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Powell: Regs That Most Directly Affect Community Banks Is Nearing an End

 

Oct 7 - Different rules for community banks than for money-center banks was a common theme as the Federal Reserve System and the Conference of State Bank Supervisors staged a community banking research conference at the St. Louis Fed. One of the speakers on the subject was Federal Reserve Gov. Jerome H. Powell.

“In our role as a bank supervisor, the Federal Reserve has been refining our examination programs and recently launched an initiative to review our consumer compliance supervision program for community banks,” Powell said. “While Federal Reserve consumer compliance examiners have traditionally applied a risk-driven approach to supervision, we recognized the need to provide more specific guidance to our examiners. Under the updated program, our consumer compliance examiners will base the examination intensity more explicitly on the individual bank’s risk profile, including its consumer compliance culture and how effectively it identifies and manages consumer compliance risk. We plan to launch this new consumer compliance supervision program for community banks in 2014. We will begin training for our examiners and outreach to our member community banks later this year.”

Touching on some areas where he believes further work could be of value, Powell suggested it would be interesting to explore the effects of risk-retention policies on community banks. “To what extent do community banks currently retain a percentage of their loans, and how do small banks compare to money-center banks when it comes to utilizing the secondary markets for loans?” he asked. “Would risk-retention policies be a non-issue for community banks, or would some banks be seriously constrained by such policies? Even if such policies do not constrain community bank activities, would new reporting requirements related to such policies increase the reporting burden faced by small banks?”

These questions point to a more general area in which more research could be useful, namely a detailed examination of the compliance costs for community banks that can highlight the most beneficial areas for regulatory relief, according to Powell. The Dodd-Frank Act has spawned a variety of new regulatory initiatives that add to the already-substantial regulatory burden faced by community banks, he noted. “Which regulations — whether new or existing — impose the greatest  regulatory burden compared to their benefits?” he wondered.

“Can regulatory agencies modify or provide exemptions to these regulations so as to make life a bit easier and more profitable for community banks, without adversely affecting bank safety and soundness or financial stability?”

One area in which new regulations are being developed involves incentive compensation. “This area seems to me to be of much more concern when we consider a money-center bank with thousands of shareholders, none of whom has a major stake, than when we consider a community bank in which management has a large or even majority ownership share,” Powell said. “Before imposing more regulatory burden on smaller banks in this area, I would like to understand whether there is any evidence that incentive compensation has caused excessive risk-taking in such institutions.”

The rulemaking phase of Dodd-Frank and changes on capital standards — at least those regulations that most directly affect community banks — is nearing an end, according to Powell. “While we have tried to tailor rules to the size and complexity of institutions, we may not have gotten the balance right in every instance,” he said. “Thus we will continue to assess the overall effects of the new rules on the safety and soundness of community banks and to consider whether modifications to rules, or the ways in which we implement them, could achieve our safety and soundness aims with a lesser burden on this class of depository institutions.”

Conceding that community banks certainly face challenges, Powell does not see their future as bleak. “Community banks continue to do a good job of attracting core deposits and those stable and relatively inexpensive deposits remain the most sought-after liability on bank balance sheets,” he said. “However, many of the asset classes that traditionally comprised much of community bank portfolios have faced increasing competition in recent decades from firms that operate at the national level.

As auto, mortgage and credit card loans have become increasingly standardized, community banks have had to focus to a greater extent on small business and commercial real estate lending — products where community banks’ advantages in forming relationships with local borrowers are still important. These are not cheap or easy loans to make, and the loss of some traditional product lines has threatened the stability of some community banks.

“It is incumbent on the Federal Reserve and other regulators to understand the challenges community banks face and to ensure that our regulatory policies do not exacerbate them,” Powell concluded.


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