Defining the intrinsic characteristics of what constitutes a community bank and the corresponding regulatory framework were the focal points of Federal Reserve Gov. Michelle Bowman’s speech during the 2024 Community Banking Research Conference, sponsored by the Federal Reserve System, the Conference of State Bank Supervisors, and the Federal Deposit Insurance Corp., St. Louis, Mo.
Several of her contentions aligned with arguments community banking advocacy groups – such as the Independent Community Bankers of America and the Community Bankers Association of Ohio (CBAO) – have championed for years.
Bowman argued fixed asset-size thresholds used in determining a bank’s risk profile no longer adequately reflect the realities of economic growth and inflation. She suggested increased collaboration with regulators to create a framework that accounts for more comprehensive factors, such as local decision-making and varying business models.
“By necessity, regulators divide banks into more manageable categories,” Bowman explained. “The Federal Reserve has distinct portfolios that oversee ‘community,’ ‘regional,’ and four ‘categories’ of larger banks. The Federal Reserve and federal banking agencies further subdivide these portfolios based on additional factors. They may also depart from this framework altogether to group banks across portfolios or based on other common features.”
Separating bank supervisory portfolios with the objective of clearly articulating the tailored requirements of supervision and regulation would allow examiners to better organize supervisory activities and training on the most relevant issues for the institutions being examined, she said.
“Locking regulatory standards into a fixed asset-size threshold has its costs,” Bowman said. “Over time, these fixed thresholds fail to take into account growth attributable to broader economic growth and inflation. They are also not reflective of any changes in a particular bank's activities or risk profile. As a result, many firms that are stable in their growth, business model, and risk profile end up unintentionally crossing regulatory thresholds. As they approach, and certainly once they cross over these asset-size lines, they must comply with additional regulatory and supervisory requirements that were specifically designed and implemented for larger and more complex firms.”
For an industry perspective, Dodd Frank Update reached out to CBAO President and CEO Aza Bittinger Jr., who was encouraged by many of her remarks.
“While traditional asset size thresholds serve as a guide to define a community bank, they may omit important factors such as local decision making, business models, and the unique communities in which they serve,” Bittinger said.
Bowman suggested a tailored, risk-based approach, rather than the existing one-size-fits-all model, would be more beneficial than the tiered regulatory system.
“While the fixed-threshold approach benefits from simplicity, it is necessary to periodically revisit the policy effect of these bright-line thresholds,” she said. “There are certainly cases in which a bank with assets less than $10 billion faces risks that are disproportionate to its asset size, warranting greater supervisory scrutiny. For these firms, asset size may vastly understate their risk profile.”
Bittinger described the community banking lobby’s views on the matter in similar terms.
“CBAO would advocate for a tiered approach to regulatory and supervisory oversight for our community banks. While similar in nature, there are very distinct differences between super-regional banks, regional banks, and community banks,” he said. “Oversight guidelines designed for large banks can stifle growth and innovation for our local community banks and in turn, the communities in which they serve.”
Bowman also emphasized the importance of fostering innovation and reducing barriers to entry for new banks, which mirrors CBAO’s recent efforts to support the growth of de novo banks in Ohio.
“CBAO is encouraged by Gov. Bowman’s comments for creating a regulatory framework that would better support our community banks,” Bittinger said. “The barriers to entry have been too high for too long limiting opportunities for organic growth. This innovation is reflected by the recent success of several Ohio di novo community banks in the past five years as consumers seek new options.”
As community banking advocates continue to push for regulatory reforms, Bowman’s remarks appear to provide a strong signal of support from at least one member of the Federal Reserve Board.