Federal Reserve Board Member Elizabeth Duke, speaking at abanking conference in Georgia on Tuesday, said banks with fewerthan $50 million in assets suffer a larger loss of return thanbanks between $500 million and $1 billion in assets when hiringemployees to comply with the same regulation.

In prepared remarks posted on the Federal Reserve's website,Duke said the Federal Reserve Bank of Minneapolis used 2011 bankcall report data to estimate that banks with fewer than $50 millionin assets would have to hire one additional employee, which wouldreduce ROA by 23 basis points for the median bank.

That decline could cause about 13% of the banks to go fromprofitable to unprofitable, Duke said.

Given the same increase in regulation, banks between $500million and $1 billion would hire three employees to comply, butthe median bank in that classification would only experience an ROAdecline of about 4 basis points.

“While this is still a significant effect, very few banks inthis group would go from being profitable to unprofitable as aresult of the regulatory burden,” Duke told attendees at the SoutheasternBank Management and Directors Conference in Duluth, Ga.

Credit unions were not included in the Fed study.

Duke also said the Federal Reserve is monitoring the movement ofdeposits that may result from the Dec. 31, 2012, expiration of theTransaction Account Guarantee. Credit union trade associations saytheir lobbyingefforts contributed to a banker-supported TAG extension billdying in the Senate.

“So far have seen little evidence of deposits moving out of thebanking system or, as some had feared, moving from smaller banks tolarger banks perceived as too big to fail,” the Fed governorsaid.

Duke predicted that large banks will focus their efforts onlarge urban markets, allowing community banks to increase theircompetitive position in rural, suburban and small urbanmarkets.

The Fed governor also touched upon another topic of interest tocredit unions: small business lending. The Federal Reserve System has aproject under way to try to improve its understanding of smallbusiness credit markets, she said, which includes communitybanks.

As of September 2012, banks with $10 billion or fewer in assetsaccounted for more than 98% of all commercial banking institutionsbut held less than 20% of industry assets. However, they held morethan half of all outstanding small loans to businesses.

Small business loans represent nearly 20% of their totaldomestic lending and slightly more than 40% of their totalcommercial lending, she said.

At the other end of the spectrum, Duke said, bankingorganizations with more than $50 billion in assets accounted forless than 1% of institutions but held 75% of assets. While bigbanks hold almost 40% of outstanding small loans to businesses,they represented less than 5% of total domestic lending.

Duke also said that community bankers have been successful inmaking the case against “one-size-fits-all regulation.”

“I can't remember a time when I have seen more regulatoryproposals drafted that differentiate between banks based on size orcomplexity,” she said.

She specifically cited Dodd-Frank provisions that exemptcommunity banks, such as the Fed's $10 billion asset threshold fora number of debitinterchange restrictions and formal stress testingrequirements. She also mentioned the CFPB's recent qualifiedmortgage final rules that included safe harbors that exempt small institutions.

“We are encouraged by Governor Duke's words of support for smartregulations that do not overburden community banks and prevent themfrom continuing to serve their customers and communities,” ICBAPresident/CEO Camden R. Fine said Tuesday in a release.