The viability of community banks is threatened by policies that have conferred “too big to fail” status on larger banks, reducing their cost of capital, Kansas City Federal Reserve Bank President Thomas Hoenig said on Monday.

Hoenig, in prepared testimony to a field hearing of the U.S. House of Representatives Subcommittee on Oversight and Investigations here, said the community bank model was still viable, especially if allowed to compete on an equal footing with larger banks.

Hoenig’s prepared remarks did not address Fed monetary policy or its outlook on the economy. Hoenig has been the lone dissenter on the Fed’s policy-setting committee in recent months, arguing the economy is beginning to recover and that the Fed should end its pledge for an extended period of low interest rates and start to shrink its balance sheet.

He said community banks had been tested by the “abnormally slow recovery” that the U.S. economy has experienced over the past two years and continued to face difficulties. “Commercial real estate, particularly land development loans, will be a drag on earnings for some quarters yet,” Hoenig said.

Community banks are generally considered those with less than $10 billion in assets, which account for all but about 83 of the 6,700 banks in the United States, he said. All but three of the 1,100 banks based in the Kansas City Fed district are community banks.

“Community banks will survive the recession and will continue to play their role as the economy recovers,” Hoenig said. “The more lasting threat to their survival, however, concerns whether this model will continue to be placed at a competitive disadvantage to larger banks. Because the market has perceived the largest banks as being too big to fail, they have the advantage of running their business with a greater level of leverage and a lower cost of capital and debt.

Hoenig said that despite provisions in recently enacted landmark financial regulatory reform law to seize and shut down failing big institutions, the markets will continue to perceive many large banks as too big to fail, giving them lower operating costs than community banks.