lending segments (e.g., office), some banks are seizing the opportunity to reduce exposures in one area while expanding lending in others. We have also seen banks increasingly consider duration, structure and hedging strategies to position loan portfolios for margin expansion when the rate environment shifts. Banks are taking a fresh look at marginal credits in sub-concentration areas to assess the impact of potential volatility and micro-market shocks over the next year (e.g., hospitality real estate in an area where seasonal tourism has been stable, but stagnant—asking whether a pool of credits are relying on a banner year to turn things around and stressing the impact of alternative outcomes). Along these same lines, we also see a trend of banks supporting their qualitative ACL adjustments through more objective data than in the past. Q. How do you anticipate changes in government policies and regulations will impact the banking industry and the broader economy? BOYAN: The bank failures of 2023 serve as a stark reminder of the value of FDIC insurance. This insurance, coupled with the regulations that accompany it, constitutes the lifeblood of the U.S. banking system. It is what distinguishes our system from the rest of the world. Our responsibility lies in comprehending the regulators’ perspectives, understanding their objectives, and ensuring that our institutions operate safely and soundly, in alignment with both the spirit and the letter of the regulations. However, I’ve long been concerned about the lack of coordination among different policymakers. For instance, while the Federal Reserve aggressively combats inflation, the housing market—representing approximately one-third of the consumer price index— remains persistently heated. As you may recall from your Economics 101 course, prices are determined at the intersection of supply and demand curves. One effective way to lower prices is by increasing supply. Ideally, the Federal Reserve would like to witness an expanded inventory of homes, leading to natural price cooling. Yet, simultaneously, the FDIC and OCC (Office of the Comptroller of the Currency) scrutinize commercial real estate (CRE) loans and banks with substantial CRE exposure. This scrutiny is justified, especially considering the sharp declines in office sector values. Consequently, banks instinctively reduce their CRE lending to comply with regulatory requirements. Here lies the challenge: Residential construction loans, which play a crucial role in boosting housing supply, fall under the definition of CRE. Consequently, the heightened scrutiny on CRE has inadvertently curtailed residential construction lending—precisely when the Federal Reserve desires more housing supply. A straightforward solution would be a twoyear exclusion of residential construction loans from the regulatory definition of CRE. Such an adjustment would stimulate housing supply and contribute to the Fed’s goal of achieving 2% long-run inflation while maintaining the safety and soundness of the banking system. Coordinated efforts among regulators would benefit both banks and their customers. GOSS: A primary focus of our U.S. financial regulatory regime is maintaining the safety and soundness of the banking and financial services sector. We can all agree this is a worthy mission and one of our greatest competitive advantages. That said, the ever-growing cost of compliance means an increasing level of scale is necessary to maintain customer service standards and operate profitably. Meanwhile, the deck is not always stacked the same for non-bank market participants (e.g., tax subsidies and lack of compliance requirements for similar activities). Unfortunately given political stalemates, these conditions may continue for the foreseeable future, fueling further consolidation in the banking sector. At the same time, completing a merger in the current political and regulatory environment is often a monumental challenge in and of itself, seemingly requiring banks to battle on both fronts. The good news is that the community banking sector as a whole is strong, and well-positioned banks with the capital and liquidity to grow could see tremendous opportunities in the coming years. Q. With the rise of digital currencies and fintech innovations, how do you see traditional banks adapting to stay competitive and relevant in today’s economy? BOYAN: Cryptocurrencies like Bitcoin and Ethereum challenge traditional banking models. They offer decentralized, borderless transactions, often faster and cheaper than traditional systems. Some banks are exploring ways to integrate cryptocurrencies into their services. For instance, allowing customers to buy, sell, or hold crypto within their accounts. Banks can leverage stablecoins (pegged to fiat currencies) for cross-border payments and remittances. Banks can adopt blockchain for secure, transparent, and efficient transactions. However, banks must address risks related to volatility, regulatory compliance, and security. Fintech startups disrupt traditional banking by offering specialized services through payment solutions, lending platforms and robo-advisors. Peer-to-peer payments, mobile wallets, and contactless payments. Lending platforms include online lending, crowdfunding, and microloans. And robo-advisors generate automated investment advice. Rather than compete, some banks collaborate with fintechs. Joint ventures or white-label partnerships allow banks to offer innovative services. Fintechs operate with agility, iterating quickly. Banks can learn from their nimble approach. These competitive forces have created customer expectations for a strong digital experience with personalization and 24/7 accessibility. Customers expect seamless online banking, intuitive apps, and real-time updates. Fintechs excel at personalized experiences. Banks must enhance customer journeys. Digital currencies and fintechs operate round the clock. Banks need to match this availability. Community banks must continue to make a local impact by balancing relationship banking and innovation. Community banks remain vital for local economies. They understand community needs and support small businesses. Personalized service and community ties differentiate them. Community banks can adopt fintech solutions while preserving their core values. In summary, traditional banks must adapt by embracing technology, collaborating strategically, and staying customer-centric. The coexistence of digital currencies, fintechs, and community banks ensures a dynamic financial ecosystem. RATHER THAN COMPETE, SOME BANKS COLLABORATE WITH FINTECHS. JOINT VENTURES OR WHITE-LABEL PARTNERSHIPS ALLOW BANKS TO OFFER INNOVATIVE SERVICES. FINTECHS OPERATE WITH AGILITY, ITERATING QUICKLY. BANKS CAN LEARN FROM THEIR NIMBLE APPROACH. J GEORGE BOYAN, III; EVP/CFO; UNITY BANK 23 in the spotlight: CFO Committee
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