On October 8, Fed Governor Michael Barr spoke on the central role of community banks in supporting families and small businesses, describing them as “indispensable” to the communities they serve. Barr emphasized that community bankers’ “soft information” about their “neighbors” as well as “relationship banking” allow them to make better credit decisions and compete with larger banks and fintechs. He noted community banks often provide a “consequential difference in customer experience” compared to larger institutions.

Turning to regulation, Barr cautioned against “proposed rollbacks in capital standards for the largest banks” and the weakening of supervisory frameworks, arguing that such changes could expose community banks to harms from the actions of the largest banks, as in the Great Recession. Barr stated his support for “responsible regulation” tailored to the specific characteristics of a community bank.

Barr discussed the opportunities and risks posed by rapidly advancing technology for community banks, noting the importance of technological options to aid community banks in strengthening, rather than replacing, customer relationships, which Barr termed their “natural advantage.” Similarly, Barr highlighted the challenge of managing third-party service providers, stating that community banks often relied on these partnerships to compete with larger banks and fintechs, and that managing third-party risk was a significant task in which the Fed and other regulators had issued guidance to help make the supervisory implications of third-party risk management more “predictable.”

Further, Barr underscored the increasing importance of AI in customer service and fraud detection, while noting general “uncertainty” about its potential impacts. He discussed how AI could help smaller banks access automated fraud detection tools which had previously only been economical for larger banks but also warned of new risks — including the growing use of “deepfakes” in cybercrime hindering fraud detection efforts. Finally on AI, Barr addressed disruption to local economies, acknowledging both the potential for AI to cause “significant dislocation” for workers, thereby potentially disrupting community banks, and the potential for AI to create new opportunities for community banks, pointing to the proliferation of data centers in rural areas as emblematic of such opportunities.