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Investing.com -- Federal Reserve Governor Michael S. Barr emphasized the crucial role community banks play in building stronger local economies during his address at the 2025 Community Banking Research Conference in St. Louis on Wednesday.
Speaking to an audience of community bankers and regulators, Barr highlighted how these institutions offer a distinctly different customer experience compared to larger banks, particularly through their relationship-based approach to banking.
"Community bankers are part of their communities. They know and care about their customers. They have an inherent advantage in understanding the needs and the challenges of local businesses and households," Barr said.
The Fed governor acknowledged that community banks face significant competitive pressure but noted they maintain advantages through their deep local knowledge and relationships. This "soft information" allows them to make better credit decisions beyond what appears on loan applications.
Technology emerged as a central theme in Barr’s speech, representing both opportunity and risk for smaller institutions. According to the Annual Survey of Community Banks by the Conference of State Bank Supervisors (CSBS), "technology and related costs" ranked as the second highest concern among community bankers, just behind cybersecurity.
Barr specifically addressed artificial intelligence’s growing role in banking. The CSBS survey showed that AI for customer support jumped from being important to 31 percent of respondents in 2024 to 47 percent in 2025. He suggested that newer forms of generative AI could make advanced technologies more accessible to smaller institutions by lowering costs.
While highlighting AI’s potential benefits in areas like fraud detection, Barr warned of emerging risks, particularly "deepfakes" that use AI to create convincing forgeries of voices and images. He cited statistics showing a twentyfold increase in deepfake attacks over the past three years.
The Fed governor also expressed concern about regulatory rollbacks for large banks, arguing that proposed reductions in capital standards and stress testing requirements for major financial institutions could ultimately harm community banks.
"These shifts would not make the system safer; they would leave community banks once again exposed to the fallout if the largest players stumble," Barr warned.
Barr concluded by expressing confidence in community banking’s future, praising bankers for their ability to navigate uncertainty and adapt to changing conditions while maintaining their essential role in local communities.
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