanced customer engagement, Barr also issued a strong caution regarding its inherent risks. He highlighted the rapid escalation of "the use of deepfakes in cybercrime," noting a "twentyfold increase in deepfake attacks over the last three years." This stark warning underscores the imperative for community banks to maintain unwavering vigilance as generative AI continues to redefine both risk exposure and the modalities of customer interaction.

Strategic Technology Partnerships

Barr further elaborated on the strategic role of third-party service providers. Community banks, he observed, "often turn to third-party service providers to help them offer products and services to compete with larger banks and FinTechs." However, he stressed that the key lies in carefully choosing to "adopt technologies or form partnerships that allow them to deepen customer relationships but not attenuate or replace them." This nuanced approach ensures that technology serves to enhance, rather than dilute, the personalized service that is a hallmark of community banking.

Recalibrating Supervisory Approaches

The discussion moved towards specific new regulatory initiatives aimed at recalibrating oversight. Building upon recent reports, Bessent highlighted a proposed rule by the FDIC and OCC designed to "define 'unsafe or unsound practice or condition.'" While seemingly a minor definitional change, he emphasized its significance as "a big step forward" in providing much-needed clarity. He also pointed to the Financial Crimes Enforcement Network’s (FinCEN) reforms, which seek to simplify compliance burdens without compromising the efficacy of oversight. These reforms, Bessent noted, represent "commonsense yet consequential changes that will ease regulatory burdens without undermining law enforcement efforts."

The Treasury, Bessent affirmed, is committed to driving further reforms to enhance regulatory tailoring, reorient the culture of supervision, and modernize illicit finance regulations. His direct message to community bankers was an empowering call to action: "Go on offense. Retake market share. Champion technology. Leverage the new regulatory landscape to your advantage." This encapsulates a forward-looking strategy that encourages proactive engagement with new frameworks and technological advancements.

A Unified Vision for Community Banking's Future

The collective remarks from Bessent, Bowman, and Barr converged on a singular, powerful premise: modern oversight and innovation are not antagonistic forces but rather complementary elements that can mutually reinforce one another. The future vitality of community banks hinges on the judicious application of both. Bessent concluded with an inspiring vision, declaring that "the community bank comeback will help pave the way for America’s Golden Age." This sentiment underscores a belief that by fostering an environment of regulatory clarity and technological empowerment, community banks can reclaim their pivotal role, driving local economies and contributing significantly to national prosperity.