Community banks represented 95% of all banking organizations in 2011 but represented only 14% of all the banking assets in the nation. However, community banks held 46% of all the small loans to businesses, according to a study done by the Federal Deposit Insurance Corp.

In light of this, Elizabeth Warren, D-Mass., said in a hearing with the Senate committee on Banking, Housing and Urban Affairs, “Are we reaching a point where we should have a two-tiered regulatory system?”

Small banks are subject to many regulations that were written for larger institutions, so now there is a regulation system that will in effect crush the smaller institutions, Warren explained.

Since the housing crisis, community banks have made significant progress, but they still have a ways to go, Lawrance Evans, director of financial markets and community investment with the Government Accountability Office.

“We are trying to minimize regulatory burden on institutions, when some were designed for the largest, most complex institutions. It is important to tier these regulations appropriately and what exemptions should be made,” Evans said.

Additionally, Jon Rymer, inspector general of the FDIC, explained that the government needs to focus on encouraging profitability and encouraging the types of behavior in a community bank that make it successful.

The study by the FDIC found that community banks that grew prudently and that maintained diversified portfolios or otherwise stuck to their core lending competencies during the study period exhibited relatively strong and stable performance over time.

The three primary factors that contributed to the bank failures in the recent crisis were rapid growth, excessive concentrations in commercial real estate lending and funding through highly volute deposits, Richard Brown, chief economist for the FDIC, explained.

Meanwhile, the majority of community banks that failed were due to aggressive growth, asset concentrations, poor underwriting and deficient credit administration coupled with declining real estate values, Rymer mentioned.

He added, “These factors led to write-downs and charge-offs on delinquent and non-performing real estate loans as opposed to examiner-required write-downs or fair value accounting losses.”

Overall, Brown said the community banking sector will stay vibrant by making sure we look at the too-big-to-fail issue.

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