Sept 10 - The first issue of Community Banking Connections, a quarterly publication on recent supervisory and regulatory developments related to community banking, has been released by the Federal Reserve. In this inaugural issue, Fed Chairman Ben Bernanke gives his perspectives on the benefits that community banks bring to the U.S. economy and the challenges they face.
Discussing how the Fed is working to clarify the applicability of its guidance to community banks, Bernanke said, “We have always understood that not all regulations and guidance apply to every size or type of financial institution; many provisions of the Dodd-Frank Act, for example, by statute apply only to the largest banks. And even when supervisory policies do apply to all institutions, our expectations are typically higher for larger, more complex institutions.
“We have realized, though,” Bernanke continued, “that we have not always communicated our specific expectations in this regard as clearly as we could have. The last thing we want is for community bankers to have to read through long and complex new supervisory policies that were never intended to impact their businesses. We have, therefore, been trying to provide greater clarity on whether new policies apply to community banks when those policies are issued.
In response to a suggestion that was made by a member of the Fed’s Community Depository Institutions Advisory Council, at the beginning of each new piece of supervisory guidance a statement is being included outlining which banks are affected. “In particular,” Bernanke explained, “when issuing supervisory letters, we try to state specifically if and how new guidance will apply to community banks. That way, banks don’t have to waste resources on requirements that don’t apply to them. We also hope that it will provide greater clarification to our examiners, so that they don’t inadvertently try to hold community banks to standards that are intended for the largest banks.”
When the board and the other federal banking agencies recently published notices of proposed rulemaking to revise our capital rules to implement the Basel III capital framework, they tried to make these complex proposals as clear as possible for community bankers.
While these proposals totaled 700 pages in length, many of the proposed revisions to the capital rules would only apply to the largest banking organizations.
“To help community banking organizations better understand the elements of the proposals that would apply to them, the agencies included summary addenda to two of the proposed rules to provide a guide for community banks and a comparison of the proposed rules to the current requirements,” Bernanke said.
“I look forward not only to receiving formal comments from community banks on the proposals but also to receiving informal feedback on whether they found these addenda to be helpful so that we can consider whether similar materials would be useful in future rulemakings.”
Everyone agrees that two-way communication between regulators and community banks is critical, Bernanke pointed out. “Not only must we clearly communicate our supervisory policies and expectations to banks, but we also need to listen to and understand banks’ concerns,” he said. “We expect our examiners to make objective assessments and to be as clear as possible in explaining to banks why they have reached particular examination conclusions.
“I’ve learned that most community bankers are not shy in raising issues where they may not agree with supervisory findings, and I encourage bankers to continue to be open and candid in sharing their views with examiners,” he continued. “In those rare situations where bankers and examiners are unable to resolve disagreements, I encourage bankers to contact management at their local Reserve Bank and, if necessary, contact the ombudsman here at the board.
“And, of course, I hope this publication and the related Community Banking Connections website will provide yet another vehicle for community bankers and the Federal Reserve to communicate with each other on supervisory matters.”
A big concern that community banks have expressed is that the more stringent requirements for larger institutions may not apply to smaller institutions now, but they might eventually do so in the future. “That, however, is not our intent, and we will work to ensure that it does not happen,” Bernanke said. “To give a tangible example, when the Federal Reserve and the other federal banking agencies recently published supervisory guidance on stress testing practices at large banks, we also issued a special one-page statement to make clear that our supervisory expectations for large bank stress testing — especially the types of firm-wide stress tests required under Dodd-Frank — do not apply to community banks.
“I see a very real need for continuation of the traditional community banking model,” Bernanke concluded. “Indeed, I believe there is a real place for the customization and flexibility that community banks can exercise to meet the needs of local communities and small business customers. And while I don’t know exactly what the future of community banking will look like, I am confident that the flexibility and creativity of community bankers will allow them to adapt their business model to prevailing financial and economic trends and conditions.”
Other feature articles in the Third Quarter 2012 edition include “Interest Rate Risk Management at Community Banks,” “Community Banks, Fed Connect Through the Fed’s Community Depository Institutions Advisory Council,” “Uncovering the Mystery of an Appraisal,” and “The Regulatory Capital Proposals: Frequently Asked Questions.”
Community Banking Connections is published quarterly. The current issue and more information on the publication are available on the website, www.communitybankingconnections.org.