Policies provide benefit for big banks

The nation's largest banks — the top 20 hold 80 percent of all banking assets — shouldn't have the idea that they are too big to fail, he said. 

The recently passed financial reform bill could help in that regard, said Hoenig, and he will wait and see how regulators use their new powers. 

"Community banks have maintained a strong presence despite industry consolidation because their business model focuses on strong relationships with their customers and local communities," Hoenig said. "Larger banks are important to a firm as they grow and need more complicated financing, but in this region, most businesses are relatively small and their needs can be met by that local bank."

The financial crisis provided a successful test for the community bank business model and it "has held up well when compared with the megabank model that had to be propped up with taxpayer funding,” he said.

"There is no better test of the viability of the community bank business model than the financial crisis, recession, and abnormally slow recovery that we’ve experienced over the past two-and-a-half years," he said. 

Hoenig didn't discuss monetary policy or the economic outlook during today's testimony, after making comments in recent weeks that the Fed should consider raising interest rates slightly to boost the economic recovery.