Small institutions that do not engage in the types of activities that led to the financial crisis have nonetheless found themselves facing a mountain of new requirements in recent years. Many industry participants have called for tiered regulation and supervision that acknowledges the differences between these firms and their megabank brethren. It appears that message is resonating with leaders at the Federal Reserve.
During a May 8 speech on rethinking the aims of prudential regulation, Fed Gov. Daniel Tarullo suggested that a case may be made for exempting community institutions from Dodd-Frank’s Volcker Rule. Tarullo also noted that the government has historically applied a “unitary approach” to bank regulation.
“When I was teaching banking law prior to my appointment to the Board of Governors, I noticed an interesting disconnect in the best casebooks in the field,” Tarullo said during his speech at the Chicago Fed’s Bank Structure Conference. “An introductory chapter on the history and purposes of bank regulation revealed a complicated set of issues concerning changes in the structure and activities of banks, which, among other things, suggested that the rationales for regulating banks might vary depending on the size, business model and affiliations of a bank. Yet the remaining chapters of the casebooks treated bank regulation as a more or less unitary endeavor — with prudential rules applicable in about the same way to the activities and affiliations of all banking organizations, and only to banking organizations.”
Tarullo said the Dodd-Frank Act signaled a turning point in bank regulation.
“One regulatory innovation in Dodd-Frank that is particularly salient for present purposes was the creation of different categories of banking organizations — largely, but not exclusively, on the basis of total assets —to which different regulatory requirements are to apply,” Tarullo said. “Clearly, the unitary approach of the pre-crisis period has been abandoned.”
Tarullo said Dodd-Frank’s approach was a step in the right direction, but he added that more can and should be done to “to specify the varying aims of regulation for different kinds of banks in a manner that helps us rationalize applicable regulatory structures.”
He said the regulatory structure for community banks should recognize the context in which such banks operate, including the community bank business model and the disproportionate cost of new regulations on small institutions. He suggested that a policy discussion focused on exempting community institutions with less than $10 billion in assets from certain statutes may be beneficial.
“In my view, two candidates would be the Volcker Rule and the incentive compensation requirements in section 956 of Dodd-Frank,” Tarullo said. “The concerns addressed by these statutory provisions are substantially greater at larger institutions and, even where a practice at a smaller bank might raise concerns, the supervisory process remains available to address what would likely be unusual circumstances. Indeed, relieving both banks and supervisors of the need to focus on formal compliance with a range of regulations less relevant to community bank practice would free them to focus on the actual problems that may exist at smaller banks.”
Fed Chair Janet Yellen also addressed community bank supervision and regulation in recent days. She told a gathering of the Independent Community Bankers of America in Washington, D.C., that her agency is reaching out to community institutions to learn about their concerns.
“One theme that has come through loud and clear in this outreach is concern about regulatory burden,” Yellen said May 1. “We know that a one-size-fits-all approach to supervision is often not appropriate. In recent years, we have taken a number of actions to tailor supervisory expectations to the size and complexity of the banking organizations we supervise.”
Yellen said the Fed is working to ensure that rules are tailored to community banks. For instance, she said the Fed has listened carefully to bankers who are concerned about upcoming changes in the accounting standard for credit losses on loans and securities.
“We have heard the concern that overly complex accounting rules in this area would increase costs with little benefit for the users of community bank financial statements,” Yellen said. “We are working with the Financial Accounting Standards Board (FASB) to help ensure that the new standard, which is an important component of financial reform efforts, can be implemented in a reasonable and practical way for community banks. We have stressed to FASB that its proposal should not require community banks to utilize complex modeling processes. We expect that a final standard will permit loss-estimation techniques that build upon current credit-risk management techniques used by community banks.”
Yellen said the Fed is also taking steps to tailor and improve its examination processes. The agency is developing common technology tools across the Federal Reserve System that should allow examiners to more effectively focus their time and enhance the consistency of our examination processes nationwide. The Fed is also looking for ways to help community bank examiners complete more examination work off-site.
“For example, for banks that have electronic loan files, examiners may be able to read these files off-site rather than on the bank premises,” Yellen said. “We are also seeking ways to utilize the financial information that we collect from banks to tailor the examination procedures that are used on-site, with less work being required at institutions with lower risk profiles.”
She said these efforts should reduce the disruption that an on-site examination can cause to a bank's day-to-day operations.
“The Federal Reserve will continue to promote a stronger and more resilient financial system, while carefully considering the effects of our actions on community banks and tailoring supervision appropriately,” Yellen said.
View Tarullo’s remarks
View Yellen’s remarks
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