RELIEF FROM CRUSHING REGULATORY BURDEN
- Community banks need regulatory relief to support the credit needs of their customers, serve their communities, and contribute to their local economies.
- ICBA has developed a “Plan for Prosperity” which contains a number of targeted provisions that would provide regulatory relief for community banks.
- ICBA urges Congress and the regulatory agencies to continue to expand and refine a tiered regulatory and supervisory system that recognizes the significant differences between community banks and larger, more complex institutions in terms of the risks they pose to consumers and to the financial system.
- To preserve their original purpose, thresholds for regulatory accommodations, exceptions and exemptions for community banks based on size and transaction volume should be continually reviewed and adjusted upward as community banks consolidate and the average asset size of banks increases.
- Well rated and well capitalized community banks with assets of less than $2 billion should be placed on a two-year safety and soundness exam cycle.
- In carrying out the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) process, the regulatory agencies must honor their Congressional mandate and provide meaningful regulatory relief.
- Regulators must not exceed their proper scope by discouraging or unduly scrutinizing community banks that provide payment services to legal and legitimate customers safeguarded by appropriate risk controls and monitoring.
Regulatory and paperwork requirements impose a disproportionate burden on community banks and diminish their ability to attract capital, support the credit needs of their customers, serve their communities, and contribute to their local economies. Large banks have larger dedicated legal and compliance staff and can more easily absorb regulatory costs. Credit unions and other nonbank institutions that perform “bank-like” functions and offer comparable bank products and services are not subject to the same laws and regulations as community banks. This uneven playing field places community banks at a competitive disadvantage and inhibits their ability to serve their customers and their communities.
In January of 2013, ICBA launched the “Plan for Prosperity” (PFP), a platform consisting of a dozen legislative provisions that would provide targeted regulatory relief for community banks. Several bills containing PFP provisions passed the U.S. House of Representatives during the last Congress including: the elimination of annual privacy notices, increasing the qualifying asset threshold under the Small Bank Holding Company Policy Statement, allowing thrift holding companies to use the new shareholder registration and deregistration thresholds, and creating a petition process relating to the CFPB’s designation of an area as “rural.” In the Senate, multiple bills designed to provide regulatory relief for community banks garnered broad bipartisan support. Much of this legislation mirrored or was very close to bills passed by the House. As Senate Banking Committee hearings repeatedly demonstrated support among Senators for community bank regulatory relief, we believe that regulatory reform will be a major point of emphasis in the 114th.
During the 113th Congress, more than two dozen separate bills containing one or more PFP provisions were introduced in the House and Senate. The PFP bill that garnered the most co-sponsors is the “Community Lending Enhancement and Regulatory Relief Act” (CLEAR Relief Act). H.R. 1750, the House version of the CLEAR Relief Act, had 177 bi-partisan co-sponsors, while S. 1349, the Senate version, had 40 bi-partisan co-sponsors including eight members of the Senate Banking Committee. Six PFP bills passed the House.
More broadly, ICBA strongly supports a system of tiered regulation—regulatory and supervisory policies that differentiate between community banks and other financial services providers. For example, a highly-rated, well-capitalized community bank should be allowed to file a “short form” call report in the first and third quarters of each year, while still providing the full report at mid-year and year-end. The short form call report would provide sufficient material information to allow regulators to assess the safety and soundness of a community bank during the first and third quarters, but would be significantly less burdensome to prepare. The average call report has grown from 18 pages in 1986 to over 80 pages today.
The Dodd-Frank Act provided for tiered regulation in several areas including an exemption for community banks from Consumer Financial Protection Bureau examination and enforcement, and indemnification of community banks from FDIC premium increases that will result from increasing the Deposit Insurance Fund minimum reserve ratio from 1.15% to 1.35%. Other examples of tiered regulation can be found in the final Basel III rule including allowing community banks to continue to use the Basel I mortgage risk weights, the exclusion of accumulated other comprehensive income (AOCI) from the definition of regulatory capital, and the grandfathering of tier one treatment of trust preferred securities (TruPS) for banks with assets under $15 billion. In addition, the CFPB made some special accommodations for community banks under the “ability-to-repay/qualified mortgage” rule and the mortgage servicing rule. While these provisions are significant, much more is needed. The basic framework of financial regulation should be based on the principle of tiering proportionate to size, business model, complexity, and risk.
The regulatory agencies should take full advantage of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) process, a two-year review of financial regulations to identify outdated, unnecessary or unduly burdensome regulations. ICBA has developed a set of recommendations intended to ensure that the process results in meaningful regulatory relief for community banks, as intended by Congress. For more information, see the separate resolution on EGRPRA.
Under current agency rules, a bank with assets of less than $500 million that has a CAMELS rating of 1 or 2 is eligible for an exam cycle of 18 months. Banks that do not meet these criteria are examined on a 12 month cycle. The extended exam cycle allows examiners to focus their limited resources on the banks that pose the greatest systemic risk. In order to more fully of reap the benefit of risk-focused exams, the exam cycle can and should be further extended to 24 months and available to banks with assets up to $2 billion, provided they have a CAMELS rating of 1 or 2. Preparations for bank exams, and the exams themselves, distract bank management from serving their communities to their full potential.
ICBA will continue to advocate for meaningful regulatory reforms including tiered regulation for community banks, their customers, and their communities.