[Senate Hearing 114-3]
[From the U.S. Government Publishing Office]
S. Hrg. 114-3
REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT UNIONS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE REGULATORY BURDEN ON COMMUNITY BANKS AND CREDIT UNIONS,
INCLUDING RECOMMENDATIONS TO ALLEVIATE THE REGULATORY BURDEN
__________
FEBRUARY 10, 2015
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: http: //www.fdsys.gov /
_____________
U.S. GOVERNMENT PUBLISHING OFFICE
93-830 PDF WASHINGTON : 2016
_____________________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center,
U.S. Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-free).
E-mail, [email protected].
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
MICHAEL CRAPO, Idaho SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
DAVID VITTER, Louisiana CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois JON TESTER, Montana
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina JEFF MERKLEY, Oregon
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
JERRY MORAN, Kansas
William D. Duhnke III, Staff Director and Counsel
Mark Powden, Democratic Staff Director
Jelena McWilliams, Chief Counsel
Beth Zorc, Senior Counsel
Jack Dunn III, Professional Staff Member
Laura Swanson, Democratic Deputy Staff Director
Graham Steele, Democratic Chief Counsel
Jeanette Quick, Democratic Senior Counsel
Erin Barry Fuher, Democratic Professional Staff Member
Phil Rudd, Democratic Legislative Assistant
Dawn Ratliff, Chief Clerk
Troy Cornell, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
TUESDAY, FEBRUARY 10, 2015
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Senator Tester............................................... 4
Senator Toomey
Prepared statement....................................... 42
WITNESSES
Doreen R. Eberley, Director of the Division of Risk Management
Supervision, Federal Deposit Insurance Corporation............. 4
Prepared statement........................................... 42
Responses to written questions of:
Senator Shelby........................................... 86
Senator Brown............................................ 89
Senator Crapo............................................ 91
Senator Corker........................................... 93
Senator Heller........................................... 95
Senator Sasse............................................ 109
Senator Moran............................................ 109
Senator Tester........................................... 115
Maryann F. Hunter, Deputy Director of the Division of Banking
Supervision and Regulation, Board of Governors of the Federal
Reserve System................................................. 6
Prepared statement........................................... 49
Responses to written questions of:
Senator Shelby........................................... 119
Senator Crapo............................................ 121
Senator Corker........................................... 122
Senator Heller........................................... 125
Senator Sasse............................................ 142
Senator Cotton........................................... 143
Senator Moran............................................ 144
Senator Tester........................................... 147
Toney Bland, Senior Deputy Comptroller for Midsize and Community
Bank Supervision, Office of the Comptroller of the Currency.... 8
Prepared statement........................................... 54
Responses to written questions of:
Senator Shelby........................................... 154
Senator Brown............................................ 157
Senator Crapo............................................ 158
Senator Corker........................................... 159
Senator Heller........................................... 161
Senator Sasse............................................ 174
Senator Moran............................................ 176
Senator Tester........................................... 178
(iii)
Larry Fazio, Director, Office of Examination and Insurance,
National Credit Union Administration........................... 9
Prepared statement........................................... 59
Candace A. Franks, Commissioner, Arkansas State Bank Department,
on behalf of the Conference of State Bank Supervisors.......... 11
Prepared statement........................................... 74
Additional Material Supplied for the Record
Legislative proposals recommended by the Office of the
Comptroller of the Currency submitted by Senator Toomey........ 184
Response from Toney Bland submitted by Chairman Shelby........... 193
REGULATORY RELIEF FOR COMMUNITY BANKS AND CREDIT UNIONS
----------
TUESDAY, FEBRUARY 10, 2015
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Richard C. Shelby, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
This week, the Committee on Banking begins an examination
of potential changes to the current regulatory structure. Today
we will focus on regulatory relief for smaller financial
institutions. In the near future, we will continue this
examination by focusing on unnecessary statutory and regulatory
impediments across the financial services spectrum.
While there are some who continue to argue that current law
is beyond reproach, there are many on both sides of the aisle
that believe improvements can and should be made. Today we will
hear from regulators on some of the lessons they have learned
and how best to overcome some of the challenges that they have
encountered. And although we may not agree on many things, I
believe that we can all agree that community banks and credit
unions play a vital role in our local economies.
Six hundred and twenty-nine counties in the United States
are served only by one single community bank. Six million U.S.
residents depend on small financial institutions for their
daily banking needs. These financial institutions use their
knowledge of local communities to lend to small businesses,
which are the engine of job creation in America.
A recent survey found that community banks provide 48
percent of small business loans issued by U.S. banks--48
percent. That number is even higher in rural areas where small
financial institutions account for 52 percent--yes, 52
percent--of small business and farm loans. These financial
institutions are able to forge relationships with local
consumers that enable them to develop products tailored to the
specific needs of their communities.
Unfortunately, we have heard that innovation tailored for
Main Street is being smothered by unnecessary regulations
originally designed for Wall Street. Some of the regulators
before us today have testified in the past that small financial
institutions did not--yes, did not--cause the financial crisis.
Nevertheless, added regulations have caused hundreds of banks
and credit unions to simply stop offering certain products.
They are instead forced to spend valuable resources on
compliance staff.
A survey by the Federal Reserve and the Conference of State
Bank Supervisors found that compliance costs have increased for
94 percent of community banks. I believe it is time to reverse
this trend. Today we expect to hear recommendations from
regulators on ways to provide regulatory relief for smaller
financial institutions. Past Committee hearings on this issue
have demonstrated bipartisan understanding that something must
be done here. Discussion here will build upon these efforts by
providing specific recommendations for both regulators and
Congress to implement.
I believe that we are long overdue for regulatory relief
for small financial institutions, and I look forward to the
hearing today.
I will now recognize Senator Brown, our Ranking Member.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, very much. I
appreciate that you have invited both Federal and State
regulators to continue the conversation that we had last fall
about regulatory relief for small banks and for credit unions.
This hearing is timely as Federal agencies have made
important changes recently that benefit the smallest depository
institutions, and I thank you for those changes.
To highlight a few, in January, the NCUA reproposed its
risk-based capital rule to be responsive to concerns,
legitimate concerns, raised by small credit unions. A few weeks
ago, CFPB announced changes to its mortgage rule, a win for
small lenders, particularly those in underserved rural areas.
The Fed proposed to eliminate quarterly consolidated financial
reporting requirements for certain bank holding companies and
savings and loan holding companies under $1 billion.
Since our last hearing last fall, Congress has also acted.
We passed and the President signed into law several regulatory
relief bills that were discussed at the September hearing and
supported by those who will be before this
Committee on Thursday. These bills included a bill
introduced by Senators King, Warner, and Tester that doubled
the threshold for the Small Bank Holding Company Policy
Statement; a bill supported by Senators King, Jack Reed on this
Committee, and Senator Warner to allow insurance for credit
unions members' IOLTA accounts; and a bipartisan bill authored
by Senator Moran and me to permit financial institutions to
offer prize-linked savings accounts. All of those are now law.
Also as a result of congressional action, led by Senator
Vitter, a Member of this Committee, the President has nominated
a community banker to serve on the Federal Reserve Board. There
are also regulatory relief proposals that I supported that did
not cross the finish line last year. I am pleased that Senator
Moran, and joined now by Senator Heitkamp, will reintroduce the
Privacy Notice Modernization Act. That bill last year had 75
Senate sponsors. Mr. Chairman, this bill is ready for action,
and we should move on it as soon as we can.
There is no question that regulators and Congress have been
responsive to the concerns of small institutions. We have acted
where legitimate problems have been identified, and members and
stakeholders have come together to find compromise.
I thank the witnesses today for helping in that process. I
do not believe, though, that every bill intended to provide
regulatory relief to small institutions is a good idea. Some
proposals could threaten the safety and soundness of individual
institutions; others could remove important consumer
protections that all customers deserve, no matter the size of
the lending institution, the bank. We must not forget that more
than 400 banks with less than $1 billion in assets failed as a
result of the crisis. The cost to the Deposit Insurance Fund
exceeded $26 billion.
Lending, of course, is an inherently risky business. We
must make sure we do not encourage unsafe practices in our
efforts to tailor regulations to small lenders. We need to
establish a process to evaluate the merits of the proposals
being suggested today and those we will hear about on Thursday.
We will not be successful this Congress in providing
regulatory relief if our proposals do not have broad bipartisan
agreement and are attached to unrelated must-pass legislation.
Our prospects are even less likely if we try to pair regulatory
relief with attempts to roll back Wall Street reform.
I am open to solving real problems affecting community
institutions, as evidenced by our actions over the last couple
of years. We can find common ground if our goal is to provide
meaningful relief to the Nation's smallest institutions while
not compromising safety and soundness or consumer protections.
Today's witnesses can help us evaluate programs. They have
done significant research to better understand the
characteristics of community banks and small credit unions.
They also understand, our panelists also understand why and how
small institutions fail. This can help us target regulatory
relief to the smallest institutions.
For example, in Ohio, 80 percent of the community banks in
my State are under $500 million in total assets. These are the
types of institutions that feel the impact of burdensome
regulations the most, whether it is providing another report to
their regulatory or needing to hire another employee for
compliance.
Last, Mr. Chairman, I look forward to hearing more about
the EGRPRA review currently underway. The Fed, the OCC, and the
FDIC are required by law to review regulations and identify
those which are duplicative, outdated, or unnecessary. The
NCUA, State regulatory agencies, and the CFPB participate in
this exercise voluntarily, in addition to the three that are
required. This review supplements a significant analysis of
impacts that the agencies also do while writing a rule.
I appreciate that you have already held meetings in Los
Angeles and Dallas and plan to hold meetings in Boston,
Chicago, Washington, and rural areas later in the year. I would
encourage you to consider a meeting in Ohio as well. This
review will be completed next year. Any actions we take in
Congress should complement, not complicate, the process
currently underway by the agencies.
Mr. Chairman, I thank you.
Chairman Shelby. All Members' opening statements will be
made part of the record. I understand that Senator Tester has
another Committee hearing. He wanted to say----
STATEMENT OF SENATOR JON TESTER
Senator Tester. I do, and I want to thank the Chairman and
Ranking Member for their statements and for holding this
hearing. In a rural State like Montana, community banks and
credit unions are the lifeblood for capital for businesses and
personal families. And I would just like to say this is a State
where personal relationships still matter, and Wall Street did
behave--some on Wall Street behaved badly a few years back. And
I think community banks and credit unions have felt the pain of
their behavior when they did nothing wrong.
I would just ask that this Committee and the regulators
match the risks with the regulation. That is really where it
needs to be. And I think that if we do that, we will have
succeeded in making capital accessible for folks that live in
rural America and across this country.
Chairman Shelby. Thank you.
Our witnesses today are Doreen Eberley, the Director of the
Division of Risk Management Supervision for the Federal Deposit
Insurance Corporation.
Maryann Hunter is the Deputy Director of the Division of
Banking Supervision and Regulation for the Board of Governors
of the Federal Reserve System.
Mr. Toney Bland is the Senior Deputy Comptroller for
Midsize and Community Bank Supervision for the Office of the
Comptroller of the Currency.
Larry Fazio is the Director of the Office of Examination
and Insurance at the National Credit Union Administration.
And Candace Franks is the Commissioner of the Arkansas
State Bank Department. She also serves as chairman of the
Conference of State Bank Supervisors.
I would like to ask all the witnesses--all the witnesses'
written testimony will be made part of the hearing record, and
if you could sum up your oral testimony in about 5 minutes, it
will give us a chance to have a dialog with you.
We will start with Ms. Eberley.
STATEMENT OF DOREEN R. EBERLEY, DIRECTOR OF THE DIVISION OF
RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE
CORPORATION
Ms. Eberley. Thank you. Chairman Shelby, Ranking Member
Brown, and Members of the Committee, I appreciate the
opportunity to testify on behalf of the FDIC on regulatory
relief for community banks. As the primary Federal regulator
for the majority of community banks, the FDIC has a particular
interest in understanding the challenges and opportunities they
face.
Community banks provide traditional, relationship-based
banking services to their communities. Although they hold just
14 percent of all banking assets, community banks account for
about 45 percent of all of the small loans to businesses and
farms made by insured institutions.
While more than 400 community banks failed during the
recent financial crisis, the vast majority did not.
Institutions that stuck to their core expertise weathered the
crisis and are now performing well. The highest rates of
failure were observed among noncommunity banks and among
community banks that departed from the traditional model and
tried to grow rapidly with risky assets often funded by
volatile brokered deposits.
The FDIC is keenly aware of the impact that its regulatory
requirements can have on smaller institutions, which operate
with fewer staff and other resources than their larger
counterparts. Therefore, the FDIC pays particular attention to
the impact its regulations may have on smaller and rural
institutions that serve areas that otherwise would not have
access to banking services.
The FDIC and the other regulators are actively seeking
input from the industry and the public on ways to reduce
regulatory burden through the Economic Growth and Regulatory
Paperwork Reduction Act process, which requires the Federal
financial regulators to review their regulations at least once
every 10 years, to identify any regulations that are outdated,
unnecessary, or unduly burdensome. As part of this process, the
agencies are jointly requesting public comment on our
regulations. We are also conducting regional outreach meetings
involving the public, the industry, and other interested
parties.
In response to what we have heard in the first round of
comments, the FDIC has already acted on regulatory relief
suggestions where we could achieve rapid change. In November,
we issued two Financial Institution Letters responding to
suggestions we received from bankers.
The first Financial Institution Letter, or FIL, released
questions and answers about the deposit insurance application
process. Commenters had told us that a clarification of the
FDIC's existing policies would be helpful.
The second FIL addressed new procedures that eliminate or
reduce the need to file applications by institutions wishing to
conduct permissible activities through certain bank
subsidiaries organized as limited liability companies, subject
to some limited documentation standards. This will
significantly reduce application filings in the years ahead.
The FDIC takes a risk-based approach to supervision which
recognizes that community banks are different than large banks
and should not be treated the same. Every FDIC examiner is
initially trained as a community bank examiner through a
rigorous 4-year program. As a result, each examiner gains a
thorough understanding of community banks before becoming a
commissioned examiners. These examiners live and work in the
same communities served by the banks they examine, ensuring
that they are knowledgeable and experienced in local issues
important to those banks.
Institutions with lower risk profiles, such as most
community banks, are subject to less supervisory attention than
those with elevated risk profiles. For example, well-managed
banks engaged in traditional, noncomplex activities receive
periodic, point-in-time safety and soundness and consumer
protection examinations that are carried out over a few weeks.
In contrast, the very largest FDIC-supervised institutions
receive continuous safety and soundness supervision and ongoing
examination carried out through targeted reviews during the
course of an examination cycle.
The FDIC also considers the size, complexity, and risk
profile of institutions during rulemaking and supervisory
guidance development processes and on an ongoing basis through
the feedback we receive from community bankers and other
stakeholders. Where possible, we scale our regulations and
policies according to these factors.
As we strive to minimize the regulatory burden on community
banks, we look for changes that can be made without affecting
safety and soundness. For example, we believe that the current
$500 million threshold for the expanded 18-month examination
period could be raised. In addition, we would support Congress'
efforts to reduce the privacy notice reporting burden.
We also think it would be worthwhile to review various
longstanding statutory and regulatory thresholds to see if they
should be changed.
In conclusion, the FDIC will continue to pursue regulatory
burden reduction which achieves the fundamental goals of safety
and soundness and consumer protection in ways that are
appropriately tailored for community banks. We look forward to
working with the Committee in pursuing these efforts.
Chairman Shelby. Ms. Hunter.
STATEMENT OF MARYANN F. HUNTER, DEPUTY DIRECTOR OF THE DIVISION
OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF
THE FEDERAL RESERVE SYSTEM
Ms. Hunter. Thank you. Chairman Shelby, Ranking Member
Brown, and other Members of the Committee, I appreciate the
opportunity to testify on the important topic of community
banks and our efforts to reduce regulatory burden on these
institutions.
Having begun my career more than 30 years ago as a
community bank examiner at the Federal Reserve Bank of Kansas
City and eventually becoming the officer in charge of
supervision at the Reserve Bank, I have seen firsthand how
critical it is that we balance effective regulation and
supervision to ensure the safety and soundness of community
banks while also ensuring that undue burden does not constrain
the capacity of these institutions to lend to the communities
they serve.
I last testified before this Committee in September of
2014, and at that time I testified that, in the wake of the
financial crisis, the Federal Reserve has spent the past
several years revising our community bank supervisory programs
to make them more efficient and less burdensome for well-run
institutions.
For example, we have continued to build upon our
longstanding risk-focused approach to supervision, reviewing
field procedures, refining training programs, and developing
automated tools for examiners to focus their attention on areas
of higher risk, reducing some of the work at low-risk, well-
managed community banks.
Furthermore, we developed programs to conduct more
examination work off-site, such as the loan review, to reduce
the time the examiners spend physically in the bank.
We also have an initiative underway to use forward-looking
risk analytics to better identify high-risk areas within
community and regional banks which would allow examiners to
focus their examination time on the areas of highest risk and
reduce burden on the low-risk institutions.
In January of this year, the Federal Reserve responded to
legislation passed by Congress in December of 2014 related to
the scope of the Federal Reserve's Small Bank Holding Company
Policy Statement. Specifically, the Federal Reserve Board
issued an interim final rule and a proposed rule to implement
Public Law 113-250. Effective immediately, the interim rule
adopted by the Board excludes small savings and loan holding
companies with less than $500 million in consolidated assets,
which also meet certain qualitative requirements, from the
Board's consolidated regulatory capital requirements, thus
putting them on par with similarly situated bank holding
companies.
The Federal Reserve Board also issued a Notice of Proposed
Rulemaking that would raise the asset threshold from $500
million to $1 billion for determining applicability of the
Small Holding Company Policy Statement and expanded its scope
to also include savings and loan holding companies.
The policy statement facilitates the transfer of ownership
for community banks by allowing their holding companies to
operate with higher levels of debt and, thus, lower levels of
consolidated capital than would otherwise be allowed.
Additionally, the Federal Reserve Board took immediate
steps beyond what was required in the legislation to relieve
regulatory reporting burden for bank holding companies and
savings and loan holding companies that have less than $1
billion in total consolidated assets and also meet the
qualitative requirements of the policy statement.
The Board has proposed to eliminate quarterly consolidated
financial requirements in the FR Y-9C report for those
institutions and instead require semiannual parent-only
financial statements. The Federal Reserve immediately notified
the affected institutions so they would not continue to invest
in system changes to report regulatory capital data for only a
short period of time.
The changes in the threshold for the Small Holding Company
Policy Statement and the related reductions in reporting have
significantly reduced consolidated capital requirements and
reporting burden for more than 700 small institutions. More
than 40 percent of the institutions that were required to file
the 60-page consolidated financial statements every quarter now
will file only an 8-page report twice a year, resulting in a
significant reduction in burden.
A second key development since September is the beginning
of the interagency review of regulations in accordance with the
Economic Growth and Regulatory Paperwork Reduction Act, or as
it is also known, the EGRPRA process. We are working closely
with our counterparts at the OCC, FDIC, and State supervisors
to seek public comment and hold outreach meetings to get
feedback directly from bankers and from community groups about
ways to reduce burden related to our rules and examination
practices. To date, the meetings held in Los Angeles and Dallas
have yielded some useful and specific suggestions for
consideration and review.
Let me conclude by emphasizing that we are committed to
listening and considering ideas for reducing burden through the
EGRPRA process. We want to ensure that our regulations and
examination activities are appropriately tailored to the level
of risk inherent in community banks. We strive to balance our
safety and soundness objectives with the need to reduce
unnecessary burden to ensure that small institutions can
continue to meet credit needs in their local communities.
Thank you for inviting me to share our views on these
matters, and I look forward to answering any questions you may
have.
Chairman Shelby. Mr. Bland.
STATEMENT OF TONEY BLAND, SENIOR DEPUTY COMPTROLLER FOR MIDSIZE
AND COMMUNITY BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF
THE CURRENCY
Mr. Bland. Chairman Shelby, Ranking Member Brown, and
Members of the Committee, thank you for the opportunity to
appear before you today to discuss the challenges facing
community banks and Federal savings associations and the
actions the OCC is taking to help these institutions address
regulatory burdens.
I have been a bank examiner for more than 30 years, and I
have seen firsthand the vital role community banks play in
meeting the credit needs of consumers and small businesses
across the Nation.
At the OCC we are committed to supervisory practices that
are fair and reasonable and to fostering a climate that allows
well-managed community banks to grow and thrive. We tailor our
supervision to each bank's individual situation. We take into
account the products and services it offers as well as its risk
profile and management team.
Given the wide array of institutions we oversee, the OCC
understands that a one-size-fits-all approach to regulation
does not work. Therefore, to the extent that the law allows, we
factor these differences into the rules we write and the
guidance we issue.
My written statement provides several examples of the
commonsense adjustments we have made to recent regulations to
accommodate community bank concerns. Guiding our consideration
of every proposal to reduce burden on community banks is the
need to ensure that fundamental safety and soundness and
consumer protection safeguards are not compromised.
Within this framework, to date we have developed three
regulatory relief proposals that we hope Congress will consider
favorably. We are also undertaking several efforts to identify
and mitigate other regulatory burdens through a regulatory
review process.
The first proposal we submitted to Congress would exempt
some 6,000 community banks from the Volcker rule. As the vast
majority of banks under $10 billion in assets do not engage in
the proprietary trading or covered funds activities that the
statute sought to prohibit, we do not believe that they should
have to commit resources to determine if any compliance
obligations of the rules would apply. We do not believe this
burden is justified by the nominal risk that these institutions
could pose to the financial system.
We also support changing current law to allow more well-
managed community banks to qualify for a longer--18 months--
examination cycle. Raising the threshold from $500 million to
$750 million for banks that would qualify for this treatment
would cover an additional 300 community banks.
We also support providing flexibility for Federal thrifts
so that those thrifts that wish to expand their business model
and offer a broader range of services in their communities may
do so without the burden and expense of a charter conversion.
Under our proposal, Federal thrifts could retain their current
governance structure without unnecessarily limiting the
evolution of their business plan. As the supervisor of both
national banks and Federal thrifts, we are well positioned to
administer this new framework without requiring a costly and
time-consuming administrative process.
I am also hopeful that the ongoing efforts to review
current regulations to reduce or eliminate burden will bear
fruit. I just returned from the second public EGRPRA meeting in
Dallas where regulators heard ideas to reduce burden from a
number of interested stakeholders. The agencies are currently
evaluating the comments received from these meetings and from
the public comment process. While this process will unfold over
a period of time, the OCC will not wait until it has completed
the implemented changes where a good case is made for relief or
to submit legislative ideas identified through this process to
Congress.
Separately, the OCC is in the midst of a comprehensive,
multiphase review of our own regulations and those of the
former OTS to reduce duplication, promote fairness in
supervision, and create efficiencies for national banks and
Federal savings associations. We are currently reviewing
comments received on the first phase of our review focusing on
corporate activities and applications.
Finally, we are continually looking for innovation ways to
reduce burden. Last month, the OCC published a paper that
focused on possibilities for community banks to collaborate to
manage regulatory requirements, trim costs, and better serve
their customers. We believe there are opportunities for
community banks to work together to address the challenges of
limited resources and acquiring the necessary expertise.
In closing, the OCC will continue to carefully assess the
potential effect that current and future policies and
regulations may have on community banks, and we will be happy
to work with the industry and the Committee on additional ideas
or proposed legislative initiatives.
Again, thank you for the opportunity to appear today. I
would be happy to respond to questions.
Chairman Shelby. Thank you.
Mr. Fazio.
STATEMENT OF LARRY FAZIO, DIRECTOR, OFFICE OF EXAMINATION AND
INSURANCE, NATIONAL CREDIT UNION ADMINISTRATION
Mr. Fazio. Good morning, Chairman Shelby, Ranking Member
Brown, and Members of the Committee. Thank you for the
invitation to discuss regulatory relief for credit unions.
While NCUA regulates 6,350 credit unions with $1.1 trillion
in assets, over three-quarters of these federally insured
credit unions have less than $100 million in assets. Because
these credit unions have fewer resources available to respond
to marketplace, technological, legislative, and regulatory
changes, NCUA is acutely aware of the need to calibrate our
rules and our examinations to remove any unnecessary burden on
these smaller credit unions.
As a result, NCUA scales our regulatory and supervisory
expectations when it is sensible and within the agency's
authority to do so.
Where regulation is needed to protect the safety and
soundness of credit unions, the savings of members, and the
Share Insurance Fund, NCUA uses a variety of targeting
strategies. These strategies include fully exempting small
credit unions from rules, using graduated requirements as size
and complexity increase for other rules, and incorporating
practical compliance approaches into agency guidance. Thus, we
work to balance maintaining prudential standards with
minimizing regulatory burden.
Since 1987, NCUA has undertaken a rolling 3-year review of
all of our rules and regulations, and although not required by
law, NCUA is again voluntarily participating in the current
EGRPRA review. These reviews conduct retrospective analysis
with an eye toward streamlining, modernizing, or even repealing
regulations that are not necessary.
Over the past 3 years, NCUA has also taken 15 actions
through the agency's Regulatory Modernization Initiative to cut
red tape and provide lasting benefits to credit unions. These
actions include: easing eight regulations, including
modernizing the definition of a small credit union, to
prudently exempt thousands of credit unions from several
complex rules; streamlining three processes, facilitating more
than 1,000 low-income designations, and increasing blanket
waivers; and issuing four legal opinions, allowing more
flexibility in credit union operations.
Next week, the NCUA Board will consider a proposal to
increase the asset threshold for defining ``small entity''
under the Regulatory Flexibility Act. If approved, this change
would provide transparent consideration of regulatory relief
for a greater number of credit unions in future rulemakings.
Going forward, NCUA Board Chairman Debbie Matz has
announced plans to consider streamlining the member business
lending rule, finalize regulatory relief on holding fixed
assets, and simplify the process for adding some types of
associational groups to credit unions' fields of membership.
NCUA is also revising our examination process to provide
relief. Through our small credit union examination program,
NCUA spends less time on average now in small, well-managed
credit unions. NCUA is further working to reduce the time spent
on-site conducting exams and to improve their consistency in
this process.
Concerning legislation, NCUA appreciates the Committee's
recent efforts to enact laws to provide share insurance
coverage for lawyers' trust accounts and enable federally
insured financial institutions to offer prize-linked savings
accounts.
NCUA would advise Congress to provide regulators with
flexibility in writing rules to implement new laws. Such
flexibility would allow us to scale rules based on size and
complexity to effectively limit additional regulatory burdens
on smaller institutions.
NCUA also supports several targeted regulatory relief bills
for credit unions. These bills include: legislation to allow
healthy and well-managed credit unions to issue supplemental
capital that will count as net worth; permit all Federal credit
unions to grow by adding underserved areas; raise the cap on
member business lending to support small businesses; and exempt
one- to four-unit non-owner-occupied residential loans from the
member business lending cap.
Finally, parallel to the powers of the FDIC, OCC, and
Federal Reserve, NCUA asks for the authority to examine and
enforce corrective actions where needed at third-party vendors.
NCUA's draft legislation would provide regulatory relief for
credit unions and close a growing gap in NCUA's authority to
work directly with key infrastructure vendors, like those with
a cybersecurity aspect. This would allow us to obtain necessary
information to assess risks and deal with any problems at the
source.
In closing, NCUA remains committed to providing regulatory
relief and streamlining examinations. We also stand ready to
work with Congress on related legislative proposals. I look
forward to your questions.
Chairman Shelby. Ms. Franks.
STATEMENT OF CANDACE A. FRANKS, COMMISSIONER, ARKANSAS STATE
BANK DEPARTMENT, ON BEHALF OF THE CONFERENCE OF STATE BANK
SUPERVISORS
Ms. Franks. Good morning, Chairman Shelby, Ranking Member
Brown, and distinguished Members of the Committee. My name is
Candace Franks, and I serve as bank commissioner of the
Arkansas State Bank Department. I am also chairman of the
Conference of State Bank Supervisors. It is my pleasure to
testify today on behalf of CSBS.
I would like to thank Congress and this Committee for your
focus on community banks. In my 35 years as a State regulator,
I have seen firsthand the positive local impact of community
banks. These banks are critical to providing access to credit
in urban as well as rural areas, and they are important to
building and maintaining consumer confidence in our financial
system.
One out of every five U.S. counties has no physical banking
offices except those operated by community banks. In my home
State of Arkansas, a very rural State, there are 96 towns that
have only one physical banking location. For these small rural
towns, the community banking system is the banking system.
Community banks excel at relationship lending, making them
a vital source of credit for small businesses. In fact,
community banks play an outsized role in lending to small
businesses, holding 46 percent of loans to small businesses and
farms.
Regulators must constantly improve the way we conduct
supervision to ensure a balanced approach. This allows banks to
contribute to the stability and resiliency of the economy and
strengthens the diversity that exists in the banking system. As
State regulators have examined various approaches to right-
sizing community bank regulation, we have found that community
banks cannot be defined by simple line drawing based on asset
thresholds. While asset size is relevant, there are other
factors. Factors like market areas, funding sources, and
relationship lending are characteristics I as a bank regulator
understand and witness on a daily basis. We need a process that
identifies the relevant factors and provides flexibility in how
those factors are weighed and considered.
This new definitional approach sets a foundation for other
measures to tailor regulation and supervision to the community
bank business model, for example, providing that application
decisions affecting community institutions do not set precedent
for other types of institutions or conferring QM status onto
all mortgages held in portfolio by community banks.
While much needs to be done to right-size community bank
regulation, I want to recognize some significant steps already
taken. The CFPB's proposed changes to its mortgage rules would
give more banks flexibility to make loans to their customers.
CSBS commends Congress for passing a bipartisan provision
requiring that at least one member of the Federal Reserve Board
have experience either as a supervisor of community banks or a
community banker. This new requirement reaffirms that community
banks are an integral part of the financial system.
Similarly, we ask Congress to reaffirm the existing legal
requirement that the FDIC Board includes an individual with
State regulatory experience. A seat at the table will not
automatically result in a right-sized regulatory framework.
Additionally, we must truly understand the state of community
banking and the issues they face. This is why CSBS has
partnered with the Federal Reserve to attract new research on
community banking. This research will help us develop a system
of supervision that provides for a strong, enduring future for
the dual banking system.
Work from the Community Bank Research Conferences held by
CSBS and the Federal Reserve has demonstrated there is real
value in the relationship lending model used by community
banks. One study presented at the 2013 conference found that
proximity to a community bank enhances the chance for survival
of startup companies. Our hope is this research will inform
legislative and regulatory proposals and appropriate
supervisory practices and will move us closer to a right-sized
regulatory framework.
There are significant operational and strategic differences
among our Nation's banks. These differences reflect the
admirable diversity of our financial system. Our regulatory
approach must also reflect this diversity.
Thank you for the opportunity to testify today, and I look
forward to your questions.
Chairman Shelby. Thank you.
I will direct my first question to Ms. Eberley. According
to the FDIC, only two de novo Federal banking charters--two--
have been approved since 2009. Since 1990, we have lost more
than 3,000 banks, including 85 percent of banks with assets
under $100 million. Equally concerning to a lot of us is that
no new banks are being created because of barriers of entry.
Is the FDIC concerned about the lack of new banks? And what
specific step is your agency taking to address the issue, if
you are? And what legislative solutions might resolve some
barriers to entry but keep the safety and soundness of the
system intact, which we all want to do? Ms. Eberley.
Ms. Eberley. Thank you. I think the issue is one of where
we are in the economic cycle versus one of legislative barriers
or even regulatory barriers.
As I mentioned, in the EGRPRA process we were asked to
clarify the application process for deposit insurance, and we
have done that. Our policy has not changed. It remains the
same. We had one application in 2014. That application remains
in process. It came toward the end of the year.
But I think the numbers of de novo's do not reflect the
interest actually in community banking. If you instead look at
the dollar amount of capital that has flowed into the community
bank industry since 2008, it is $43 billion. That indicates
that there is investor interest in supporting community banks
and belief in the viability of the community bank model. And I
believe that capital at some point will shift into de novo
institutions as the economy continues to improve and as the
inventory of small troubled banks continues to decline.
Chairman Shelby. Do you see any legislative proposals, or
do you have any of your own?
Ms. Eberley. No.
Chairman Shelby. Do you like what the regulations call for
now?
Ms. Eberley. The regulations that govern applications for
deposit insurance--and there are two pieces to it, so there is
the charter as well, which we do not grant. The charter would
either come from the State authority or the Office of the
Comptroller of the Currency in the case of a national bank. But
the guiding principles for us are the statutory factors for
deposit insurance in the FDI Act, and we think they are
relevant today.
Chairman Shelby. I understand that the FDIC, the Federal
Reserve, and the OCC are currently undertaking a regulatory
review under the Economic Growth and Regulatory Paperwork
Reduction Act. This act requires, among other things, a review
of all regulations prescribed by your agencies. But buried in a
footnote in the related Federal Register notice, you have
indicated that you will not review certain rules.
Who decided to exclude regulations from this review and
based on what authority? You do not need to tell us why they
did it. We just want to know who made the decision. Was it made
at the very top? We will start again with you, Ms. Eberley, and
then go to the OCC and the Fed.
Ms. Eberley. We work on this through the Federal Financial
Institution Examination Council with the benefit of our Legal
Advisory Group. The regulations that were excluded are
regulations that are new, so recently enacted, and that is the
basis, as I understand it, for excluding them.
Chairman Shelby. OK. Ms. Hunter, do you have any comment?
Ms. Hunter. Yes, that is my understanding as well. It is
just the newer regulations require more time to get experience
with exactly how they are operating and where the burden might
be. So that was really the basis for that.
Chairman Shelby. Mr. Bland, do you have any----
Mr. Bland. Chairman Shelby, I would just add that while the
footnote says that, I have attended both the Los Angeles and
the Dallas one, and in the spirit of just hearing from the
bankers and other stakeholders, we have been open to any and
all proposals or thoughts they have had. And so part of the
process is to just be as open and hear as candid from them on
regs that are of interest to them.
Chairman Shelby. Who made that decision? Was it the
Chairman of the Federal Reserve?
Mr. Bland. I am not aware of that.
Chairman Shelby. Was it the Comptroller of the Currency?
Was it the Chairman of the FDIC? Somebody made the decision. We
just want to know who.
Mr. Bland. We can find out for you, Chairman.
Chairman Shelby. Will you furnish that for the record?
Mr. Bland. We will find out who made that decision.
Chairman Shelby. OK.
This leads me to the cost-benefit analysis for regulatory
review. I am a believer in empirical analysis when it comes to
regulations. If a regulation's costs outweigh its benefits, I
believe it should be thrown out. Does anyone disagree? And if
so, why? In other words, if a regulation's cost, you weigh
that, outweigh its benefits, should we keep it? Mr. Bland, if a
regulation's costs outweigh its benefits, should it be thrown
out?
Mr. Bland. Chairman Shelby, the issue of cost-benefit, if
it should be thrown out, you know, also when you enact
legislation, it needs time to see what the effectiveness is.
And so----
Chairman Shelby. But ultimately if you had time to analyze
it and if its costs to the banking system outweigh its benefits
to the public, should we have it? In other words, it would be
weighed in the balance, and should it be gone?
Mr. Bland. Chairman Shelby, in the strictest sense, I
understand your point. But one of the things that is
important----
Chairman Shelby. Do you disagree with me?
Mr. Bland. No. I was going to make this point.
Chairman Shelby. OK.
Mr. Bland. There are safety and soundness and consumer
protections safeguards----
Chairman Shelby. Oh, absolutely.
Mr. Bland. And so that has to be weighed in addition to
that----
Chairman Shelby. Absolutely. That would be one of the
costs--or benefit to the public, benefit versus cost.
What about you, Ms. Hunter? What is your thought?
Ms. Hunter. Well, I would add to Mr. Bland's comment that
the challenge is that it is easy to measure the costs because
they fall to specific institutions. It is much harder to
measure the benefits because they really accrue to a very broad
population, things like safety and soundness of the banking
system or confidence in the payment system. So that is really
the challenge in assessing costs and benefits. I do think that
it is worth doing that analysis, and I know when we propose
rules, we look first at what was the benefit that the statute
was intending to try to achieve. You know, what was that goal?
And then try to fashion rules that minimize the cost of
achieving that goal as best we can. And, obviously it takes
time to understand exactly how it gets implemented in the
industry.
Chairman Shelby. But that is part of the process, is it
not, to weigh the costs versus the benefits. That is part of
your job as a regulator, is it not?
Ms. Hunter. It is, and it is part of the process we go
through when we develop rules responding to statutory
mandates----
Chairman Shelby. What about the FDIC?
Ms. Eberley. I would add to what Ms. Hunter said, the
challenge is quantifying the benefits of a safe and sound
banking environment and the lack of failures, the lack of
economic loss, that is the challenge.
Chairman Shelby. It is.
Ms. Eberley. And it is a difficult thing to quantify when
you are going with a cost-benefit analysis.
Chairman Shelby. I do not disagree with you, but you would
weigh the costs versus the benefits. If the benefits outweigh
the costs, keep the regulation. If it does not, it ought to
fall. But that is a big debate we have going, because we are
talking about overregulating smaller banks and so forth, the
costs to them versus the benefit to the public, I guess.
OK. Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Thank you all for
joining us, the four of you that were at our September 16th
hearing, the four Federal regulators. Thank you for being here,
Ms. Franks. Thank you for joining us on this one.
Ms. Hunter, a question for you. Over the weekend, the major
story broke in U.S. and European media outlets, including ``60
Minutes'', about a trove of HSBC account holder data that
reveals the HSBC Swiss banking arm collaborated in efforts by
some of its account holders to engage in tax evasion. I
understand European tax officials recovered huge amounts of
back taxes from and imposed large penalties on some of these
account holders. I understand that the IRS received this
information in 2010, 5 years ago. Would they normally share
that information immediately with the Fed?
Ms. Hunter. Well, in response to your question, I will
first say I did not personally see the piece that was on ``60
Minutes'', but I can say that--we really cannot comment on
specific investigations.
Senator Brown. That is why I asked would you normally get
that kind of information.
Ms. Hunter. In a general sense, when there is an
investigation, yes, we do share information when requested by
the law enforcement authorities.
Senator Brown. ``Share'' meaning you give to them. Do they
normally give this kind of information to you?
Ms. Hunter. It would depend on the case. There would be a
dialog about--certainly if they are limited in their ability to
share with us, they would not do that. But we provide
information upon request. We generally may be aware that there
is an investigation going on.
Senator Brown. OK. I want to ask you something. I take that
to mean there is a good chance that you have had this, that the
Fed has had this information for quite some time. I gather
investigations of some individual U.S. account holders
identified by these leaks have been undertaken by IRS.
My question is this: HSBC has a recent history of major
U.S. sanctions and money-laundering violations. They now face
these new charges of facilitating tax evasion. Summarize, if
you will, for the Committee what the Fed has done with respect
to HSBC to pursue these tax evasion allegations, what
conclusions you may have reached regarding HSBC's
responsibility for these activities, and what steps you are
taking with other Federal officials to pursue these matters.
Ms. Hunter. OK. Well, first of all, again, I cannot really
speak to the specific matter that is under investigation, but I
can tell you that, with respect to HSBC--we have entered into
three formal enforcement actions, consent, cease, and desist
orders, and those relate to Bank Secrecy Act and AML
compliance. There is one related to mortgage servicing
activities and one related to compliance risk management in
general. So we have been obviously working on issues with the
firm related to compliance generally.
I will say that in any situation where there is an
investigation, if we have evidence or we are provided with
evidence that there is a violation of law or breach of safety
and soundness based on activities, and especially those that
might involve tax evasion, we take that very seriously. We
would favor certainly moving forward, and I am firmly committed
to taking any appropriate sanctions or penalties that would
accrue from the outcome of that work.
Senator Brown. These are, as you know, very serious
accusations and in some cases more than accusations, as we
found. And this Committee, a lot of us, will be watching the
Fed's actions on this, so we will be in touch about that.
Ms. Hunter. We agree they are very serious accusations.
Senator Brown. A question for the four Federal regulators,
one question. Each of your agencies must comply with a slew of
requirements when writing rules. This is a bit of a follow-on
to Chairman Shelby's question. The Administrative Procedures
Act, the Regulatory Flexibility Act, the Paperwork Reduction
Act--these require you to publish rules for public comment,
review rules for impacts on small businesses, consider less
burdensome alternatives, reduce the paperwork burden. You are
also currently undertaking the EGRPRA review process to
identify burdensome and outdated regulations.
The question is this--a couple of questions, and if you
would just start with Ms. Eberley and work your way down. Do
you think your agency adequately takes into account the costs
and benefits of the rules you write? What impact would
additional analysis requirements have on your ability to
implement new rules? Might some of these proposals actually
stop rulemaking in its tracks or slow it down so the burden is
too great to move forward? Ms. Eberley, we will begin with you,
please.
Ms. Eberley. OK. Well, we certainly do try to carry out the
cost-benefit analysis. Under our policy on rulemakings, we
consider the costs, the benefits, and alternatives based on
available data. We ask a lot of questions during the rulemaking
process to garner the impact on institutions, and we are
particularly interested in the feedback we get from community
banks about the costs of the regulation or the ways that it
would impact the institution. And we make changes based on the
information that we hear.
As to your second question, which was about whether
additional requirements would impact that process, I think it
would. Anytime you add additional requirements, it makes the
process of conducting the analysis more difficult and also
would open it up to additional legal challenges.
And your final question was what kind of impact could that
have on the process. I think it could certainly slow the
process and certainly would make it more cumbersome and limit
our flexibility.
Senator Brown. Thank you.
Ms. Hunter.
Ms. Hunter. I am not sure I have much more to add to that
very complete response. I do agree that it would add complexity
to the process, certainly adding extra steps, and those would
tend to slow down development of rules. And that can be
problematic in the sense that on some occasions the lack of
clarity between the time a law is passed and the rule is
developed can impose burdens on banks as well, because they are
not sure exactly how various requirements might be implemented.
Senator Brown. Mr. Bland.
Mr. Bland. The OCC has a very robust economic analysis
impact that looks at the quantitative and qualitative factors
and to appropriateness of a rule. We also have this process
consistent with the OMB guidance, which has been assessed.
And to your last point, the only thing to add is the
proposed rules could halt or slow down implementation of rules.
Senator Brown. And, Mr. Fazio, last.
Mr. Fazio. I would just echo the comments of my colleagues
and indicate that NCUA does take account of all the costs and
benefits that we can reasonably catalogue and quantify in our
rulemaking process and try to speak to that in the preambles to
our rules.
We also take very seriously and find very useful the
comments we receive during the rulemaking process. The agency
responds to those comments in our preambles to our final rules.
We find stakeholder comments very helpful in fine-tuning and
calibrating the rules so that we target the rule and keep it as
efficient as possible while also providing alternatives,
practical alternatives, for credit unions to comply.
Senator Brown. Thank you, Mr. Chairman.
Chairman Shelby. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman. I have just a few
questions.
First, if I could--and I would like to address this to Ms.
Hunter--one issue that represents a particular regulatory
burden on small banks involves new rules for appraisals. Kansas
Fed President Esther George observed at a 2014 conference that
market values in smaller rural communities may not have an
objective comparison. However, new appraisal rules do not
provide requisite flexibility for small businesses and
individuals in rural and other small community markets.
Now, while the Fed did not promulgate the appraisal rules,
it has to examine them. How are you addressing the small banks'
concerns about appraisals in rural communities? And what
recommendations would you have to rectify the problem?
Ms. Hunter. Well, Senator, you raise an excellent point and
one that we have certainly heard in our outreach and
discussions with community banks, and particularly those in
rural areas. The difficulty in getting appraisers who know the
community and are able to do the work that is required has been
a real challenge, and so this is actually one area where,
through the EGRPRA meetings that we have had in Dallas and in
Los Angeles, we have actually heard comments about some
suggestions that might help alleviate some of the issues in
rural areas but also burden more broadly for community banks.
And one of the suggestions was to take a look at the threshold
for when these appraisals are actually required and for what
kinds of deals.
The threshold was last set in 1994, I believe. It is an
interagency rule. But it was set in 1994, and it is at
$250,000, and there is a higher threshold for some business
loans.
In hearing that in the meetings, came back--and speaking
for the Federal Reserve, we certainly think it merits a good
look at just what that threshold should be, how many deals was
it capturing in 1994 versus what the right level might be
today; and if we were to raise that threshold, it could achieve
the burden reduction and particularly alleviate the problem in
rural areas.
Senator Rounds. Does anyone else care to comment on that as
well? If not, I do have another question, and that would be
for, in this case, Ms. Eberley. Kansas Fed President Esther
George, once again, said at the same 2014 conference that
community banks were considered well capitalized and that their
risks understood before Basel III. Yet in spite of that, now
community banks must adopt the more complicated capital rules
with finer degrees of risk weights and capital buffers. The
risk-weighted asset schedule of the Call Report has 57 rows and
89 pages of instructions, even though no additional capital was
required for the majority of the community banks. Are 57 rows
and 89 pages of instructions simply too much for most community
banks? Are they necessary?
Ms. Eberley. You know, one of the lessons coming out of the
crisis was that the industry as a whole needed higher levels of
capital and higher-quality capital, and that is what our
interagency capital rules were designed to do. I think it is
fair to ask if we can make it more simple for community banks,
and then I think that that is something we are open to
continuing to look at.
Senator Rounds. OK. One more question, and this is for Ms.
Franks. There are several legislative proposals to consider as
a qualified mortgage all residential mortgage loans made, as
long as the loan is included in the lender's portfolio. Can you
explain how this would benefit or impact consumers?
Ms. Franks. The State bank supervisors believe that that
would certainly benefit consumers to have QM loans held in
portfolio qualify. We feel like that would be beneficial to a
consumer because the local bank knows their customer and they
have an inherent interest in ensuring that those banks can
repay those loans when they make those loans in the first
place. So we think that that would be a great benefit to our
consumers.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
I think we all share common beliefs here that community
banks are critically important. They play an outsized role both
in relationship lending and particularly lending for small
business.
One of the things the Chairman mentioned in his opening
comments--and I have heard similar numbers--is that compliance
costs have gone up north of 90 percent. I find, though, that
when I press my community bankers to specifically enumerate
where those costs come from and document them, I get not a lot
of specificity.
For all of you, very briefly--because I have got one
another follow-up--would you estimate--could you give an
estimate of how much compliance costs have gone up since Dodd-
Frank for community banks? And is there kind of an enumeration
of top three things that you are hearing as you do these
sessions around the country? Just go on down the line.
Ms. Eberley. We attempted an empirical study in 2012, and
the difficulty with doing that is that institutions are not--as
you noted, they are not maintaining the kind of information
that you could actually just do the math. They do not keep
their books in a way that would allow you to gather the data
that is necessary. And, in fact, they told us that gathering
that data would in and of itself be burdensome. So there is
that issue.
But on the EGRPRA front, the comments that we are
receiving, the general themes have been mentioned previously,
looking at the various thresholds and rules and regulations,
some of which have been outstanding for decades, and whether or
not those thresholds are still reasonable based on changes in
the industry. That is the number one theme through the EGRPRA
process.
Senator Warner. Ms. Hunter.
Ms. Hunter. Yes, and I would add to that as well, the
things we hear most are the lack of specificity is an issue. It
is really the time, and it is accumulation of small changes. So
at least what I hear from the banks--and we have been hearing
in the EGRPRA process sometimes it is a one-time change; it is
getting used to a new way of doing things. It might even
introduce system changes that they might not have wanted to do
at exactly that point in time. So there is an accumulation of
burden or an up-front investment of time, and then going
forward it is this 5 minutes to review a policy, 10 minutes
with the board.
So it is hard to quantify, but that is the kind of thing we
are looking for in the EGRPRA process to try to see how we
might streamline that.
Senator Warner. But do you think it is--the 90 percent
number that is thrown around, do you think that is an accurate
reflection?
Ms. Hunter. 90 percent increase----
Senator Warner. In terms of increased compliance cost.
Ms. Hunter. I do not have the information to be able to
evaluate that.
Senator Warner. Could we finish down the----
Mr. Bland. Senator Warner, it is a very complex issue, but
I have heard in my visits with bankers, it manifests itself in
additional resources you have to hire, particularly as it gets
more complex, they have to hire folks with a certain specialty,
but also diverting their attention away from lending and
interacting with their customer base. The impact on staff,
though, varies with the size of the institution and the
activities they are involved in, but it is real based on what
we hear from bankers.
But similar to what was said before, some of the changes
are looking at different threshold, but also our collaborative
paper that we put out is in recognition of the challenges that
institutions have, and by sharing and working together, they
can help them manage their costs, but also acquire the
experience they need, because the banking business is going
through a substantial change. When you overlay technology but
also nonbank competition, different products and services, and
so that realization of the change, and to be able to offset
that with sharing of resources, building expertise, is
critical.
Senator Warner. Very briefly, because I have got one other
question.
Mr. Fazio. I would just echo that. I think it is a case of
there is just a lot of change going on now. Part is regulatory;
part is marketplace and technological. And it is a lot for the
institutions, especially smaller ones, to deal with. It remains
to be seen if we will reach a state of equilibrium that, you
know, allows them to feel like that is something that they can
manage going forward.
We try to help where we can. A lot of the rules that credit
unions complain about are not within NCUA's direct authority,
and so there is not much we can do, but we do try where we can
to help them in complying, have practical approaches, guidance,
our Office of Small Credit Union Initiatives, to help them with
their planning and with consulting. And so we do what we can.
Ms. Franks. Yes, Senator, my institutions generally tell me
that the costs are incurred through hiring additional staff and
also in implementing and spending the manual time and effort in
trying to understand the new regulations and to implement them,
and particularly this is difficult in more rural areas and more
rural banks where you do not have a large group to choose new--
--
Senator Warner. Let me just add, I mean, I think there are
certain things, like Senator Rounds mentioned, in terms of
forms, I think the thresholds issue. I do think the more we can
get some specificity around the kind of pressing our community
banks for what the changes are.
I guess the comment I would like to make, Mr. Chairman, is
that--and I do not know how you grapple with this. Clearly,
with 400 banks failing, we still have to deal with safety and
soundness. But my belief is that enhanced prudential standards
for the larger institutions, even though we try to bifurcate
them toward smaller, have kind of seeped down into the
examiners at the smaller banks. And I do not know how you
grapple with that best practices standard, but I would love to
come back and revisit that.
Chairman Shelby. Thank you.
Senator Heller.
Senator Heller. Mr. Chairman, thank you. And it is my wish
to follow up on some of your questions, Senator Warner's
questions, and Senator Brown's questions as I use up my 5
minutes. But I want to thank everybody for being here. Thanks
for taking the time and spending time with us. It is very, very
helpful. I am bouncing back between a couple of committees
here, and I know a couple of us here are doing the exact same
thing. So I just want to make sure I ask the right committees
the right questions.
Having said that, and I think the theme here is that the
number of financial institutions in this country has shrunk to
its lowest level since the Great Depression. I know some of
these statistics have already been discussed, but we once in
this country had 18,000 banks, and today we have less than
7,000.
In my home State of Nevada, there are about a dozen
community banks left, and that is less than half of what there
were 5 years ago. The last bank closure occurred June of 2013.
There are only 19 credit unions left in the State, serving
nearly 340,000 members. Thirty-one percent of Nevadans are
unbanked or underbanked, which is the highest in the country.
So I guess for the FDIC, is this a concern or a statistic?
Ms. Eberley. It is a concern, and it is one of the reasons
we conducted a study on consolidation in the banking industry
to really look at what are the underlying reasons for
consolidation and see what we could learn from that.
What we saw over the period that you talked about, with the
decline of institutions from 18,000 down to less than 7,000, is
that about 20 percent of the consolidation that occurred over
that period was from failures that were really isolated into
two significant crises primarily. And so to the extent that we
can avoid financial crises in the future through strong
supervision and good regulation, that will go a long way toward
protecting institutions.
The other 80 percent of consolidation we considered
voluntary, and it was a mix of institutions that were merging
with unrelated companies and institutions that were
consolidating with related companies. The biggest single wave
of that activity that really accounted for a substantial part
of the voluntary consolidation occurred after the relaxations
on interstate branching through Riegle-Neal and other State
initiatives in the mid- to late 1990s. So that was the single
biggest period. That can only happen once. So, you know, we do
not expect to see large waves like that again.
What is missing from the equation is de novo's. We do
expect that, as the economy continues to improve, we will see
some de novo activity again, and we are looking at it that way.
The other point I might make----
Senator Heller. Ms. Eberley, I do not have a lot of time,
so----
Ms. Eberley. I am sorry.
Senator Heller. And I hate to cut you off, but I do have to
get to my questions. This was brought up, and, again, I want to
follow up on the Chairman's comments about this application
process. I do not know if the Community Bank of Pennsylvania
has been brought up in this hearing. It is the first new
federally approved bank since 2010. In the process of applying,
the Pennsylvania bank raised $17 million from investors but had
to spend nearly $1 million just in application fees, and the
attorneys said that it was 8 to 16 inches of application pages
in order to get it chartered.
I guess the question is, quickly: If you have to spend $1
million to open up a bank in America today, how many more banks
do you anticipate are going to pay that price?
Ms. Eberley. We do not charge any application fees for
applications for deposit insurance. There is no fee associated
with that. Institutions do have startup costs as they go
through the process----
Senator Heller. But you understand what I am saying. We are
talking about the cost of putting together 16 inches of
paperwork, lawyers and accountants and everybody else that you
have to put together. It cost them $1 million. Is this what we
can expect in the future from the FDIC as costs? The question
is: Are you going to open a bank today if you have those kind
of costs?
Ms. Eberley. That sounds like a large figure based on my
experience.
Senator Heller. Let me just go to Senator Warner's comments
about costs and how they are not getting answers from small
community banks in his State. I tell you, I am getting answers
from the small community banks, and, Mr. Bland, I think you
touched on it, and that is, personnel costs. We have small
banks in Nevada that are being audited by the Feds. There are
no exceptions, clean books, but then being required--required--
to hire another compliance officer. And they are saying,
``Where are we going to come up with $120,000 to $150,000 to
pay for another compliance officer, even though we have no
exceptions?'' That is part of the problem of what is going on.
So I want to ask--do I have a minute, Chairman? On EGRPRA,
I just want to ask one quick question on EGRPRA.
Senator Toomey. [Presiding.] OK.
Senator Heller. Will you consider Dodd-Frank's regulations
during the EGRPRA process?
Mr. Bland. I will take a stab.
Senator Heller. OK.
Mr. Bland. Given that the EGRPRA process is looking at
rules, established rules that are outdated, overly burdensome,
and unnecessary, most of the Dodd-Frank rules that the OCC is
responsible for have not been implemented yet or have taken
effect. And so it is not, we feel, appropriate to look at those
rules at this time.
Senator Heller. But isn't it true, though, we will not have
another EGRPRA study for another 10 years?
Mr. Bland. That is true.
Senator Heller. And so if we do not include Dodd-Frank----
Mr. Bland. But I would say that the OCC, as part of our
normal practice, looks at whether rules are appropriate in
terms of relevance, and we will make changes without waiting
for the next EGRPRA process.
Senator Heller. OK. To all of you, thank you very much for
being here.
Mr. Chairman, thank you.
Senator Toomey. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
I think you are getting a theme here that this is not a
partisan issue, this is not something that there is a lot of
disagreement on this Committee about. We are deeply concerned
about the status of community banks in this country, deeply
concerned about what we hear back home in terms of
overregulation, compliance burden, extra paperwork, what needs
to happen. And I look at this in kind of two different ways.
First, you have got the obligation to make sure that your
rules make sense, to make sure that you are doing the lookback;
when you are enacting these rules, you are actually sensitive
to some of the issues like appraisals, some of the issues like
extra compliance and burden. These banks did not create the
problem, but yet they feel like they have the lion's share of
the burden because they do not have the economies of scale. And
so what was too small--you know, too big to succeed--or too big
to fail has now become to small to succeed. So it has then
allowed new entrants into the market that are competing without
the burden of regulation, but also has really made--not just
look at shutting down banks or closing down banks but removing
lines of credit, especially in the mortgage area.
And so I want to kind of get to two points. It would be
very informative to know what reactions you have had to what
you have already heard in the Dodd-Frank arena, what reactions
you have had to what you have already heard about the need for
accommodation and retreat on some of the regulation.
On the other hand, Mr. Bland, you said to the extent the
law allows, and I think that is the other challenge we have
here, is trying to figure out where we are going to put the
burden on you to solve this problem and where we need to be a
partner. And so I am curious, as you have been going through
the EGRPRA process, as you have met with the community bankers
in your meetings, what are you hearing about Dodd-Frank that
would be impossible for you to fix without legislative action?
Mr. Bland. Our primary focus has not been on Dodd-Frank in
the EGRPRA process, but, what we----
Senator Heitkamp. I would imagine they do not hesitate to
tell you about it, though.
Mr. Bland. In a kinda-sorta way, they get at it.
[Laughter.]
Mr. Bland. But I think those themes that you touched on are
the important ones in terms of the impact relative to the
institution. And I think part of the discussion we had earlier
about what is a community bank I think is an important one
because where it used to be traditional services in a defined
market, it is really being stretched in terms of definition
when you overlay the competition. But banks are really
challenged by what is the right business model and making sure
that the rules and regs and our policies and practices mirror
what those institutions are----
Senator Heitkamp. But I think our point is, as they are
trying to meet those challenges, whether it is technology and
competing with online banking, competing with folks who do not
have these regulations as their challenge, we do not want to
add additional unnecessary burden on that challenge. And so I
think one of the things that would be extraordinarily helpful
for me, as you kind of go back and look, is to take a look at
what you have already done in response to concerns that have
been raised, and not looking at EGRPRA but looking at Dodd-
Frank, and then taking a look at where you are sympathetic to
the concerns that community banks or smaller institutions have
and what we need to do to fix those concerns, because the
viability of financial institutions going forward is dependent
on its diversity. And I could tell you stories about community
bankers who did not use QM, but yet were able to do 200
mortgages on an Indian reservation that they would not have
gotten otherwise. That is relationship banking, and none of us
here want to preside over a Federal policy that eliminates the
need for relationship banking.
And so I just would appreciate any information that you
could get to me about what accommodations you have already made
and then what needs to happen, in your judgment, beyond that to
accommodate the concerns that you are hearing. And, you know,
we all have a role to play. I think that you guys have heard
and are starting to react, but this idea--and I think the
Chairman talked about cost-benefit and so did Mark. How do you
evaluate costs? It is not good enough to say, ``I do not
know.'' We have got to get to the point where we do know so
that we can evaluate the risk-benefits of what we are doing in
this arena, especially as it relates to small institutions.
Senator Toomey. Senator Vitter.
Senator Vitter. Thank you. I want to start by thanking the
Chair for calling this hearing and certainly echoing his
introductory comments. I think there is great opportunity on a
bipartisan basis to move forward with some regulatory relief
for smaller institutions. And as one piece of evidence of that,
Senator Brown and I have a bill. The discussion of it has
dominated on the section which requires higher capital
standards or megabanks, but it also have a very important
separate section offering some significant regulatory relief
for community banks. And I think that is one example of
bipartisan work in that direction. I hope this Committee will
produce that sort of movement.
Let me ask all of our guests, in general, what do you think
or what have you measured as the increase in compliance costs
burden in the last few years on community banks specifically?
Ms. Eberley. As I mentioned, we did try to do an empirical
study in 2012, and the data is just not there to complete the
study. I can share some anecdotal information that would
suggest that some of Dodd-Frank's provisions that were designed
to eliminate too big to fail may, in fact, be leveling the
playing field.
One of the things that we have seen is loan growth in
community banks compared to the industry. Last year we started
putting out our quarterly banking profile with a separate
section dedicated to community banks and just their financial
information. That shows that community bank loans grew year
over year and quarter over quarter at a greater pace than the
industry, and it was about 2:1.
Senator Vitter. OK. What about my question, which was
compliance costs?
Ms. Eberley. I mentioned we had attempted to do an
empirical study, and we cannot----
Senator Vitter. OK. So you do not know. Does anyone else
have any general perceptions or studies regarding compliance
costs of community banks in the last few years?
Ms. Hunter. I would only add that the Federal Reserve
cosponsors a research conference with the Conference of State
Bank Supervisors. We have had two of those conferences. There
have been some papers presented at those conferences, getting
at this very issue. Not having the details in front of me on
exactly what each study said or did, I would not want to quote
them directly, but I do recall, for example, one paper looked
at the very smallest institutions and found that having to hire
one more compliance staff member made the difference between
profitability and nonprofitability.
So those kinds of studies are really helpful in that we
take that information and when we think about the impact of new
requirements and as we are implementing them, try to take the
least burdensome path to achieving the result that was intended
in the law.
Mr. Bland. Senator Vitter, we do not have any assessments
like that.
Senator Vitter. OK. Anybody else have any?
Ms. Franks. I would just echo what Ms. Hunter said as far
as the Community Bank Research Conference, because we have had
some papers presented that do address some of those issues,
particularly on small banks, and we will be glad to get that
information to you, Senator.
Senator Vitter. OK. Well, I would really commend this issue
to all of you. It is pretty darn important. Compliance costs
have mushroomed. That impacts every financial institution, but
it disproportionately impacts smaller ones for the reasons Ms.
Hunter suggested. You know, if you increase compliance costs
100 percent, Citi is in a much better position to deal with
that than a small community bank for whom it can literally put
them under or cause them to have to sell out--a trend which is
clearly accelerating. So I really commend that to you. It is
awfully important, and certainly my perception, talking to
community banks every week, is that the burden is enormous. For
the most part, they are dealing with things, solutions for
things they had--problems they had nothing to do with, and yet
the burden on them is far bigger proportionally than it is on
larger institutions.
Another theme I hear all the time from smaller banks is
real concern that Dodd-Frank and other recent regulation is
pushing toward a one-size-fits-all, very standardized model for
products. And they really think that is taking away their whole
reason for existence in essence, their whole niche in the
market. And in that context, the qualified mortgage issue comes
up a lot.
Do you hear that from community banks? And what is your
reaction?
Ms. Eberley. We have heard a lot from community banks about
the concerns with the ability to repay and QM rules, primarily
relating to the definitions of rural and small bank. We have
shared those concerns with CFPB as we have heard them, and CFPB
has recently put forth a Notice of Proposed Rulemaking to
respond to the concerns that they have heard from community
banks and offering some expanded designations.
Senator Toomey. Thank you.
Senator Vitter. OK.
Senator Toomey. Senator Merkley.
Senator Merkley. Thank you, Mr. Chair.
The feedback that I get from my community banks around
costs, around the general topic we are discussing, are
overlapping audits, visits from different regulatory bodies,
uncoordinated--too many staff coming in, overwhelming the local
institution, the costs of preparing for that.
You mentioned, Ms. Eberley, the 2012 study. In that study,
the community banking study, was there an effort to step into
the mind-set of a community bank and look at it from their
point of view in terms of how many regulators are coming, how
often, in what kinds of numbers, and whether there is a way to
coordinate that whole set of activities in order to diminish
the burden on community banks while achieving the core purposes
of the regulatory visits?
Ms. Eberley. At the same time that we completed the data
study, we embarked on an outreach initiative that started with
a symposium of community banks that we held in Washington,
followed by outreach sessions around the country in each of our
regional offices, hosted by our Chairmen, and we specifically
asked institutions, you know, what were the things that created
burden for them. They talked about new regulations, they talked
about communication, and they talked about the examination
process and ways that we could make it better. We took actions
back in 2012 and 2013 on the feedback that we received from
institutions and the feedback that we continue to receive. In
particular, we streamlined our pre-exam planning process, the
information that we ask institutions for before we go in, to
make the examination process smoother once we get there. So we
try to do as much work off-site as possible before we even show
up, so that we go in with informed examiners ready to hit the
ground running and limit the examination process.
We did not get specific feedback during that process that I
recall about coordination with other regulators, but we do work
on that at a local level with our State counterparts through
our field supervisors as they go through examination planning.
We have cooperative examination agreements that define who will
examine the institution when.
Senator Merkley. Thank you. I am going to cut you off
there. I think you have gotten to the core of the type of
feedback loop that is so important. I am not sure, based on the
feedback from my community banks, that it cannot be further
improved on, but I gather you are continuing to hold the
regional roundtables to try to get to the heart of this. And I
appreciate that.
Another piece of the commentary is that rules that were
designed really for big banks engaged in market making, banks
that are engaged in wealth management and investments in wealth
management funds, banks that have trading going on in the
derivative markets, these rules become part of an examination
process that just is a burden and misappropriately applied.
Is that a problem? And is it getting addressed? Yes, as the
primary regulator of small community banks.
Ms. Eberley. Absolutely. I would say first that all of our
examiners are trained as community bank examiners, so they are
aware of the rules that apply to community banks. We have a
number of controls in place to prevent any kind of trickle-
down, if the concern is that the rules that are meant for the
largest banks are being applied to smaller banks.
First is just the good education of our staff. We have a
very professional and experienced examination staff.
Second, every report of examination goes through at least
one level of review by a case manager in our regional office,
who, again, is trained in all of our rules and regulations and
what applies to which institutions.
Third, we audit our regional office adherence to policy on
a regular basis to ensure that we are being consistent across
the country. And we stress communication at all levels that if
institutions have any concerns, that they bring them up early
in the examination process so that we can resolve them.
Senator Merkley. Thank you. In short, you are saying that
that really is not an issue for the things you are doing, and I
am sure that will lead to further discussion of that.
Then, finally, the feedback is--and this was referred to, I
believe, by Senator Warner--that even when formal requirements
do not exist, the regulators in the examinations are often
saying, ``Well, you must do X.'' And it is, like, ``Well, why
is that?'' ``Well, it is a best practice, and so you really do
not legally have to do it, but we expect you to do it.'' And
that trickle of best practices from large institutions down is
creating challenges and problems that may be, again,
inappropriately suited to small community banks. Is that an
area you feel like you have adequately addressed?
Mr. Bland. Senator, I can jump in here. Absolutely, this
whole notion of best practices is something that we have to
guard against, because some of the intentions are good, but the
net effect, as you say, could be bad in terms of the
institutions. And so one of the things we do is make sure we
emphasize a matter requiring attention, which is an identified
issue that the banks need to address, versus a best practice or
a recommendation. Most recently, we updated our guidance to be
very clear about what our examiners communicate, the things
that have to be done because they are impacting the bank versus
those things that are nice-to-do's. And so that is one of the
things that we really have to focus on.
But one of the keys that is really at this is explaining
the why to bankers. Why are we asking them to do this? And then
what will be the tangible benefit of acting on whatever our
recommendation is?
Senator Merkley. Thank you. My time is up, but I appreciate
the feedback. Thanks.
Senator Toomey. Thank you, and I will claim my time at this
point.
I would like to submit for the record a letter that I
received from Comptroller Curry that contained a number of
suggested reforms that I appreciate very much. Hearing no
objection, I will submit that to the record.
Second, I want to make a brief editorial comment, if I
could. I just want to underscore how frequently we had
sometimes several hundred new bank charters issued in a given
year across this country, not at all unusual to have 100, 200
new charters in a year. To go for 6 years with only two new
charters, I have to say I find it wildly implausible to think
that that is a reflection of a business cycle. In my view, it
is very clearly a combination of a zero interest rate
environment that has been engineered by the Fed and massive
regulation that makes it impossible for people to see how they
can have a surviving community bank. I say this as a person who
helped launch a community bank in 2005. I was shocked by the
amount of regulation that that bank was subject to then, and
that was before Dodd-Frank. It has clearly gotten much, much
worse, and it is impossible to believe that this is not related
to the just virtually complete halt in a very, very important
source of capital for small businesses and consumers.
Having said that, what I think is very good news today is
what I really want to talk about, and that is that the OCC has,
in my mind, quite constructively, suggested several significant
reforms, and I would like to pursue a discussion about that,
especially with Mr. Bland, because this is exactly the
conversation I think we should have. What are the specific
things we can do that will help the existing community banks
and more community banks serve the credit needs of their
community?
So, Mr. Bland, as you know and you mentioned in your
testimony, one of the proposals you have suggested is to exempt
community banks with assets of less than $10 billion from the
Volcker rule, and I want to discuss that a little bit. But let
me first start by--is it your sense, is it generally true that
banks of $10 billion and less engage in virtually none or a de
minimis amount of the activities meant to be precluded by the
Volcker rule?
Mr. Bland. Senator Toomey, that is correct. Our assessment
around this area has shown that a lot of the activities that
most community banks engage in is not under the purpose of the
proposed rule. And, therefore, to require the compliance effort
to make that determination seems costly compared to the actual
activities that they have. And so that is where our view is on
that.
And then even if institutions were involved in activities
that would follow the rule, the extent of those activities are
not significant relative to larger institutions. And so the
realization of looking at institutions around the $10 billion
and under mark did not seem to be the intent of the
legislation. So that is pretty much the bedrock of our
proposal.
Senator Toomey. And the reality is that these small banks
have to spend a fair amount of time and energy and resources
simply proving that they do not do what they have never done.
Is that fair?
Mr. Bland. That is correct. And, Senator Toomey, our
thought is we can use the supervisory process to make
assessments of whether or not those types of activities pose
risks that we need to address.
Senator Toomey. So I would like to ask Ms. Eberley and Ms.
Hunter just briefly, are you open to pursuing a reform such as
what has been proposed by the OCC?
Ms. Hunter. Well, speaking for the Federal Reserve, I know
Governor Tarullo, in testimony and in speeches, has voiced
support for the proposal for exactly the reasons that Mr. Bland
identified. Community banks do have some activities that are
covered by the Volcker rule, but the risks are not nearly as
great as for the largest institutions and it can be managed in
the supervisory process.
Senator Toomey. Thank you.
Ms. Eberley.
Ms. Eberley. We would estimate that very few of the banks,
if any, that we supervise are engaged in activities covered by
Volcker, but we have not taken an agency position.
Senator Toomey. Well, I would encourage you to consider
this seriously. I think it is a very constructive proposal.
The last point I would make is, Mr. Bland, would you agree
that there is nothing magical about the $10 billion figure? In
other words, there is nothing intrinsic about one incremental
dollar above that that suddenly gives rise to the activities?
Mr. Bland. I would agree with that.
Senator Toomey. OK. The second thing I want to touch on was
you have also suggested that banks with up to $750 million in
assets be examined every 18 months rather than every 12 months.
Now, isn't it true that the size of the banks is not the only
criteria that would determine whether they get that little bit
of relief from the frequency of these reviews?
Mr. Bland. Yes, the primary driver is well managed, and the
ability of these banks in terms of the risks, but their proven
performance. And really one of the major emphases here is for
us to divert our attention to less well managed institutions,
so it is a matter of devoting our resources, but also to lessen
the burden on those banks that are performing well and that are
managing themselves properly.
Senator Toomey. I think that is a very constructive
approach.
Again, Ms. Eberley and Ms. Hunter, just briefly, because I
am out of time, have you considered this? And are you open to
this type of reform as well?
Ms. Eberley. We indicated our support in our opening
statement.
Senator Toomey. OK.
Ms. Hunter. Yes, and I think this is also a suggestion that
OCC are looking at. One point I would make is we also hear
proposals about cutting back on Call Report reporting, and that
combined with extending of frequency or somehow reducing-- on-
site presence, there is a tradeoff there. We could use the
reported information to monitor risks, which would allow us to
feel comfortable extending exam frequency for certain
institutions.
Senator Toomey. Thank you. My time has expired.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman
Our community banks and credit unions play a unique and
critical role in the market for financial services, and we must
ensure that they can continue to do that in the years ahead.
These small institutions clearly do not pose the same kinds of
risks as the biggest banks, and our regulation and supervision
of these institutions should reflect that.
The good news is that Dodd-Frank does reflect that basic
principle. It exempts community banks and credit unions from
many of its rules, and for the others it almost always gives
regulators the discretion to tailor their approach based on the
size and business model of the institution.
So when Members of Congress start talking about rolling
back regulations in the name of community banks, I want to be
sure that it is really about helping community banks and not
about helping their much larger competitors.
I want to start with this: Ms. Hunter, in your testimony
you note that the Fed defines ``community banking
organizations'' as those with under $10 billion in assets. Is
that right?
Ms. Hunter. Yes, that is true.
Senator Warren. Good. And, Mr. Bland, I us that the OCC's
definition of community banks looks at a few factors in
addition to asset size, but under the OCC's definition, what
percentage of community banks have under $10 billion in assets?
Mr. Bland. Senator Warren, we have about 85 percent of our
banks are less than $10 billion.
Senator Warren. OK. And about what percent are under $1
billion in assets?
Mr. Bland. Boy, that is a good test for me. We have 1,400
banks under $1 billion. We supervise a total of 1,600, so that
is really in the higher 80s.
Senator Warren. So it is going to be in the higher 80s. So
nearly all of the banks that you are supervising, community
banks are going to be under $1 billion, much less under $10
billion.
Mr. Bland. That is correct.
Senator Warren. And, finally, Ms. Eberley, I know that the
FDIC also defines community banks by examining a few different
factors in addition to size, but I have the same question for
you. Under FDIC definition, what percentage of community banks
are under about $10 billion?
Ms. Eberley. Using our definition, 94 percent of the banks
under $10 billion meet our definition. A couple over $10
billion meet it.
Senator Warren. OK. So the banks--you have got a few that
are under $10 billion that do not meet the definition of
community banks.
Ms. Eberley. That is correct.
Senator Warren. But your community banks, the ones that do
meet the definition, are nearly all concentrated under $100
billion. You said all but a few, I think.
Ms. Eberley. Yes, yes.
Senator Warren. And how many under $1 billion, that is, way
under $10 billion?
Ms. Eberley. That is 90 percent of institutions.
Senator Warren. OK. Thank you. So it sounds to me like the
consensus from our Federal regulators is that, out of the
several thousand community banks out there, nearly every single
one has under $10 billion in assets and most are under $1
billion in assets. There are a lot of bills out there that are
being promoted as helping community banks, but I want to look
just a little bit closer at who they will actually help, and
here is an example.
Under current law, banks with less than $10 billion in
assets are completely exempted from the examination and
reporting requirements of the Consumer Financial Protection
Bureau. A bill introduced in the last Congress would have
raised that exemption threshold from $10 billion to $50
billion. By raising that exemption threshold, would that bill
benefit any of the 99 percent of community banks that are under
$10 billion in assets? Anyone?
[Witnesses shaking heads.]
Senator Warren. No? OK. I will take that as a no.
In fact, given that the banks between $10 billion and $50
billion in assets directly compete with the community banks in
many communities, would not a bill that raises the Consumer
Financial Protection Bureau threshold to $50 billion actually
hurt community banks by helping their competitors? Anyone? In
other words, it just adds more competition against what we
define as community banks.
So I just think that 6 years ago--we need to focus on the
fact that 6 years ago we suffered through the worst financial
crisis in generations, one that caused millions of families to
lose their homes, their jobs, their retirement savings, and
that forced taxpayers to bail out the biggest banks. We put in
new rules to try to rein in the biggest financial institutions.
It is important that our community banks and credit unions
thrive, but rolling back important protections to help the
biggest banks just puts community banks at a greater
disadvantage.
The big banks are going to keep using the small banks as
cover for their special rollbacks. That is what they did before
the crisis, and that is what they have been doing after the
crisis. We should not fall for that trick.
Thank you, Mr. Chairman.
Chairman Shelby. [Presiding.] Senator Moran.
Senator Moran. Mr. Chairman, good morning. Thank you all--
way over here. I have a profile view of you this year. Thank
you all for being back. I was speculating with my staff about
the number of times we have had hearings in this room. Many of
you have participated before. We are guessing three or four
times a year we have examined the issue of the regulation of
community banks.
My question initially is: What has changed? I have been a
Member of this Committee, now I am beginning my fifth year. My
position at the end of the table does not demonstrate that, but
I have been here for 5 years.
[Laughter.]
Senator Moran. What have we eliminated, what have we
improved in the issue of community banks? And somewhat in
response to the Senator from Massachusetts, I am not
particularly interested in the banks. I am interested in the
people they lend money to. And while we talk about $1 billion
deposit banks, what I am thinking about is banks that are less
than $100 million. That dominates our State. I have made the
case, and perhaps this sounds a bit back home, but economic
development can be whether or not there is a grocery store in
many of the communities I represent, and that translates in
today's hearing in my world is if there is not a community bank
that cares about the community, that is willing to take a risk
because it matters to that community that there is a grocery
store, and taking that risk they believe they are going to get
a return on their investment, if they are wrong, it does not
create a systemic problem for the country's financial
circumstances.
What are we doing to take care of those folks who are
willing to have relationship banking because they are so
connected to their community? My question about the hearings
is: Has anything changed in the 5 years that we have had 20
hearings on this topic? Have we made any progress? Or are my
bankers just folks who like to complain and come to my town
hall meetings and tell me stories that really they should not
worry about?
I asked this question in a previous hearing. What have you
ever heard in one of these hearings that you have taken back
and there has been a consequence to what you heard at a hearing
and said, ``Let us solve this problem''?
Ms. Hunter. Well, I will go ahead and start off.
Senator Moran. Thank you.
Ms. Hunter. Especially since I spent a considerable amount
of time in your State earlier in my career.
So some things have changed and some have not. I would
think that one thing that has changed, certainly we have been
through a very significant economic cycle. That always changes
the environment with which examiners in particular are looking
at banks and assessing the risks that they have. So that will
change from year to year, the intensity of examination activity
or discussions.
I think to some of the earlier discussion, some of the more
recent regulatory changes, there have been some new
requirements for community banks, but by far the vast majority,
the most significant changes are falling on the larger
institutions. That is hard to absorb, though, when they are
struggling to absorb additional compliance activities or adapt
to new rules.
One thing I would say is that when we come to these
hearings, we do take it very seriously. I know at the Federal
Reserve--and I am confident my counterparts would say the same
thing--we look very carefully at our procedures, at our
examinations, and the messages that we give to our examiners,
we review across districts, across examination offices to see
are we being consistent, are we responding to concerns that we
hear from bankers. And sometimes we will find, yes, we are
asking for things that are beyond what we had initially
envisioned might be necessary and we will invest more in
training to deal with that through changing our supervisory
process.
Senator Moran. How much of the problems that a banker or a
bank faces in the regulatory environment comes from decisions
made by the local office, the local examiner? Is that an issue
in which the applications are applied in a different manner in
a particular region or community versus what decisions you make
and what guidelines you put in place for those exams?
Ms. Hunter. Well, I will start again. The way our process
works is we delegate supervision and responsibility to the
Reserve Banks, which means if there is an examination or
supervision of a well-managed institution, the decisions are
made locally. Where we have more involvement from Washington is
when I would think the industry would want us to have greater
consistency, decisions around issues about if we are
restricting capital distributions or some other kind of
important factor that might come up through the supervisory
process. Here being consistent across districts is quite
important, and that is when we will try to bring those issues
to Washington.
Senator Moran. I remember the last time we had this
conversation, you played the Kansas card with me. It always
works.
[Laughter.]
Senator Moran. It is difficult to chastise anybody who
spent time in our State.
Just a couple of other observations, and I will conclude. I
do not know that there is a question here, but my point in this
part of the conversation is I want these hearings to make a
difference, and in part we need to know what it is
legislatively by law needs to be changed. But I hope that this
is not just something that has become a routine in hearing us
espouse the challenge we face.
One of those challenges--and it is going to change again, I
do not know whether for the good or the bad, on August 1st in
regard to real estate mortgages. I have had at least a dozen
community bankers tell me they no longer make real estate loans
to people who want to buy a home in a town of 2,000 people.
What an amazing development. And the only reason they say they
do not do it is the nature of the regulations, the uncertainty
of whether they are complying, and the consequences if they are
not. And to live in a community of 2,000 or 3,000 people and
have your hometown bank say, ``I am sorry, I cannot make you a
loan because I am fearful that I might not cross the `t' and
dot the `I,' '' that is a pretty damning thing, in my view, for
the future of rural America.
I just was going to point out that Senator Tester and I
will once again package--we are drafting a small lending credit
union/bank piece of legislation, and I am hoping that in this
new Congress it has the opportunity to be heard in this
Committee and action taken and be considered on the Senate
floor, and I look forward to working with you to see that we
get the right framework in place.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Brown.
Senator Brown. Thank you for one more question, Mr.
Chairman, on the second round.
I want to first say I agree with Senator Warren and Senator
Moran on the whole idea of what we should do to help the
smallest banks. As I said earlier, in my State, in Ohio, a
State of almost 12 million people, 80 percent of the community
banks are very small, under $500 million in total assets. So we
know who we are aiming at here.
This is a question for the four of you. Sorry again to
leave you out, Ms. Franks. At the hearing last fall, I asked
you to describe and define community banks and small credit
unions. Your answers were helpful as we thought about
regulatory relief and generally identified the smallest
institutions serving local areas with a very simple business
model. One banker told me that banking should be boring, and he
has been very successful at growing a very small bank into a
several-billion-dollar community bank.
As we consider proposals to provide regulatory relief to
these smaller institutions, I am reminded of an exchange I had
within then-Chairman Bernanke a couple years ago. He indicated
that regulators should do whatever we need to do to make sure
the financial system--``that our financial system is safe.'' I
agree with that sentiment. I want to ensure that any steps
taken by you all or by us to provide regulatory relief first
and foremost keep the system safe. I know your comments play
into that. I know you believe that it is very important.
So this question is for the entire panel. I will start this
time with you, Mr. Fazio, and work to your right, to my left.
Is there a particular size of institution that you believe
would benefit the most from regulatory relief? What should we
know about the causes and failures of small institutions as we
consider these regulatory relief proposals? What analysis are
you doing on Congress' regulatory relief proposals to ensure
that the relief is targeted to those institutions that need it
most and that those proposals do not threaten safety and
soundness or do not strip away consumer protections, regardless
of the size of the banks.
So, Mr. Fazio, if you would take that sort of mix of four
questions and just give us thoughts as specific as you can,
each of you.
Mr. Fazio. Well, I would start with the fact that under the
Regulatory Flexibility Act analysis, we have historically
defined small as $50 million or less. We had increased that
several-fold in January of 2013 when the NCUA Board raised that
definition to $50 million. The board next week is going to take
up that new definition and potentially raise it to as high as
$100 million. Eighty percent of all credit unions are $100
million or less in assets, so that would exempt--or that would
provide special analysis that we would do in considering
exempting or scaling expectations for safety and soundness and
other regulatory provisions in the rules we make. So I think
that is mainly how we think about a smaller entity in our
context.
What we try to do, as I had indicated, is scale and target
our regulations at the institutions that have the most risk and
that have the size and complexity to deal with it. We do take
every opportunity to tailor our processes and to understand the
costs and the benefits as it relates to credit unions when we
need to do safety and soundness-based regulations to support
that. And so we have done a lot of things to try to help along
those areas. A big part of it--and we have heard about it today
a lot at the hearing--is the exam process itself and the
supervision process, and we have made significant strides in
recent years to tailor our exam process to help small entities,
to reduce the burden on them, to support them. We have an
office that is dedicated to supporting small credit unions. It
is called the Office of Small Credit Union Initiatives. We
provide a lot of training and consulting, partnership
opportunities. So we are doing a lot of that.
We would be mindful of any legislation going forward that
would preserve the ability for us to continue to flexibly
approach cost-benefit analyses in the way we approach targeting
and scaling our regulations, so that would be our thought
process, at least in terms of potential future legislation.
Senator Brown. Thank you.
Mr. Bland.
Mr. Bland. Senator Brown, when you look at the community
banks the OCC supervises, 1,400 of our 1,600 are less than $1
billion. So that is what our primary focus is around.
But I would also caution all of us, though, when you look
at what is happening in the industry today, with technology in
particular, it is changing the size. But also we have to be
careful of prescribing certain limits that also then prescribes
what a bank can do under those limits, because we run the risk
of threatening innovation in the industry. And so at the OCC we
do use asset size as a pointer, but then we try to delve deeper
into what activities and complexity that those institutions are
involved in. Coming out of the last crisis, we had institutions
that were very small doing very complicated things that
required them to have the requisite systems.
For the most part, the institutions that we supervise are
less than $1 billion. But we are also trying to challenge
ourselves as we contemplate rules around what they do, not so
much what their size is.
Senator Brown. Thank you.
Ms. Hunter.
Ms. Hunter. Your question is who would benefit most and
kind of linking it back to causes of failure. For small banks
the cause of failure is generally bad loans and not enough
capital to absorb the losses, and that is something we have
seen over decades. So when you think about small banks, making
sure the safety and soundness elements, the capital, is
sufficient, that is obviously important.
In terms of who would benefit, I am very interested to hear
what the bankers have to tell us when we do the EGRPRA outreach
session focused on rural institutions. I think those banks are
different from even the suburban community banks that might be
just under $10 billion, and so I am hoping that we will hear
something that might be useful and how we can address their
particular needs.
Senator Brown. Thank you.
Ms. Eberley.
Ms. Eberley. The definition we use is also not asset based.
We look at the activities of the institution, relationship-
based lending funded by core deposits in a relatively tight
geographic market. So they have local knowledge and local
experience and face-to-face work with their customers.
In terms of the lessons learned from the crisis that we
should keep in mind as we think about regulatory relief, I will
draw back a little bit from the last crisis as well. You know,
there is no substitute for an on-site examination of an
institution--the time that we spend face-to-face with
management and understanding the bank's activities and risks
and what they are doing. To Toney's point about understanding
the risk profile of the institution, you can be a very small
institution engaged in very risky activities. Quality and
quantity of capital are important; as is recognizing loss
timely. A lot of institutions at the beginning of the crisis
did not, and that prevented them from being able to raise
capital.
Concentrations have to be managed. Early supervisory
intervention makes a difference. Institutions where there was
early supervisory intervention and they heeded the
recommendations fared better than those who did not. And rapid
growth funded by noncore deposits creates a situation where
there is really no franchise value and institutions struggle to
find investors when they need capital down the road because
they have not created a franchise.
So those are some of the key lessons that we would look at
when we are looking at regulatory relief proposals and also
just looking back to what was the original reason for the rule
and do any of these things still play today.
Senator Brown. Thank you. Thank you all.
Chairman Shelby. Thank you, Senator Brown.
A 2012 study found that of 192 Dodd-Frank rulemakings done
through 2012, 74 percent contain no cost-benefit analysis or no
quantitative analysis. This means that as of 2012 we had no
idea how much three-fourths of Dodd-Frank rules would cost to
comply with.
Assuming this is true--and I think the study showed it--
does this concern you, Ms. Eberley?
Ms. Eberley. It would not be in conformance with the way
that we approach rulemaking, which is we certainly do work to
do cost-benefit analysis and consider the costs, benefits, and
alternatives.
Chairman Shelby. Sure. Does that concern you, does it
concern the Federal Reserve?
Ms. Hunter. I would add to Ms. Eberley's comment, in making
rules we do consider costs and benefits and do quantitative
impact studies on a number of issues related to rulemaking. So
I know that that analysis underlies the development of the
rule.
Chairman Shelby. Mr. Bland.
Mr. Bland. Chairman Shelby----
Chairman Shelby. Is that important? Is cost-benefit
analysis important?
Mr. Bland. It is important.
Chairman Shelby. OK.
Mr. Bland. And, you know, with the regulations under Dodd-
Frank that the OCC is responsible for, as I mentioned earlier,
we do an economic impact analysis, and that is part of our
process, and it is really embedded in our rulemaking process.
Chairman Shelby. Mr. Fazio, is cost-benefit analysis
important to the viability of the credit unions, too many
regulations not thought out?
Mr. Fazio. Yes, sir, that is important, and we, again, try
to articulate those costs and analyze those costs where we can.
Chairman Shelby. Sure. Ms. Franks.
Ms. Franks. We believe a cost-benefit analysis is
beneficial. We do that in Arkansas, so that is something that
we certainly take in mind.
Chairman Shelby. Ms. Hunter, you said earlier that it is
easy to calculate the cost of regulations but not the benefits.
That might be true. I do not know. But maybe more work needs to
be done.
In 2011, the General Accounting Office found that Federal
financial regulators' economic analysis for Dodd-Frank ``falls
short'' of what could be done. How do you respond to that? Do
you think that you need to do more? A lot of us think you need
to do more----
Ms. Hunter. Well, if I said it was easy, I would try to
qualify that by saying it is easier when it is focused in on
specific institutions.
Chairman Shelby. ``Easy'' or ``easier''?
Ms. Hunter. Easier to identify costs that affect particular
institutions. And so along those lines, I would add that, yes,
we very much value information about costs. When we put rules
out for comment, the most valuable ones are when institutions
tell us, ``Here is a real impact. Here is a cost I am going to
have to have. Here is the impact on perhaps my need to change
computer systems in order to implement what you propose.'' We
respond to those and incorporate those into the final rules,
and I think our capital rules are a good example where we took
the feedback from the banks about the cost of implementation
and made adjustments.
So we do recognize that more information on cost is
valuable. I hope that as we go through the EGRPRA process we
will hear more about it, but certainly in any comment period,
the more specific information we get from the institutions, the
better.
Chairman Shelby. A lot of us that advocate cost-benefit
analysis for all regulations, not just for banks, but I have
been pushing that for years, it defies logic not to do it. But
we are not saying to you as bank regulators loosen the
regulations and do not worry about safety and soundness. We do
worry about that. You have got to do that. But do the whole
thing and do it right, because I know from being up here on
this Committee 29 years, I can tell you that a lot of those
regulations make no sense and they ought to be weighed in the
balance.
Senator Cotton.
Senator Cotton. Thank you.
Chairman Shelby. We have one of your Arkansans here.
Senator Cotton. I know that. Very proud and excited. I
apologize for being a little late. I was presiding over the
Senate, which I think is the Senate's version of paying your
dues, right?
Thank you all very much for your time. I want to touch on
the mortgage servicing business, a specific concern I have
about the mortgage servicing business being driven into a
largely unregulated shadow nonbank system. Some reports I have
seen suggest that you have seen at least a doubling if not a
tripling of nonbank companies moving into the mortgage
servicing business. A lot of banks are divesting of this
business. And I wanted to ask, first, why you think this is,
and maybe we can start with Ms. Eberley.
Ms. Eberley. Not a lot of the banks that we supervise have
significant amounts of mortgage servicing businesses. By and
large, community banks do very small amounts, and they are
keeping it.
Senator Cotton. Ms. Hunter.
Ms. Hunter. The mortgage servicing industry certainly has
undergone significant changes in recent years, so we are noting
that there is some shift away from the larger banking
organizations, but at this point I do not know that I could add
any more insight on that.
Mr. Bland. Senator Cotton, I would share what has been said
also, but I also would say that continuing innovation and speed
of delivery and technology is making a big difference in who
can provide the services at a more effective cost, and that has
been a big driver as well.
Mr. Fazio. Most credit unions portfolio their mortgages,
and they service them. Not many credit unions hold mortgage
servicing assets on their books. A few do. It is a very small
percentage, and we have not seen any real trends to move those
outside of the credit union portfolio.
Ms. Franks. We feel the capital requirements that are
causing these mortgage servicing rights to be taken to other
sources will cause relationship lending to be dampened, and we
would like to see our banks be able to continue to service
those mortgages that they produce. State regulators, many State
regulators--I do not, but many State regulators do regulate
those mortgage service companies, and I know that they are
looking at prudential standards for those companies.
Senator Cotton. And, Ms. Franks, you are talking about the
regulations implementing the Basel III capital requirements?
Ms. Franks. Right.
Senator Cotton. I have to say that I tend to agree with
your assessment, Ms. Franks, and that is not just chauvinism
for Arkansas. But this is, you know, what I have heard and what
I have seen in other studies. So, you know, one question that I
would like to ask is: Was there any study in particular on the
assets that the regulations implementing the capital
requirements have on the mortgage servicing business, not the
general study on capital requirements but specifically the
impact it could have on the mortgage servicing business,
especially of small and midsize banks?
Ms. Eberley. We absolutely looked at it for community
institutions in response to the comments we received as part of
the capital rulemaking. And as I noted, there are very few
community institutions that are engaged in mortgage servicing
to a level that would have been impacted by the new capital
rules.
Senator Cotton. Ms. Hunter.
Ms. Hunter. Yes, I would only add the goal of the capital
rules was to make the capital regime more resilient, and as I
understand it, in going through the comment process, we looked
at various classes of assets. Those assets that proved to be
less liquid in the financial crisis and when institutions
needed more liquidity in those assets, those tended not to get
the more relaxed treatment than some of the other assets
perhaps received in the final rule.
Senator Cotton. Well, I mean, I appreciate the goal. I just
feel that this may be another instance in Dodd-Frank and its
implementation and the overall regulatory environment we have
seen over the last few years where we have actually been aiming
at one goal and maybe having the opposite result, driving
activity out of the regulated banking and credit union sphere
and into nonbank businesses. To me it seems like this is a
problem for at least two reasons. One, for community banks in
particular, especially in a State like Arkansas--and I know
States like Alabama and Tennessee and other States represented
here--that is a good business, provides a good margin, has
relatively safe assets; but, two, it is also very bad for the
people we serve, the consumers of those banks. You know, rather
than dealing with a small bank in a place like Yell County,
Arkansas, or, for that matter, in Pulaski County, Arkansas,
which is small by Washington standards, you know, they may end
up now dealing with esoteric and obscure nonbank entities that
are far away, where they have less recourse and less
protections than they would if they were dealing with their
community banks and their credit unions.
My time has expired. I want to thank you all for your time,
and, Ms. Franks, thank you in particular for increasing the
number of Arkansans we have in Washington today.
Chairman Shelby. Senator Corker.
Senator Corker. Well, thank you, Mr. Chairman. I apologize
for being in a closed session for the last 2\1/2\ hours
regarding Iran, and I know that the key questions that I had
hoped to ask have been asked by others. I just came to say to
you I appreciate you having this hearing and for these
distinguished witnesses being here.
I think it is really evident that while Dodd-Frank was put
in place to attempt to deal with financial stability and some
of the risks that especially the larger institutions in America
posed and to try to cause them to not be such a threat, if you
will, to our Nation's economy, there is no question that what
has happened in the process is that our community banks have
been tremendously affected. We are losing community banks left
and right. The asset base that they have to deal with relative
to compliance is causing them to be noncompetitive. And I look
forward to working with you to alleviate some of the
restrictions that have been put in place, unintentionally I
think, on them that are causing them to not be able to serve
the purpose that they serve in the communities that we know
thrive from having active community bankers doing what they are
doing.
So I thank you. I look forward to working with you. I do
have some detailed questions that I will send through QFRs, and
I look forward to additional hearings covering this same topic.
Chairman Shelby. Thank you. Thank you, Senator Corker.
I want to follow up on Senator Moran, and others here
alluded to this today, but Senator Moran was specific. A small
bank, you know, we have millions--as all of you know, millions
and millions of people living in small communities in this
country. And he was talking about a small bank's inability to
make a ``plain vanilla'' blue-chip loan on a piece of real
estate because of regulations. Do you all understand that?
Nobody wants a failing institution or, you know, a troubled
institution. But should not banks have clarity on what they can
do to make it work? Because, you know, we have a banking system
because we have a free market economy. We want to keep it that
way. We want to have access to capital. We want those debts
paid back. We understand all that. But isn't there some way for
regulators to solve some of those problems, at least try to? Is
it a question of capital? Is it a question of management? Or is
it a problem of overregulation? I do not know.
Ms. Eberley. We have shared the concerns that we have heard
from community bankers, especially those that are in what they
think are rural communities but maybe did not meet the
definition of rural under the CFPB's rules. I think the CFPB
has tried to be responsive to that. They have put out a Notice
of Proposed Rulemaking expanding the definition of rural and
small bank. The expanded rural definition picks up about 1,700
more institutions, bringing the total to a little over 4,000, I
believe. And the small bank exemption expansion will pick up
about 700 additional institutions.
We do think that with those proposals it will make it
easier for banks in rural communities to comply with the
ability-to-repay rules and make mortgages.
Chairman Shelby. The Federal Reserve, do you have----
Ms. Hunter. Yes, I would add to that I think some of the
issues we are hearing around the appraisal threshold and some
of the appraisal issues, that may also be helpful for the kind
of situation that you are describing. So we will continue to
work on that as we move through the EGRPRA process.
Mr. Bland. Chairman Shelby, I was going to say the areas
you listed, I would say all of the above, and for different
reasons. I think the new and the amount of regulations have had
impact on institutions, and so to the extent there is relief,
we need to give them that relief. And one of the things we are
doing at the OCC is doing that assessment of laws and rules
that are not necessary or should be modified.
For example, when the OTS was combined in the OCC, we are
undertaking and still undertaking a review of all the
regulations to make sure they are fair and balanced and
consistent.
The other part about management, though, that you mentioned
is very critical. With the complexity of the industry, you
know, making sure you have the right skill sets, not only at
the board level but at the management level, is key. But if
they cannot acquire that, particularly rural banks, that is why
our collaboration paper was emphasizing sharing of resources,
which is for some institutions hard to do when they have been
solely focused on going their own way. But it is important to
look for opportunities to manage those costs, offload those
costs, but also get the expertise you need so rural, urban--we
are really stressing that as a good opportunity for
institutions.
Chairman Shelby. The credit unions?
Mr. Fazio. In addition to what my colleagues have
mentioned, I would say that one of the challenges, we have been
in, again, a tremendous period of change, and one of the
additional challenges is the uncertainty there, the market
uncertainty. How will, for example, QM and non-QM loans price?
How liquid will they be? What is the legal uncertainty? Do we
have any court precedents yet, for example, on how that will be
interpreted? So I think that lack of certainty creates
challenges for our financial institutions in terms of the
lending process, and we understand that. What we can do about
it as regulators and what we try to do at NCUA is to provide,
when it is within our authority to do so, clarity about how we
will view it in the exam process and the supervision process.
And we have published a lot of guidance on that to try to help
credit unions understand the rules, the new rules, and how we
will examine for them.
We also do a lot of training and outreach within
institutions, especially the smaller ones who are serving in
these rural communities, to help them understand those areas
and to get training and to share best practices.
Chairman Shelby. Ms. Franks, do you want to comment on
behalf of the small banks?
Ms. Franks. I do, Senator. While we do recognize that the
CFPB has made some improvements in these areas, we would like
to see, as far as the State supervisors are concerned, that
qualified mortgage--any mortgage loan that is held in portfolio
would qualify under the QM rules, because when you have made a
loan that you are holding in portfolio, you have already done
the ability-to-repay analysis. So we would really like that to
be something that is initiated. We feel like that would be an
improvement in those areas.
Chairman Shelby. Thank you.
On behalf of the Committee, I want to thank all of the
witnesses today. We will be following up with each of your
agencies as we begin consideration of regulatory relief here,
and we want your input.
The record will remain open for the next 7 days for
additional questions, statements, and other materials that any
Member may wish to submit.
So thank you very much for your appearance today. The
Committee is adjourned.
[Whereupon, at 12:07 p.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
Mr. Chairman, I not only want to thank you for holding this hearing
but I also want to take the opportunity to thank the panel of
regulators for agreeing to appear before the Committee. The topic of
regulatory relief for our community financial institutions is not new
to the Members of this Committee. Our offices are frequented by small
banks and credit unions who are struggling under a regulatory regime
that hasn't been ``right-sized'' for them.
Opening an account or obtaining a loan at your local community bank
is often the first exposure people have to the financial system. That
experience used to be marked by exceptional service, personalized
products, and an ongoing relationship that proved beneficial to both
the customer and the banker. It really was like going to see George at
Bailey Building and Loan for your first mortgage or a loan for your
local business.
But over the years, as Washington attempted to deal with problems
that were much bigger and which emanated from different parts of the
financial system, our community financial institutions found themselves
trying to navigate longer and longer regulations and a seemingly
endless amount of red tape. While their larger brethren, for whom the
regulations were targeted, at least had the advantage of scale
economies to shoulder the cost, small banks not only had to comply with
requirements that didn't suit them, but they also had little ability to
pay for additional compliance.
While I am very frustrated with the current regulatory framework
for our community financial institutions, I am encouraged by our
regulators' willingness to appear today and address some of these
issues head-on. I also want to commend Comptroller Tom Curry, and the
staff at the Office of the Comptroller of the Currency, for attempting
to be proactive in giving the right regulatory touch to our community
banks. On December 5, 2014, Comptroller Curry sent me a letter and
attached three legislative proposals that he recommend Congress act on
to provide some relief to the institutions regulated by the OCC. Mr.
Chairman, I'd like to submit that letter and those proposals for the
record.
In short the OCC has proposed exempting banks with less than $10
billion in assets from the Volcker Rule, allowing banks with less than
$750 million in assets be examined every 18 months as opposed to
annually, and providing thrifts some additional flexibility in their
charter in order to remain competitive in the marketplace. I look
forward to exploring these proposals with the witnesses later in the
hearing.
Our regulators have a tough job to do in promoting a safe and sound
financial system. As Congress looks to better align the regulatory
touch community financial institutions receive with the risks they pose
to the greater financial system, I ask our regulators to be
constructive partners in helping us identify those regulations that
need to be revised and for them to implement the statutory changes
Congress makes in a manner that is consistent with our intent.
I look forward to the panel's testimony and a robust discussion.
______
PREPARED STATEMENT OF DOREEN R. EBERLEY
Director of the Division of Risk Management Supervision, Federal
Deposit Insurance Corporation
February 10, 2015
Chairman Shelby, Ranking Member Brown, and Members of the
Committee, I appreciate the opportunity to testify on behalf of the
Federal Deposit Insurance Corporation (FDIC) on regulatory relief for
community banks. As the primary Federal regulator for the majority of
community banks, the FDIC has a particular interest in understanding
the challenges and opportunities they face.
My testimony will highlight the profile and key performance
information for community banks. I then will discuss the current
interagency review to identify outdated, unnecessary, or unduly
burdensome regulations. Next, I will describe how the FDIC strives on
an ongoing basis to implement regulations and our supervision program
in a way that reflects differences in risk profile among the industry
participants, while achieving our supervisory goals of a safe-and-sound
banking system. Finally, I will touch on our continued work under our
Community Bank Initiative to respond to requests we have received from
community banks for technical assistance.
Community Bank Profile
Community banks provide traditional, relationship-based banking
services to their communities, including many small towns and rural
areas that would otherwise not have access to any physical banking
services. Community banks (as defined in FDIC research \1\) make up 93
percent of all banks in the U.S.--a higher percentage than at any time
going back to at least 1984. While they hold just 14 percent of all
banking assets, community banks account for about 45 percent of all of
the small loans to businesses and farms made by insured institutions.
Although 448 community banks failed during the recent financial crisis,
the vast majority did not. Institutions that stuck to their core
expertise weathered the crisis and are now performing well. The highest
rates of failure were observed among noncommunity banks and among
community banks that departed from the traditional model and tried to
grow rapidly with risky assets often funded by volatile noncore and
often nonlocal brokered deposits.
---------------------------------------------------------------------------
\1\ Our research is based on a definition of community banks that
goes beyond asset size alone to account for each institution's lending
and deposit gathering activities, as well as the limited geographic
scope of operations that is characteristic of community banks.
---------------------------------------------------------------------------
The latest available community bank data, \2\ as of September 30,
2014, showed continued improvement in the overall financial condition
of community banks and the industry as a whole. Further, the
profitability gap between community banks and larger, noncommunity
banks has narrowed in recent quarters. In the third quarter of 2014,
community bank return on assets (ROA) rose to 0.97 percent--the highest
in more than 7 years, and just 6 basis points less than the ROA of
noncommunity banks.
---------------------------------------------------------------------------
\2\ Community bank is defined as FDIC-insured commercial banks and
savings institutions meeting the criteria for community banks that were
developed for the FDIC's Community Banking Study, published in
December, 2012: http://fdic.gov/regulations/resources/cbi/report/cbi-
full.pdf.
---------------------------------------------------------------------------
Community banks earned $4.9 billion during the quarter, an increase
of 11 percent from a year ago. Higher net interest income, increased
noninterest income, and lower provision expenses were the primary
drivers of stronger earnings at community banks. A steepening of the
Treasury yield curve in the year ending in September helped to lift the
average community bank net interest margin (NIM) by 2 basis points from
a year ago, even as the industry NIM was falling by 12 basis points.
Close to 33 percent of the industry's annual growth in net interest
income (up $3.2 billion) came from community banks. Meanwhile,
community bank loan balances rose by 8 percent over the past year
compared to 4.6 percent for the industry. Community banks reported
growth in all major loan categories, including residential mortgages
and loans to small businesses, and asset quality showed continued
improvement with noncurrent loans down 20.3 percent from the third
quarter of 2013.
EGRPRA Review and Progress to Date
The FDIC and other regulators are actively seeking input from the
industry and the public on ways to reduce regulatory burden. The
Economic Growth and Regulatory Paperwork Reduction Act of 1996 \3\
(EGRPRA) requires the Federal Financial Institutions Examination
Council (FFIEC) \4\ , the FDIC, the Federal Reserve Board (FRB), and
the Office of the Comptroller of the Currency (OCC) to review their
regulations at least once every 10 years to identify any regulations
that are outdated, unnecessary, or unduly burdensome. EGRPRA also
requires the agencies to eliminate unnecessary regulations to the
extent such action is appropriate. The second decennial EGRPRA review
is in process with a required report due to Congress in 2016. The FDIC
has developed a comprehensive plan for conducting its EGRPRA review
that includes coordination with the other Federal banking agencies. \5\
---------------------------------------------------------------------------
\3\ Public Law 104-208 (1996), codified at 12 U.S.C. 3311.
\4\ The FFIEC is comprised of the Board of Governors of the
Federal Reserve System (FRB), the Office of the Comptroller of the
Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the
National Credit Union Administration (NCUA), the Consumer Financial
Protection Bureau (CFPB) and the State Liaison Committee (SLC), which
is comprised of representatives from the Conference of State Bank
Supervisors (CSBS), the American Council of State Savings Supervisors
(ACSSS), and the National Association of State Credit Union Supervisors
(NASCUS).
\5\ http://www.fdic.gov/EGRPRA/
---------------------------------------------------------------------------
As the primary Federal regulator for the majority of community
banks, the FDIC is keenly aware of the impact that its regulatory
requirements can have on smaller institutions, which operate with fewer
staff and other resources than their larger counterparts. Therefore,
the FDICs pays particular attention to the impact its regulations may
have on smaller and rural institutions that serve areas that otherwise
would not have access to banking services, and the input community
bankers provide regarding those impacts.
On June 4, 2014, the Federal banking agencies jointly published in
the Federal Register the first of a series of requests for public
comment on regulations. The first request for comment covered
applications and reporting, powers and activities, and international
operations. The comment period for this request closed on September 2,
2014, and 40 comments were received and are being reviewed. The
Agencies also are in the process of adopting for comment a second
Federal Register notice, which was approved by the FDIC Board 3 weeks
ago, addressing the banking operations, capital, and Community
Reinvestment Act categories of regulations.
To date, the agencies also have held two regional outreach meetings
in Los Angeles and in Dallas to get direct input as part of the EGRPRA
review process. Presenters included bankers, community groups, and
consumer groups, and the events have been attended by agency principals
and senior agency staff. Additional meetings are currently scheduled
for Boston on May 4, 2015; Chicago on October 19, 2015; and Washington,
DC, on December 2, 2015. The agencies also plan to hold an outreach
meeting focused on rural banks.
In response to what we heard in the first round of comments, the
FDIC already has acted on regulatory relief suggestions where we could
achieve rapid change. In November, we issued two Financial Institution
Letters (FILs), our primary communication tool for policy and guidance
to bankers.
The first FIL released questions and answers (Q&As) about the
deposit insurance application process to aid applicants in developing
proposals for Federal deposit insurance and to enhance the transparency
of the application process. Some EGRPRA commenters--and others--
indicated that there was some confusion about the FDIC's existing
policies and suggested that a clarification of existing policies would
be helpful. The Q&As address four distinct topics: the purpose and
benefits of prefiling meetings, processing timelines, initial
capitalization requirements, and business plan requirements.
The second FIL addressed new procedures that eliminate or reduce
the need to file applications by institutions wishing to conduct
permissible activities through certain bank subsidiaries organized as
limited liability companies, or LLCs, subject to some limited
documentation standards. The prior procedures dated back to the time
when the LLC structure was first permitted for bank subsidiaries. In
the past 10 years, the FDIC processed over 2,200 applications relating
to bank activities; the vast majority of these applications involved
subsidiaries organized as LLCs. Commenters remarked, and we agreed,
that an LLC is no longer a novel structure and does not create
particular safety-and-soundness concerns. We are confident that the new
procedures will result in a more streamlined process for the
institutions we supervise--especially our community institutions--
without compromising the FDIC's safety and soundness standards.
Several themes are emerging through the EGRPRA process that could
affect community bankers, such as looking at whether laws and
regulations based on long-standing thresholds should be changed--for
example, dollar thresholds requiring an appraisal or a currency
transaction report. Along these same lines, commenters have expressed
an interest in decreasing the frequency of examinations set forth in
statute, increasing the size of the institutions eligible for longer
examination intervals, or both. Commenters also have asked that we
ensure that supervisory expectations intended for large banks are not
applied to community banks and that we have open and regular lines of
communication with community bankers. We look forward to continuing to
receive comments during the EGRPRA process and through the outreach
sessions and we intend to carefully consider comments received. It is
our intention to continue looking for ways to reduce or eliminate
outdated or unnecessary requirements as we move forward with this
review, rather than wait until the end of the EGRPRA process.
Tailored Supervisory Approach for Community Banks
The FDIC's supervision program promotes the safety-and-soundness of
FDIC-supervised institutions, protects consumers' rights, and promotes
community investment initiatives by FDIC-supervised institutions. The
FDIC has long tailored its supervisory approach to the size,
complexity, and risk profile of each institution. This approach is
embedded throughout our supervisory program, which includes issuing
rulemakings and guidance, and maintaining a highly trained and
professional examiner cadre to conduct periodic, on-site examinations
and ongoing monitoring.
Rulemakings and Guidance
The FDIC considers the size, complexity, and risk profile of
institutions during the rulemaking and supervisory guidance development
processes and on an ongoing basis through feedback we receive from
community bankers and other stakeholders. Where possible, we scale our
regulations and policies according to these factors. The FDIC's policy
statement on the development and review of regulations includes a goal
of minimizing regulatory burdens on the public and the banking
industry. Additionally, all of our FILs have a prominent community bank
applicability statement so community bankers can immediately determine
whether the FIL is relevant to them.
A number of recent FDIC rulemakings implemented provisions of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank
Act) that were designed to benefit community institutions. For example,
the assessment base for deposit insurance was changed from domestic
deposits to average total assets minus average tangible equity, which
shifted more of the deposit insurance assessment burden from smaller to
larger institutions. As a result, aggregate premiums paid by
institutions with less than $10 billion in assets declined by
approximately one-third in the second quarter of 2011, primarily due to
the assessment base change. Under the Dodd-Frank Act, the deposit
insurance coverage limit was permanently increased to $250,000, which
particularly benefits small businesses and other depositors of
community institutions. The Dodd-Frank Act also increased the minimum
reserve ratio for the Deposit Insurance Fund (DIF) from 1.15 percent to
1.35 percent, with the increase in the minimum target to be funded
entirely by larger banks.
In addition to issuing rules to implement the Dodd-Frank Act
provisions that benefit community banks, the FDIC also has taken into
account the unique characteristics of community banks in its rulemaking
to implement other important reforms to the financial system. For
example, in adopting the implementing regulations for the Volcker Rule,
the agencies recognized that, while the requirements of the
implementing statute apply to all banking entities regardless of size,
the activities covered are generally conducted by larger, more complex
banks. Accordingly, the agencies designed the Volcker Rule to reduce
the burden placed on banks that do not engage in proprietary trading
activities or have only limited exposure to fund investments.
Under the Volcker Rule, a bank is exempt from all of the compliance
program requirements, and all of the associated costs, if it limits its
covered activities to those that are excluded from the definition of
proprietary trading. This exemption applies to the vast majority of
community banks. For community banks that are less than $10 billion in
assets but do engage in activities covered by the Volcker Rule,
compliance program requirements can be met by simply including
references to the relevant portions of the rule within the banks'
existing policies and procedures. This should significantly reduce the
compliance burden on smaller banks that may engage in a limited amount
of covered activities.
The FDIC and other bank regulators also considered the burden on
community banks in adopting regulatory capital rules. The FDIC
recognizes that a number of the more complex requirements of our
capital rules are not necessary or suitable for community banks. As
such, many aspects of the revised capital rules do not apply to
community banks. For example, the new capital rules introduce a number
of provisions aimed only at the large, internationally active banks.
These provisions include the supplementary leverage ratio, the
countercyclical capital buffer, and capital requirements for credit
valuation adjustments and operational risk, to name a few. In addition,
the revised capital rules contain large sections that do not apply to
community banks. Most notably, the advanced approaches framework only
applies to internationally active banks and the market risk rule only
applies to banks with material trading operations.
Several areas of the proposed rule attracted significant comment
and concerns from community bankers, namely, proposed changes to risk
weightings for 1-to-4 family mortgages; the treatment of accumulated
other comprehensive income (AOCI), trust preferred securities (TruPS)
and mortgage servicing assets; and the applicability of the
conservation buffer to banking organizations organized under Subchapter
S of the Internal Revenue Service Tax Code. After considering those
comments and taking into account other safety and soundness factors,
the banking agencies did not adopt certain of the proposed changes that
caused concerns for community banks in the final rule, namely mortgage
risk weightings and the treatment of AOCI and TruPS.
Notwithstanding our belief that the applicability of the
conservation buffer to all financial institutions was important to
achieving the safety-and-soundness goal of higher capital, last July we
issued a FIL to FDIC-supervised institutions describing how we would
treat certain requests from S corporation institutions under the new
capital rules. Many community banks are S corporation banks, and we
issued this guidance because of feedback we heard from concerned S
corporation banks and their shareholders. The FIL describes how the
FDIC will consider requests from FDIC-supervised S corporation banks to
pay dividends to their shareholders to cover taxes on their pass-
through share of bank earnings when those dividends are otherwise not
permitted under the new capital rules. We informed FDIC-supervised
banks that we would generally approve those requests for well-rated
banks, barring any significant safety and soundness issues.
To assist bankers in complying with the revised capital rules, the
FDIC conducted outreach and technical assistance designed specifically
for community banks. In addition to the publication of a community bank
guide and an informational video on the revised capital rules, FDIC
staff conducted face-to-face informational sessions with bankers in
each of the FDIC's six supervisory regions to discuss the revised
capital rules most applicable to community banks.
Examination Program
The foundation of the FDIC's examination program is a highly
trained and professional examiner cadre. Every FDIC examiner is
initially trained as a community bank examiner through a rigorous 4-
year program that teaches examination concepts, policies, and
procedures. As a result, on the way to becoming commissioned examiners,
they gain a thorough understanding of community banks. The vast
majority of our field examiners in our 83 field offices nationwide are
community bank examiners. These examiners live and work in the same
communities served by the community banks they examine, ensuring that
they are knowledgeable and experienced in local issues of importance to
community bankers and can serve as a first line resource to bankers
regarding supervisory expectations.
Our examiners conduct bank examinations using a risk-focused
examination program, which tailors the supervisory approach to the
size, complexity, and risk profile of each institution. Risk-focused
examinations are based on core principles of safety and soundness,
including risk identification and mitigation. Institutions with lower
risk profiles, such as most community banks, are subject to less
supervisory attention than those with elevated risk profiles. For
example, well-managed banks engaged in traditional, noncomplex
activities receive periodic, point-in-time safety and soundness and
consumer protection examinations that are carried out over a few weeks,
while the very largest FDIC-supervised institutions are subject to
continuous safety-and-soundness supervision and ongoing examination
carried out through targeted reviews during the course of an
examination cycle.
Our examination cycle is also tailored to the size and risk posed
by a bank. The Federal Deposit Insurance Act requires regular safety-
and-soundness examinations of State nonmember banks at least once
during each 12-month period. However, examination intervals can be
extended to 18 months for well-run and well-rated institutions with
total assets of less than $500 million. Most FDIC institutions have
total assets less than $500 million. This longer cycle permits the FDIC
to focus its resources on those segments of the industry that present
the most immediate supervisory concern, while concomitantly reducing
the regulatory burden on smaller, well-run institutions that do not
pose an equivalent level of supervisory concern.
FDIC policy guides consumer compliance examination schedules, which
also vary based on the institution's size, prior examination rating and
risk profile. Community Reinvestment Act (CRA) examination schedules
conform to the requirements of the Gramm-Leach-Bliley Act, which
established the CRA examination cycle for most small institutions. The
FDIC also uses different CRA examination procedures based upon the
asset size of institutions. Those meeting the small and intermediate
small asset-size threshold are not subject to the reporting
requirements applicable to large banks and savings associations.
The FDIC utilizes off-site monitoring programs to supplement and
guide the on-site examination process. Off-site monitoring programs can
provide an early indication that an institution's risk profile may be
changing. The FDIC has developed a number of off-site monitoring tools
using key data from banks' quarterly Reports of Condition and Income,
or Call Reports, to identify institutions that are experiencing rapid
loan growth or reporting unusual levels or trends in problem loans,
investment activities, funding strategies, earnings structure or
capital levels that merit further review. Off-site monitoring also
allows the FDIC to expand the examination cycle for certain lower-risk
institutions, as described above.
Community Banking Initiative and Technical Assistance
FDIC Community Banking Study
Since late 2011, the FDIC has been engaged in a data-driven effort
to identify and explore issues and questions about community banks.
Initial findings were presented in a comprehensive FDIC Community
Banking Study, published in December 2012. Our subsequent research has
studied community bank consolidation, long-term developments in branch
banking, the effects of rural depopulation on community banks, and the
efforts of minority-owned and operated depository institutions to serve
their communities. The FDIC's community bank research agenda remains
active, and in 2015, we will be studying the challenges that face
small, closely held banks, such as raising external capital and
ensuring management succession.
New Community Bank Quarterly Banking Profile
Last year, the FDIC introduced a community bank section in the
FDIC's Quarterly Banking Profile. The QBP, as it is commonly known, is
a long-standing tool that the industry, regulators, policymakers,
investors, analysts, consumers, and other stakeholders use as a report
card on the banking industry. We launched the Community Bank QBP to
ensure that community bank performance was not obscured in the overall
industry picture because of their small size. The most recent analysis
of that data was presented earlier in this testimony.
Community Bank Outreach and Technical Assistance
In 2009, the FDIC established its Advisory Committee on Community
Banking to provide advice and guidance on a broad range of policy
issues impacting small community banks and the local communities they
serve. In February 2012, the FDIC sponsored a national conference to
examine the unique role of community banks in our Nation's economy.
Later in 2012, roundtable discussions were conducted in each of the
FDIC's regions that focused on the financial and operational challenges
and opportunities facing community banks, and the regulatory
interaction process. Additional roundtable discussions were held in
each region in 2013 and 2014.
In discussions with community bankers in these venues and through
our routine outreach efforts, it became clear that community banks were
concerned about keeping up with changing regulations and policy issues
and were interested in assistance from us to stay informed. As a
result, in 2013, the FDIC created a regulatory calendar that alerts
stakeholders to critical information as well as comment and compliance
deadlines relating to new or amended Federal banking laws, regulations
and supervisory guidance. The calendar includes notices of proposed,
interim and final rulemakings, and provides information about banker
teleconferences and other important events related to changes in laws,
regulations, and supervisory guidance.
In addition, in 2013, and based on community banker feedback, the
FDIC restructured our preexamination process to better tailor
examination activities to the unique risk profile of the individual
institution. As part of this process, we developed and implemented an
electronic preexamination planning tool to ensure consistency
nationwide and to ensure that only those items that are necessary for
the examination process are requested from each institution to minimize
burden.
We also instituted a number of outreach and technical assistance
efforts, including more than 20 training videos on complex topics of
interest to community bankers. For example, in spring 2013, we issued
six videos designed to provide new bank directors with information to
prepare them for their fiduciary role in overseeing the bank. This was
followed by the release of a virtual version of the FDIC's Directors'
College Program that regional offices deliver throughout the year. We
also have issued a series of videos, primarily targeted to bank
officers and employees, providing more in-depth coverage of important
supervisory topics with a focus on bank management's responsibilities.
\6\ We issued the latest technical assistance video (on the Consumer
Finance Protection Bureau's loan originator compensation rule) just
last month.
---------------------------------------------------------------------------
\6\ Technical Assistance Video Program: https://www.fdic.gov/
regulations/resources/director/video.html.
---------------------------------------------------------------------------
We also hosted banker call-ins on topics such as proposed new
accounting rules, new mortgage rules, and Call Report changes. The FDIC
offers a series of Deposit Insurance Coverage seminars for banking
officers and employees. \7\ These free seminars, which are offered
nationwide, particularly benefit smaller institutions, which have
limited training resources.
---------------------------------------------------------------------------
\7\ Deposit Insurance Coverage: Free Nationwide Seminars for Bank
Officers and Employees (FIL-17-2014), dated April 18, 2014.
---------------------------------------------------------------------------
In June 2014, the FDIC mailed an Information Packet \8\ to the
chief executive officers (CEOs) of FDIC-supervised community banks
containing resources and products developed as part of the FDIC's
Community Banking Initiative, as well as documents describing our
examination processes. In addition to an introductory letter to CEOs,
the packet contained brochures highlighting the content of key
resources and programs and a copy of the FDIC's Cyber Challenge
simulation exercise. Cyber Challenge was designed to encourage
community banks to discuss operational risk issues and the potential
impact of information technology disruptions. The exercise contained
four videos that depict various operational disruptions and materials
to facilitate discussion about how the bank would respond. Lists of
reference materials where banks could obtain additional information
were also included. All of these resources can be found on the
Directors' Resource Center, available through the FDIC's Web site. \9\
---------------------------------------------------------------------------
\8\ See http://www.fdic.gov/regulations/resources/cbi/
infopackage.html.
\9\ See https://www.fdic.gov/regulations/resources/director/.
---------------------------------------------------------------------------
At the local level, we have enhanced communication efforts by
having our community bank examiners contact supervised institutions
between examinations to discuss and clarify supervisory and regulatory
changes and the overall risk profile of the institutions.
Going forward the FDIC intends to continue to be a resource for
community banks regarding developing industry issues. One recent
example involves Call Reports. We have received comments from
institutions and others about the cost and burden of preparing Call
Reports, and we have also heard comments about the benefits of Call
Reports, including their aforementioned use in extending examination
cycles and the transparency they bring to the industry for investors,
bankers, consumers, analysts, and other stakeholders. Working through
the Federal Financial Institutions Examination Council or FFIEC, we
have engaged the industry in a dialogue about ways to improve Call
Reports and the reporting process, and we will pursue several actions
in the near term. For example, we have already conducted banker
training calls regarding certain Call Report changes and plan to
conduct additional calls going forward as needed. Additionally, we plan
to propose certain burden-reducing changes in 2015 and implement a more
robust process for bank agency users to justify retaining or adding
items to the Call Report.
Another example is actions taken by the FDIC to raise awareness of
cyber risks and to work with community banks to encourage practices to
protect against cyberthreats. During 2014, the FDIC issued a list of
free resources from which community banks could obtain cyberthreat
information and assisted financial institutions in identifying and
shutting down ``phishing'' Web sites that attempt to fraudulently
obtain and use an individual's confidential personal or financial
institution, This year, the FDIC will add additional videos to the
Cyber Challenge simulation exercise and work as a member of the FFIEC
to implement actions to enhance the effectiveness of cybersecurity-
related supervisory programs, guidance, and examiner training. The FDIC
will continue to work with community banks to address this and other
emerging threats.
Conclusion
The FDIC will continue to pursue regulatory burden reduction for
community banks, while preserving safety and soundness goals. Strong
risk management practices and a strong capital base are fundamental to
the long-term health of community banks and their ability to serve
their local communities. Most community banks know how to manage the
risks in their loan portfolios and have strong capital positions. And
of course, community banks have a strong interest in retaining
customers by treating them fairly. Serving the credit needs of their
local communities, while managing the attendant credit risks, truly is
the core expertise of many community banks.
Reports by the General Accounting Office and the FDIC's Office of
Inspector General (OIG), \10\ and our own Community Banking Study have
shown that banks--even those with concentrated asset portfolios--with
sound risk management practices and strong capital have been able to
weather crises and remain strong. Institutions that did not survive,
according to these reports, were those with weaker or more aggressive
risk management approaches, including imprudent loan underwriting and
rapid growth often financed by wholesale funds or brokered deposits.
One of our IG reports also found that banks that heeded supervisory
directives regarding risk management practices were more likely to
survive.
---------------------------------------------------------------------------
\10\ Causes and Consequences of Recent Bank Failures (January
2013), GAO-13-71 and Comprehensive Study on the Impact of the Failure
of Insured Depository Institutions (January 2013), EVAL-13-002.
---------------------------------------------------------------------------
We believe the evidence strongly supports the idea that the best
way to preserve the long term health and vibrancy of community banks,
and their ability to serve their local communities, is to ensure their
core strength is preserved: strong capital, strong risk management and
fair and appropriate dealings with their customers. We also believe our
own supervision plays an important role in obtaining corrective action
to address problems where this is needed, and that this also promotes
the long-term health of community banks. This being said, we remain
alert to the importance of achieving the fundamental objectives of
safety-and-soundness and consumer protection in ways that do not
involve needless complexity or expense. Going forward, we continue to
look for ways to improve our supervisory processes and reduce
regulatory burden on the industry. We also stand ready to provide
technical assistance regarding proposals that seek to achieve the
fundamental goals of safety-and-soundness and consumer protection in
ways that are appropriately tailored for community banks.
______
PREPARED STATEMENT OF MARYANN F. HUNTER
Deputy Director of the Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System
February 10, 2015
Introduction
Chairman Shelby, Ranking Member Brown, and other Members of the
Committee, I appreciate the opportunity to testify on the important
topic of community banks and the effects of regulatory burden on these
institutions. Community banks are a critical component of our financial
system and economy. Their deep ties to their local communities give
them firsthand perspectives on the local economic landscape; they focus
on customer relationships and often look beyond traditional credit
factors to consider unique borrower characteristics when making credit
decisions. Having begun my career more than 30 years ago as a community
bank examiner at the Federal Reserve Bank of Kansas City and eventually
becoming the officer in charge of bank supervision at the Reserve Bank,
I have seen first hand how critical it is that we balance effective
regulation and supervision to ensure safety and soundness of community
banks, while also ensuring that undue burden does not constrain the
capacity of these institutions to lend to the communities they serve.
In my testimony, I will discuss measures taken by the Federal Reserve
to ensure that regulations, policies, and supervisory activities do not
place an undue burden on community banks.
The Federal Reserve supervises approximately 850 State-chartered
community banks, the majority of which are small community banks with
total assets of $1 billion or less, and which are members of the
Federal Reserve System (referred to as State member banks). \1\ In
addition, the Federal Reserve supervises more than 4,400 bank holding
companies and more than 300 savings and loan holding companies, most of
which operate small community banks and thrifts.
---------------------------------------------------------------------------
\1\ For supervisory purposes, the Federal Reserve uses the term
``community banking organization'' to describe a State member bank and/
or holding company with $10 billion or less in total consolidated
assets.
---------------------------------------------------------------------------
The overall condition of community banks has improved significantly
in the wake of the financial crisis. The number of banks on the Federal
Deposit Insurance Corporation's ``Problem List'' fell from a peak of
888 at the end of first quarter 2011, to 329 at the end of third
quarter 2014. \2\ Despite that significant decline, the number of
problem banks compares unfavorably with historical numbers of less than
100, on average, in the years prior to the crisis. Moreover, small
community banks continue to experience considerable earnings pressure
based on historically low net interest margins, and many report
concerns about their prospects for continued growth and profitability.
---------------------------------------------------------------------------
\2\ See Federal Deposit Insurance Corporation, Quarterly Banking
Profile, Third Quarter 2014, www2.fdic.gov/qbp/2014sep/qbp.pdf.
---------------------------------------------------------------------------
Soliciting Views From Community Banks on Regulatory Burden
The Federal Reserve uses multiple channels to solicit the views of
community banks on banking and economic topics, including regulatory
burden. For instance, when a proposed rule or policy is issued to the
public for comment, we gather information from banking organizations
that assists us in assessing implementation complexity or cost,
especially for the smallest institutions. The feedback received has
been instrumental in helping us scale rules and policies to
appropriately reflect the risks at these institutions without
subjecting them to unnecessary burden. This was evident in the final
capital guidelines that were issued in July 2013. \3\ The Federal
banking agencies' final rules reflected several changes to respond to
comments and reduce the regulatory burden on community banks. As a
result, many of the requirements that apply to larger banking
organizations do not apply to community banks.
---------------------------------------------------------------------------
\3\ http://federalreserve.gov/newsevents/press/bcreg/20130702a.htm
---------------------------------------------------------------------------
Also, in 2010, the Federal Reserve Board (the Board) formed the
Community Depository Institutions Advisory Council (CDIAC) to provide
input to the Board of Governors on the economy, lending conditions, and
other issues of interest to community depository institutions. \4\
CDIAC members are selected from representatives of banks, thrift
institutions, and credit unions serving on local advisory councils at
the 12 Federal Reserve Banks. One member of each of the Reserve Bank
councils is selected to serve on the national CDIAC, which meets twice
a year with the Board of Governors in Washington, DC, to discuss topics
of interest to community depository institutions.
---------------------------------------------------------------------------
\4\ http://federalreserve.gov/aboutthefed/cdiac.htm
---------------------------------------------------------------------------
Additionally, in accordance with the Economic Growth and Regulatory
Paperwork Reduction Act of 1996 (EGRPRA), the Federal banking agencies
have launched a review to identify banking regulations that are
outdated, unnecessary, or unduly burdensome. \5\ The comment period for
the EGRPRA review for the first set of regulations ended early in
September 2014, and the agencies plan to publish three additional
Federal Register notices seeking comment over the next year and a half.
The Federal Reserve and the other agencies have begun a series of
outreach meetings with bankers, consumer groups, and other interested
parties as part of the EGRPRA review. \6\ The Federal Reserve and the
other agencies conducted two outreach meetings, the second of which
took place in Dallas last week. Additional outreach meetings are
scheduled for the coming months, including one scheduled for this
August focused on issues affecting rural institutions. The comments
from the industry, consumer groups, and others have been very
informative and will help the agencies in assessing regulatory burden.
---------------------------------------------------------------------------
\5\ Board of Governors of the Federal Reserve System, Federal
Deposit Insurance Corporation (FDIC), and Office of the Comptroller of
the Currency (OCC), ``Federal Bank Regulatory Agencies Seek Comment on
Interagency Effort To Reduce Regulatory Burden'', press release, June
4, 2014, www.federalreserve.gov/newsevents/press/bcreg/20140604a.htm.
\6\ See the Federal Financial Institutions Examination Council's
(FFIEC) EGRPRA Web site at http://egrpra.ffiec.gov/ for more
information.
---------------------------------------------------------------------------
A recurring theme from the EGRPRA outreach meetings thus far has
been the question of whether the agencies could reevaluate the various
thresholds and limits imposed in regulations that may constrain
community banks and their lending activities. For example, bankers have
asked the agencies to consider increasing the dollar threshold in the
appraisal regulations for transactions below which an appraisal would
not be required. Community bankers in rural areas have noted that it
can be difficult to find an appraiser with knowledge about the local
market at a reasonable fee, and raising the threshold would allow
bankers to use a less-formal valuation of collateral for more loans.
Some bankers at the EGRPRA meetings have suggested reviewing the
statutorily mandated examination frequency for banks of various sizes
and condition as a way to ease burden from frequent examinations. Other
banks have commented on the requirements of some longstanding
interagency guidance and suggested that some may now be outdated and
warrant a fresh look and revision.
In order to better understand and respond to concerns raised by
these institutions through the various channels, the Board has
established a community and regional bank subcommittee of its Committee
on Bank Supervision. \7\ The governors on this subcommittee help the
Board as a whole to weigh the costs associated with regulation against
the safety-and-soundness benefits of new supervisory policies for
smaller institutions. The subcommittee also meets with Federal Reserve
staff to hear about key supervisory initiatives at community banks and
ongoing research in the community banking area.
---------------------------------------------------------------------------
\7\ http://federalreserve.gov/aboutthefed/bios/board/default.htm
---------------------------------------------------------------------------
Tailoring Regulations and Policies for Community Banks
At the Federal Reserve, we weigh the burden on banks to implement
new regulatory requirements against the need for requirements to
safeguard the safety and soundness of the financial system. We
recognize that the cost of compliance can be disproportionally greater
on smaller banks versus larger institutions, as they have fewer staff
available to help comply with additional regulations. To address this,
we work within the constraints of the relevant statutory mandate to
draft rules so as not to subject community banks to requirements that
would be unnecessary or unduly burdensome to implement.
Many recently established rules have been applied only to the
largest, most complex banking organizations. For example, the Federal
Reserve and the other Federal banking agencies have not applied large-
bank stress testing requirements to community banks. To clarify stress
testing expectations for community banks, the Federal banking agencies
issued a policy statement in May 2012. \8\ While the stress testing
policy statement reiterated the Federal Reserve's view that all banking
organizations, regardless of size, should have the capacity to analyze
the potential impact of adverse outcomes on financial conditions, the
agencies also made clear that community banks were exempt from the more
stringent requirements for the largest banks, such as Dodd-Frank Wall
Street Reform and Consumer Protection Act stress testing and the
Federal Reserve's Comprehensive Capital Analysis and Review. The
Federal Reserve has reminded examiners that while community banks
should anticipate how future events and adverse trends might affect the
institution's financial condition and viability, examiners should not
apply complex large-bank stress testing expectations to community
banks.
---------------------------------------------------------------------------
\8\ Board of Governors of the Federal Reserve System, FDIC, and
OCC, ``Agencies Clarify Supervisory Expectations for Stress Testing by
Community Banks'', press release, May 14, 2012, www.federalreserve.gov/
newsevents/press/bcreg/20120514b.htm.
---------------------------------------------------------------------------
Most recently, the Board issued an interim final rule and proposed
rule to implement Public Law 113-250, which was signed into law by the
President in December 2014. \9\ Effective immediately, the interim rule
adopted by the Board excludes small savings and loan holding companies
with less than $500 million in total consolidated assets that meet
certain qualitative requirements from the Board's regulatory capital
requirements (Regulation Q). This effectively places these savings and
loan holding companies on equal footing with similarly sized bank
holding companies that are subject to the Board's Small Bank Holding
Company Policy Statement (policy statement).
---------------------------------------------------------------------------
\9\ Board of Governors of the Federal Reserve System, ``Federal
Reserve Board Invites Public Comment on Proposed Rule To Expand the
Applicability of Board's Small Bank Holding Company Policy Statement'',
press release, January 29, 2015, www.federalreserve.gov/newsevents/
press/bcreg/20150129b.htm.
---------------------------------------------------------------------------
The Board also issued a notice of proposed rulemaking that would
raise the asset size threshold from $500 million to $1 billion for
determining applicability of the policy statement, and expand its scope
to include savings and loan holding companies. The policy statement
facilitates the transfer of ownership of small community banks by
allowing their holding companies to operate with higher levels of debt
than would otherwise be permitted. Institutions subject to the policy
statement are not subject to the Board's regulatory capital
requirements.
While consolidated capital requirements do not apply to firms
covered by the policy statement, regulatory capital requirements will
continue to apply at the depository institution level.
The Federal Reserve has made a concerted effort to communicate
clearly to both community bankers and examiners about new requirements
that are applicable to which community banks. We provide a statement at
the top of each Supervision and Regulation letter and each Consumer
Affairs letter that clearly indicates which banking entity types are
subject to the guidance. These letters are the primary means by which
the Federal Reserve issues supervisory and consumer compliance guidance
to bankers and examiners, and this additional clarity allows community
bankers to focus efforts only on the supervisory policies that are
applicable to their banks. Also, to assist community banks in
understanding how new complex rules could possibly affect their
business operations, the Federal banking agencies have issued
supplemental guides that focus on which rule requirements are most
applicable to community banks. For example, the Federal banking
agencies issued supplemental guides for the capital requirements issued
in July 2013, as well as the Volcker rule issued in December 2013. \10\
Moreover, it is important to note that we work closely with our
colleagues at the State banking agencies and the other Federal
regulatory agencies to ensure that our supervisory approaches and
methodologies are applied as consistently as possible to all community
banks.
---------------------------------------------------------------------------
\10\ Board of Governors of the Federal Reserve System, FDIC, and
OCC, ``New Capital Rule: Community Bank Guide'', July, 9, 2013,
www.federalreserve.gov/bankinforeg/basel/files/
capital_rule_community_bank_guide_20130709.pdf; and Board of Governors
of the Federal Reserve System, FDIC, and OCC, ``The Volcker Rule:
Community Bank Applicability'', December 10, 2013,
www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210a4.pdf.
---------------------------------------------------------------------------
We also have developed several platforms to improve our
communication with community bankers and to enhance our industry
training efforts. For example, we have developed two programs--``Ask
the Fed'' and ``Outlook Live'' \11\--as well as periodic newsletters
and other communication tools such as FedLinks. \12\ These platforms
highlight information about new requirements and examiner expectations
to address issues that community banks currently face and provide
resources on key supervisory policies.
---------------------------------------------------------------------------
\11\ Consumer Compliance Outlook is available at
www.philadelphiafed.org/bank-resources/publications/consumercompliance-
outlook/, and Outlook Live is available at www.philadelphiafed.org/
bankresources/publications/consumer-compliance-outlook/outlook-live/.
\12\ FedLinks is available at www.cbcfrs.org/fedlinks. Also see
another Federal Reserve publication, Community Banking Connections,
which is available at www.cbcfrs.org/.
---------------------------------------------------------------------------
Changes in Regulatory Reporting Requirements
In an action related to changes in the policy statement, the Board
took immediate steps beyond what was required in the legislation to
relieve regulatory reporting burden for bank holding companies and
savings and loan holding companies that have less than $1 billion in
total consolidated assets and meet the qualitative requirements of the
policy statement. Specifically, the Board eliminated quarterly and more
complex consolidated financial reporting requirements (FR Y-9C) for
these institutions, and instead required parent-only financial
statements (FR Y-9SP) semiannually. The Board also eliminated
regulatory capital reporting for savings and loan holding companies
with less than $500 million in total consolidated assets from the FR Y-
9SP. The Board filed an emergency request with the Office of Management
and Budget and received approval to make these changes effective on
March 31, 2015, while it completes the notice and comment process on
the related rulemakings. The Board took this action and immediately
notified the affected institutions so they would not continue to invest
in system changes to report revised regulatory capital data for only a
short period of time. Also, the Board took this action in response to
feedback from members of the banking community who indicated that
reducing the reporting frequency of financial data could save
institutions time, especially time spent on internal audit and review
processes associated with senior officials' attestations.
A number of community banks have suggested reducing burden from
required quarterly reporting of the Consolidated Reports of Condition
and of Income (the Call Report). Working through the Federal Financial
Institutions Examination Council, the Federal Reserve is considering a
number of ways to be responsive to industry concerns about Call Report
filing requirements and assess the potential impact of collecting less
data from banks. Later this month, the Federal banking agencies will
host a teleconference with bankers to provide additional guidance on
the reporting of revised regulatory capital information on the Call
Report.
Risk-Focused Supervision Examination Process
Consistent with the Federal Reserve's approach to development of
supervisory policy, our longstanding risk-focused approach to
consolidated supervision provides that examination and inspection
procedures should be tailored to each organization's size, complexity,
risk, profile, and condition. There are distinct differences between
the supervision program of a large, complex bank and a small,
noncomplex bank. For one, large banks generally have a dedicated
supervisory team that may be resident at the bank, unlike small banks,
which may only meet with an examination team every 12 to 18 months.
Furthermore, if a bank is engaging in nontraditional or higher-risk
activities, our supervision program typically requires greater scrutiny
and a higher level of review of specific transactions. Conversely, if a
well-managed bank's activities are lower risk, we adjust our
expectations for examiners to a lower level of review. In this way, we
alleviate examination burden on community banks with histories of sound
performance and modest risk profiles.
We are continually working to calibrate examination expectations so
that they are commensurate with the level of risk at banking
organizations. For example, the Federal Reserve has an initiative
currently underway to use forward-looking risk analytics to identify
high-risk community and regional banks, which would allow us to focus
our supervisory response on the areas of highest risk and reduce the
regulatory burden on low-risk community and regional banks.
The Federal Reserve also adopted a new consumer compliance
examination framework for community banks in January 2014. \13\ While
we have traditionally applied a risk-focused approach to consumer
compliance examinations, the new program more explicitly bases
examination intensity on the individual community bank's risk profile,
weighed against the effectiveness of the bank's compliance controls. As
a result, we expect that examiners will spend less time on low-risk
compliance issues at community banks, increasing the efficiency of our
supervision and reducing regulatory burden on many community banks. In
addition, we revised our consumer compliance examination frequency
policy to lengthen the time frame between on-site consumer compliance
and Community Reinvestment Act examinations for many community banks
with less than $1 billion in total consolidated assets.
---------------------------------------------------------------------------
\13\ See the Board's Consumer Affairs Letter CA 13-19 (November
18, 2013), ``Community Bank Risk-Focused Consumer Compliance
Supervision Program'' at www.federalreserve.gov/bankinforeg/caletters/
caltr1319.htm and Consumer Affairs Letter CA 13-20 (November 18, 2013),
``Consumer Compliance and Community Reinvestment Act (CRA) Examination
Frequency Policy'' at www.federalreserve.gov/bankinforeg/caletters/
caltr1320.htm.
---------------------------------------------------------------------------
In addition to our efforts to refine our risk-focused approach to
supervision, we have been investigating ways that would allow for more
supervisory activities to be conducted off-site, which can improve
efficiency and reduce burden on community banks. For example, we can
conduct some aspects of the loan review process off-site for banks that
maintain electronic loan records and have invested in technologies that
would allow us to do so. While off-site loan review has benefits for
both bankers and examiners, some bankers have expressed concerns that
increasing off-site supervisory activities could potentially reduce the
ability of banks to have face-to-face discussions with examiners
regarding asset quality or risk-management issues. In that regard, we
will continue to work with community banks that may prefer their loan
reviews to be conducted on-site. In short, the Federal Reserve is
trying to strike an appropriate balance of off-site and on-site
supervisory activities to ensure that resources are used more
efficiently while maintaining high-quality supervision of community
banking organizations.
The Federal Reserve has invested significant resources in
developing various technological tools for examiners to improve the
efficiency of both off-site and on-site supervisory activities, while
ensuring the quality of supervision is not compromised. For instance,
the Federal Reserve has automated various parts of the community bank
examination process, including a set of tools used among all Reserve
Banks to assist in the preexamination planning and scoping. This
automation can save examiners and bank management time, as a bank can
submit requested preexamination information electronically rather than
mailing paper copies to the Federal Reserve Bank. These tools also
assist examiners in the continuous, off-site monitoring of community
banks, enabling examiners to determine whether a particular community
bank's financial condition has deteriorated and warrants supervisory
attention between on-site examinations.
As we develop supervisory policies and examination practices, we
are mindful of community bankers' concerns that new requirements for
large banks could become viewed as ``best practices'' that trickle down
to community banks in a way that is inappropriate. To address this
concern, the Federal Reserve is enhancing communications with and
training for examinations staff about expectations for community banks
versus large banks to ensure that expectations are calibrated
appropriately. Specifically, we are modernizing our longstanding
examiner commissioning training program for community bank examiners,
and a key part of this effort is reviewing the curriculum to ensure
that supervisory expectations for larger banks do not make their way
into the community bank examination curriculum. In addition, when new
supervisory policies are issued, we typically arrange a teleconference
to explain the new policy to examiners, including whether and to what
extent the policy is applicable to community banks. By effectively
training our examination staff and providing channels to keep them
informed of newly issued policies in a timely manner, examiners are
better equipped to understand the supervisory goals of regulations and
guidance for community banks and to provide appropriate guidance to
community banks.
Additional Opportunities To Reduce Burden
In addition to the steps taken to reduce regulatory burden that
were already discussed, the Federal Reserve recently issued the first
semiannual public report on applications activity. \14\ The report aims
to increase transparency about applications filings, while providing
useful information to bankers to help them gain efficiency. In
addition, Federal Reserve System staff are working to identify
opportunities to change examination practices and rules to increase
efficiency of the examination process and thereby reduce the time
community bankers spend to prepare and work with examiners. We are in
the process of conducting a review of community bank examination
scoping procedures to make sure they are aligned with current banking
practices and risks, and reflect key lessons from the crisis. Overall,
these adjustments should enhance our supervisory efficiency by
targeting more intensive examination work at bank activities that
proved to be higher risk and reducing some examination testing at
community banks that performed well throughout the crisis.
---------------------------------------------------------------------------
\14\ The report can be found at www.federalreserve.gov/
bankinforeg/semiannual-report-on-banking-applications-20141124.pdf.
---------------------------------------------------------------------------
Although none of the actions that we are currently taking require
legislative changes, some of the relief that bankers have asked for and
suggestions developed through the EGRPRA process may require
legislative action. We will work with the other Federal banking
agencies as appropriate to consider and assess the impact of potential
changes identified through the EGRPRA review process.
Conclusion
We understand that one size does not fit all in supervision and
regulation and that supervisory expectations for the largest, most
complex firms are often inappropriate for community banks. We are
committed to making sure that regulations, policies, and activities are
appropriately tailored to the level of risk inherent in these
institutions and that we respond to ideas for reducing burden that come
through the EGRPRA process. The Federal Reserve is committed to taking
a balanced approach that fosters safe and sound community banks and
fair treatment of consumers, and encourages the flow of credit to
consumers and businesses.
Thank you for inviting me to share the Federal Reserve's views on
the effect of regulatory burden on community banks. I would be pleased
to answer any questions you may have.
______
PREPARED STATEMENT OF TONEY BLAND
Senior Deputy Comptroller for Midsize and Community Bank Supervision,
Office of the Comptroller of the Currency
February 10, 2015
Introduction
Chairman Shelby, Ranking Member Brown, and Members of the
Committee, thank you for the opportunity to appear before you today.
Consistent with the Committee's invitation letter, my testimony focuses
on the challenges facing small national banks and Federal savings
associations (hereafter referred to as community banks) and the work of
the Office of the Comptroller of the Currency (OCC) to help these
institutions remain a vibrant part of our Nation's financial system. I
also discuss specific steps we are taking to address regulatory burden
on community banks, OCC recommendations for congressional action in
furtherance of this goal, and our progress on the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (EGRPRA) regulatory review.
---------------------------------------------------------------------------
Statement Required by 12 U.S.C. 250: The views expressed herein
are those of the Office of the Comptroller of the Currency and do not
necessarily represent the views of the President.
---------------------------------------------------------------------------
Before describing these initiatives, I would like to share the
OCC's perspective on community banks. The OCC supervises approximately
1,400 institutions with assets under $1 billion. These community banks
provide many of the essential financial services and much of the credit
necessary for our Nation's economic growth. Throughout the country,
these banks help small businesses thrive by offering personalized
service and credit products tailored to their customers' needs. In
addition, these banks and their employees strengthen our cities and
towns by helping to meet municipal finance needs and actively
participating in civic life.
Overseeing the safety and soundness of community banks is central
to the mission of the OCC. Approximately two-thirds of our examination
staff is dedicated to the supervision of these institutions. In my role
as Senior Deputy Comptroller for Midsize and Community Banks, I
regularly meet with community bankers to hear first-hand about their
successes, their challenges, and their frustrations. I have seen how
well-managed community banks weathered the financial crisis and
provided a steady source of credit to their communities. But I've also
heard their concerns about the long-term viability of their business
models. And I've heard their frustration with the time and resources
they spend trying to track and comply with regulatory requirements--
time and resources they contend could be better spent responding to the
needs of their customers and communities.
We take these concerns seriously. My testimony describes steps that
we are taking to help community bankers meet these challenges, navigate
the changing regulatory landscape, and ensure that the OCC's
supervisory policies and regulations are appropriately tailored to
community banks. I also provide the OCC's perspective on legislative
proposals and regulatory opportunities for reducing regulatory burden
on these important institutions.
The OCC's Approach to Community Bank Supervision
The OCC is committed to fostering a regulatory climate that allows
well-managed community banks to grow and thrive. We have built our
supervision of community banks around local field offices where the
local Assistant Deputy Comptroller (ADC) has responsibility for the
supervision of a portfolio of community banks. Each ADC reports to a
District Deputy Comptroller who, in turn, reports to me. We have based
our community bank examiners in over 60 locations throughout the United
States, close to the banks they supervise.
Through this supervisory structure, community banks receive the
benefits of highly trained bank examiners with local knowledge and
experience, supplemented by the resources and specialized expertise
that a nationwide organization can provide. Our bank supervision
policies and procedures establish a common framework and set of
expectations. Each bank's portfolio manager tailors the supervision of
each community bank to its individual risk profile, business model, and
management strategies. We give our ADCs considerable decision-making
authority, reflecting their experience, expertise, and first-hand
knowledge of the institutions they supervise.
We also seek to ensure that we apply our supervisory policies,
procedures, and expectations in a consistent and balanced manner. For
example, a key element of the OCC's supervisory philosophy is open and
frequent communication with the banks we supervise. In this regard, my
management team and I encourage any banker who has concerns about a
particular examination finding to raise these concerns with his or her
examination team and with the district management team that oversees
the bank. Our ADCs and Deputy Comptrollers expect and encourage such
inquiries.
If a banker does not want to pursue these avenues of communication,
our Ombudsman provides a venue for bankers to discuss their concerns,
either informally or formally by requesting an appeal of examination
findings. The OCC's Ombudsman is fully independent of the supervisory
process, and he reports directly to the Comptroller. In addition to
hearing formal appeals, his office provides bankers with an impartial
ear to hear complaints and a mechanism to facilitate the resolution of
disputes with our examination staff.
Tailored Supervision
The OCC understands that a one-size-fits-all approach to
supervision is not always appropriate, especially for community banks.
We recognize that community banks have different business models and
more limited resources than larger banks. Therefore, where we have the
flexibility under the law, we seek to tailor our supervision to a
bank's size and complexity, and we factor these differences into the
rules we write and the guidance we issue.
The OCC seeks to minimize burden on community banks through various
means. Examples of ways in which we tailor our regulations to
accommodate community banks, while remaining faithful to statutory
requirements and legislative intent, include explaining and organizing
our rulemakings so these institutions can better understand their scope
and application, providing alternative ways to satisfy regulatory
requirements, and using regulatory exemptions or transition periods.
For example, the OCC, Federal Deposit Insurance Corporation (FDIC),
and Board of Governors of the Federal Reserve System (Board) jointly
drafted the final risk-based regulatory capital rule to reflect the
nature and complexity of the different institutions we regulate.
Although some provisions in the rule apply broadly, many requirements,
including the supplementary leverage ratio and the countercyclical
capital buffer, apply only to the largest banking organizations that
engage in complex or risky activities. We also adjusted the final rule
to address significant concerns raised by community bankers by
retaining the current capital treatment for residential mortgage
exposures and allowing community banks to elect to treat certain
accumulated other comprehensive income (AOCI) components in a manner
consistent with the general risk-based capital rules. This treatment of
AOCI helps community banks avoid introducing substantial volatility
into their regulatory capital calculations. And we continue to explore
additional ways to tailor the capital rules to respond to community
bank concerns and proposals, consistent with our objective of ensuring
appropriate levels and quality of capital.
The OCC also responded to community bank concerns when we finalized
our revised lending limits rule, issued in accordance with section 610
of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), to include counterparty credit exposure arising from
derivatives and securities financing transactions. Specifically, the
rule exempts from the lending limit calculations certain securities
financing transactions most commonly used by community banks. It also
permits small institutions to adopt compliance alternatives
commensurate with their size and risk profile by providing flexible
options for measuring covered counterparty credit exposures, including
an easy-to-use lookup table.
Our final rule implementing the Volcker Rule provisions of the
Dodd-Frank Act is another example of how we seek to adapt statutory
requirements to activities at different sized institutions, where
possible. The statute applies to all banking entities, regardless of
size; however, not all banking entities engage in activities covered by
the prohibitions in the statute. One of the OCC's priorities in the
interagency Volcker rulemaking was to make sure that the final
regulations imposed compliance obligations on banking entities in
proportion to their involvement in covered activities and investments.
The rule, however, does not exempt community banks from the burden of
needing to assess and determine whether their activities may be covered
by the rule. As noted later in my testimony, we have submitted a
legislative proposal that would exempt small banks from this rule.
The OCC is constantly seeking to improve how we communicate
information to community banks and to provide them with tools and
resources to assist them in identifying and managing their risks. We
have designed the bulletins announcing the issuance of each new
regulation or supervisory guidance so that these banks can quickly
assess whether the issuance applies to them, and we include a
``highlights'' section that identifies the key components of the rule
or guidance. We also provide plain language descriptions of complex
requirements to assist community bankers in understanding newly issued
rules. For example, we provided community banks with a quick reference
guide to the mortgage rules issued by the Consumer Financial Protection
Bureau last year. We also produced a streamlined, 2-page summary of the
final domestic capital rule, highlighting aspects of the rule and key
transition dates applicable to community banks. We supplemented this
summary with an online regulatory capital estimator tool for banks,
which we developed with the other Federal banking agencies. The
agencies plan to augment the estimator tool with a supplemental tool
that banks may use to help calculate regulatory capital requirements
for securitization exposures.
In addition, the OCC is interested in providing community banks
with tools to assist them in determining whether they are adequately
prepared to address cyberthreats. This has been a particular focus of
the Federal Financial Institutions Examination Council (FFIEC), which
the Comptroller currently chairs. During the summer of 2014, members of
the FFIEC, including the OCC, piloted a cybersecurity assessment at
more than 500 community institutions to evaluate their preparedness to
mitigate cybersecurity risks. The assessment supplemented regularly
scheduled exams and built upon key supervisory expectations contained
within existing FFIEC information technology handbooks and other
regulatory guidance. The agencies subsequently published FFIEC
Cybersecurity Assessment General Observations, \1\ which includes
questions for bank management to consider when assessing their
institutions' cybersecurity preparedness. We understand that community
banks have found this information helpful in assessing their own
strengths and weaknesses in this important area. In addition, the FFIEC
is in the process of updating and expanding its cybersecurity guidance
and expects to make an announcement on this soon.
---------------------------------------------------------------------------
\1\ http://www.ffiec.gov/press/PDF/
FFIEC_Cybersecurity_Assessment_Observations.pdf
---------------------------------------------------------------------------
Through our secure BankNet Web site, the OCC provides other tools
targeted to community banks. These include a portfolio-level stress
test tool designed to provide bankers with a simple method to perform
portfolio stress testing on income producing commercial real estate
loans. OCC examiners developed this optional tool in response to
requests from community bankers seeking additional guidance on how to
stress test their loan portfolios. Another popular tool allows bankers
to develop customized peer reports that they can use to compare their
bank's balance sheet and financial performance ratios to those of other
banks.
The OCC's Semiannual Risk Perspective reports provide bankers with
an analysis of current market and risk trends that may affect their
institutions. Because we recognize that community banks may face
different challenges than larger banks, the report discusses risks from
both a large and small bank perspective. We supplement this semiannual
report with periodic webinars, generally targeted to community banks,
on emerging risk topics. For example, last year, the FFIEC conducted a
webinar for community banks on ``Executive Leadership of
Cybersecurity''. More than 5,000 Chief Executive Officers of community
institutions registered for this event. The goal of this and similar
webinars is to provide community bankers with practical information to
help them mitigate emerging risks and to understand and comply with
supervisory expectations.
Other Burden Reduction Opportunities
When considering proposals to reduce burden on community banks, the
OCC seeks to ensure that the proposals do not compromise fundamental
safety and soundness or consumer protection safeguards. Within this
framework, the OCC is committed to exploring additional ways to reduce
unnecessary regulatory burden on community banks. To this end, we are
undertaking several regulatory review projects designed to reduce
burden, particularly on community banks, and are considering other
innovative approaches to address this issue. Late last year, we drafted
and submitted three legislative proposals that, if enacted, would
provide a statutory basis to revise our regulations and reduce burden
on covered institutions. These proposals, which I describe below, are
the product of both our on-going dialogue with smaller institutions and
our supervisory expertise with both large and small banks and savings
associations. We recently resubmitted these proposals to this committee
for consideration. In addition, the OCC would be pleased to share our
experience and expertise with the Committee as it considers other
legislative options to address regulatory burden.
Legislative Proposals
Amendments to the Scope of the Volcker Rule. The risks to the
financial system of proprietary trading and owning or sponsoring
private equity and hedge funds are far more significant when larger
institutions engage in these activities than when community banks do
so, to the extent they even engage in such activities. Yet, the Volcker
Rule contains no exemption for community banks. Accordingly, community
banks need to ascertain whether their activities are covered by the
Volcker Rule in order to understand whether they have any compliance
obligations. Making this determination may require them to expend money
and resources--for example, by hiring attorneys and consultants. This
regulatory burden is not justified by the risk these institutions
present.
In response to concerns raised by community institutions, and
issues that have arisen during our ongoing Volcker Rule implementation
efforts, the OCC drafted a legislative proposal to exempt from the
Volcker Rule banks with total consolidated assets of $10 billion or
less. This proposal would eliminate unnecessary burden for small banks
while ensuring that we address the risks the Volcker Rule sought to
eliminate. Where a community bank engages in activities covered by the
current Volcker Rule, the OCC could address any concerns as part of its
normal safety and soundness supervisory process. Based on our analysis,
we estimate that this amendment could exempt more than 6,000 small
banks, including small banks regulated by the OCC, from the requirement
to comply with the regulations implementing the Volcker Rule.
Revisions to the Examination Schedule. The OCC generally examines
national banks and Federal savings associations with total assets
greater than $500 million on a 12-month cycle. We believe, however,
that there are additional healthy, well-managed community banks that
should qualify for the 18-month examination cycle. Accordingly, the OCC
drafted a legislative proposal to increase from $500 million to $750
million the asset-size threshold that determines whether a community
bank can qualify for an examination every 18 months, rather than every
12 months. The OCC would continue to use off-site monitoring tools to
identify potential problems in these low risk institutions and, if
warranted, could examine the institution more frequently.
This is consistent with the incremental approach that Congress has
taken when increasing the threshold amount of assets that permit small
institutions to qualify for the 18-month examination cycle.
Furthermore, it would allow the OCC to more appropriately align our
supervisory resources with risk, while simultaneously reducing the
regulatory burden on small, well-capitalized, and well-managed
institutions. We estimate that this amendment would affect more than
300 banks, including banks regulated by the OCC.
Changes to Permissible Activities for Federal Savings Associations.
Currently, the powers of Federal savings associations are set out in
the Home Owners' Loan Act (HOLA), which establishes lending and
investment limits for these institutions. Federal savings associations
have told us that they would like to engage in additional activities to
serve their communities but are unable to do so because of the HOLA
limits. Under existing law, their only option is to convert to a bank
charter, a process that can impose costs and burden that we believe can
be alleviated.
To address these concerns, the OCC drafted legislation that would
give a Federal savings association a choice: continue to operate as a
traditional thrift or file a notice to be treated as a ``covered
savings association.'' Generally, a covered savings association would
have the powers of and be subject to the same restrictions as a
national bank. In practice, this means that a Federal savings
association that becomes a covered savings association would gain
national bank powers but would have to discontinue activities not
permissible for a national bank, subject to rules governing
nonconforming assets and subsidiaries. This option would provide a
Federal savings association with the flexibility to retain its current
corporate form and governance structure without unnecessarily limiting
the evolution of its business plan. If a Federal savings association's
business plan changed after it became a covered savings association, it
generally would be permitted to reverse its election and regain its
traditional thrift status after an appropriate period. This proposal
would allow these institutions to adapt to changing economic and
business environments and to better meet the needs of their
communities. As the supervisor of both national banks and Federal
savings associations, we are well-positioned to administer this type of
framework given our familiarity with the individual institutions and
their governing statutes.
Current Initiatives
While the OCC calibrates individual regulations to account for
differences in the size and complexity of institutions as they are
developed, we recognize the need to periodically assess how existing
rules can be modified to ease regulatory burden on banks. The OCC has
several projects underway, and it is considering other approaches to
achieve this goal.
Integration of National Bank and Savings Association Rules. The
Dodd-Frank Act transferred to the OCC all functions of the Office of
Thrift Supervision (OTS) relating to the examination, supervision, and
regulation of Federal savings associations. Following the transfer of
OTS rulemaking functions to the OCC, we began a comprehensive,
multiphase review of our regulations and those of the former OTS to
reduce burden and duplication, promote fairness in supervision, and
create efficiencies for national banks and Federal savings
associations. Last spring, we issued a proposal to integrate our bank
and saving association rules relating to corporate activities and
transactions into a single set of rules, where possible. Many of the
changes included in the proposal would reduce burden for all
institutions, including community banks. We are working on a final rule
to implement these changes and hope to issue it in the near future.
EGRPRA. The OCC, FDIC, Board, and FFIEC are currently engaged in a
review of their regulations imposed on insured depository institutions,
as required by EGRPRA. Specifically, the statute requires that, at
least once every 10 years, the agencies seek public comment on rules
that are outdated or otherwise unnecessary. This provides both the
agencies and the public with an opportunity to consider how to reduce
burden. The OCC, as chair of the FFIEC, is currently coordinating this
joint regulatory review.
To conduct the EGRPRA review, the agencies published a Federal
Register notice this past June asking for comment on three categories
of rules. We plan to issue a second Federal Register notice this month
seeking comment on three additional categories, followed by two
additional notices on the remaining rules during the next year. In each
notice, we specifically ask the public to identify ways to reduce
unnecessary burden associated with our regulations, with a particular
focus on community banks.
The agencies received over 40 comments on the first Federal
Register notice, many of which suggested specific rule changes. We are
carefully reviewing all of the comments to identify where changes would
be appropriate. In addition, we are undertaking our own review of these
rules, and the statutes they implement. This project is very important
to the Comptroller, and we are hopeful that it will yield positive
results, particularly for community banks.
In addition, the agencies are holding a series of EGRPRA outreach
meetings to give members of the public an opportunity to present their
views in person. The outreach meetings feature panel presentations by
industry participants and consumer and community groups. To date, we
have held outreach meetings in Los Angeles and Dallas, and I have
participated in each of these meetings to hear first-hand the views and
recommendations offered by the many participants. We have additional
meetings scheduled in Boston, Chicago, and Washington, DC. We have also
scheduled an outreach meeting in Kansas City that will focus
specifically on rural banking issues. Recognizing that travel costs may
restrict the ability of interested parties to attend in person, we
live-stream each outreach meeting, where possible, and provide a video
archive of the proceedings to increase the public's opportunity to view
the meetings. These resources are easily accessible on the agencies'
EGRPRA Web site, along with the Federal Register notices, all comments
we have received, and additional EGRPRA information. \2\
---------------------------------------------------------------------------
\2\ The EGRPRA Web site can be accessed at http://
egrpra.ffiec.gov.
---------------------------------------------------------------------------
While the EGRPRA process will unfold over a period of time, the OCC
will not wait until it is over to implement changes where a good case
is made for regulatory relief. Where it is clear that a regulation is
outdated, unnecessary, or unduly burdensome, we will act where we have
the authority to do so. For example, we are actively reviewing
suggestions to eliminate board of director approvals in certain
circumstances and to broaden the use of electronic submissions for
filing forms. In addition, many of the changes that we included in the
integration rulemaking discussed above are consistent with comments we
received in the EGRPRA review. Finally, the EGRPRA review may help us
identify burdensome regulatory requirements that derive from statutory
provisions. When we identify these provisions, we look forward to
sharing our insights and experience with Congress.
Call Report Simplification. The OCC and other Federal banking
agencies, under the auspices of the FFIEC, are considering ways that we
can further tailor reporting requirements for community banks.
Recently, we have received proposals to reduce the burden associated
with the preparation of the Consolidated Reports of Condition and
Income (Call Reports), including the feasibility of allowing certain
banks to file a short-form Call Report for two quarters of a year. The
OCC has discussed the Call Report issue in numerous meetings with
bankers, and we are committed to carefully considering their concerns.
As part of this effort, the OCC and other Federal banking agencies
have agreed to undertake a comprehensive review of all Call Report
items and schedules and to review every line item of every schedule in
the Call Report to try to determine what truly needs to be collected
and if there is any other way to get such information. The OCC's
standard is that Call Report data should directly support long-term
supervisory needs to ensure the safety and soundness of banks and that
a strong business case that discusses the relative benefits, costs, and
alternatives must support any additions. At the request of members of
the FFIEC, its Task Force on Reports is developing a set of guiding
principles as the basis for evaluating potential additions or deletions
of data items to and from the Call Report.
Collaboration. While we expect that the above-referenced projects
will reduce burden for many community banks, the OCC is also studying
other, less conventional approaches to help community banks thrive in
the modern financial world. One especially promising approach involves
collaboration between community banks and is the subject of an
important paper the OCC published last month. \3\ The principle behind
this approach, which grew out of productive and ongoing discussions
between the OCC and our community banks, is that by pooling resources,
community banks can manage regulatory requirements, trim costs and
serve customers who might otherwise lie beyond their reach. We have
already seen examples of successful collaboration, such as community
banks forming an alliance to bid on larger loan projects and banks
pooling resources to finance community development activities.
---------------------------------------------------------------------------
\3\ ``An Opportunity for Community Banks: Working Together
Collaboratively'', Jan. 13, 2015.
---------------------------------------------------------------------------
There are many other opportunities of this nature, which can
increase efficiencies and save money. As noted in our paper, these
include collaboration on accounting, clerical support, data processing,
employee benefit planning, and health insurance--to name just a few.
Our innovative community banks can undoubtedly find other ways to share
resources in a safe and sound manner.
Conclusion
Community banks are essential to our Nation's communities and small
businesses. The OCC is committed to minimizing unnecessary regulatory
burden for these institutions. We will continue to carefully consider
the potential effect that current and future policies and regulations
may have on community banks and will be happy to work with the
Committee on any proposed legislative initiatives.
______
PREPARED STATEMENT OF LARRY FAZIO
Director, Office of Examination and Insurance, National Credit Union
Administration
February 10, 2015
Chairman Shelby, Ranking Member Brown, and Members of the
Committee, the National Credit Union Administration appreciates the
invitation to testify about regulatory relief. \1\ I am Larry Fazio,
Director of NCUA's Office of Examination and Insurance.
---------------------------------------------------------------------------
\1\ NCUA's primary mission is to provide, through regulation and
supervision, a safe and sound credit union system. NCUA performs this
important public function by:
Examining all Federal credit unions;
Participating in the supervision of federally insured, State-
chartered credit unions in coordination with State regulators; and
Insuring accounts up to $250,000 at federally insured credit
unions.
As required by the Federal Credit Union Act, NCUA also serves as
the administrator of the $12 billion National Credit Union Share
Insurance Fund. In this role, NCUA provides oversight and supervision
to 6,350 federally insured credit unions. Of these credit unions, NCUA
directly supervises 3,981 Federal credit unions chartered by the
agency.
---------------------------------------------------------------------------
Today, three-quarters of credit unions have less than $100 million
in assets and the median asset size of a credit union is $24 million.
\2\ Smaller credit unions in particular have fewer resources available
to respond to marketplace, technological, legislative, and regulatory
changes. NCUA, therefore, is acutely aware of the need to calibrate our
rules and examinations to remove any unnecessary burden on these
smaller credit unions.
---------------------------------------------------------------------------
\2\ The term ``credit union'' is used throughout this testimony to
refer to federally insured credit unions. NCUA does not oversee
approximately 132 State-chartered, privately insured credit unions. As
of September 30, 2014, federally insured credit unions represent 98
percent of all credit unions in the United States and serve 98.7
million credit union members.
As a policy matter, in 2007 NCUA issued a report to Congress
concluding that the Federal Government should be the sole provider of
primary deposit insurance. Federal deposit insurance has played an
important role in maintaining confidence in the financial system and
the stability of our economy, and the lessons learned from failures of
private deposit insurance schemes should not be forgotten. See http://
www.ncua.gov/Legal/Documents/DepositInsuranceStudyReporttoCongress-
Ver6-4.pdf for more details.
---------------------------------------------------------------------------
NCUA scales our regulatory and supervisory expectations for smaller
credit unions. NCUA also seeks to provide broader regulatory relief
when it is sensible and within the agency's authority to do so. Over
the past 3 years, we have taken many actions to cut red tape and
provide lasting benefits to credit unions. This includes relaxing eight
regulations and streamlining three processes.
Where regulation is necessary to protect the safety and soundness
of credit unions and the National Credit Union Share Insurance Fund,
NCUA employs a variety of strategies to ensure our regulations are
effectively targeted. \3\ These strategies include fully exempting
small credit unions from certain rules, using graduated requirements as
size and complexity increase for others, and incorporating practical
compliance approaches in agency guidance. In short, we work to balance
maintaining prudential standards with minimizing regulatory burden.
---------------------------------------------------------------------------
\3\ Congress established the National Credit Union Share Insurance
Fund in 1970 as part of the Federal Credit Union Act (P.L. 91-468) and
amended the Share Insurance Fund's operations in 1984 (P.L. 98-369).
The fund operates as a revolving fund in the U.S. Treasury under the
administration of the NCUA Board for the purpose of insuring member
share deposits in all Federal credit unions and in qualifying State-
chartered credit unions that request Federal insurance. Funded by
federally insured credit unions, the Share Insurance Fund is backed by
the full faith and credit of the United States.
---------------------------------------------------------------------------
My testimony will discuss elements of NCUA's current rulemaking
process, including recent and prospective efforts to tailor regulation
and supervision based on credit unions' size and complexity. I will
also comment on NCUA's efforts to reduce examination burdens. Finally,
I will offer legislative recommendations related to regulatory relief.
Regulatory Flexibility Act
Under the Regulatory Flexibility Act, NCUA must publish an analysis
in the Federal Register and give special consideration to the
regulatory burden and alternatives for small credit unions whenever a
proposed or final rule would impose a significant economic burden on a
substantial number of small credit unions. \4\
---------------------------------------------------------------------------
\4\ The Regulatory Flexibility Act provides NCUA with the
opportunity to define which credit unions fall under the law's
coverage. 5 U.S.C. 601(4).
---------------------------------------------------------------------------
In recognition of the operational and financial challenges faced by
smaller credit unions, the NCUA Board in January 2013 reviewed the
threshold used to identify which credit unions qualify as small
entities under the Regulatory Flexibility Act. Based on credit union
system percentages carried forward from the last update in 2003 and
corresponding risks to the Share Insurance Fund, the Board determined
credit unions with less than $50 million in assets, up from the prior
$10 million threshold, were small entities for purposes of the
Regulatory Flexibility Act.
At the time of the 2013 adjustment, the number of credit unions
classified as small for purposes of the Regulatory Flexibility Act
nearly doubled. Today, 4,124 institutions representing 65 percent of
all credit unions are covered by the small credit union definition.
At the same time it revised the small credit union definition, the
NCUA Board provided immediate regulatory relief by exempting credit
unions under $50 million from several regulatory requirements. First,
the Board increased from $10 million to $50 million the threshold that
defines which credit unions are complex, narrowing the category of
credit unions that could be subject to risk-based net worth
requirements and the associated prompt corrective action mandates.
Second, the Board increased from $10 million to $50 million the
threshold used to exempt credit unions from our interest rate risk
rule.
In a coordinated policy change, the Board nearly doubled the number
of credit unions eligible to apply for NCUA's Office of Small Credit
Union Initiatives' individualized consulting services by increasing the
eligibility threshold to $50 million. \5\ Subsequently, the NCUA Board
extended relief at the same level in new rules requiring certain
liquidity contingencies and creditor notices in voluntary liquidations.
---------------------------------------------------------------------------
\5\ Created in 2004, NCUA's Office of Small Credit Union
Initiatives fosters credit union development and the effective delivery
of financial services for small, new, and low-income credit unions, as
well as minority depository institutions. The office provides
individualized consulting, loan and grant opportunities, targeted
training, and valuable partnership and outreach services to help viable
small credit unions thrive.
---------------------------------------------------------------------------
In January 2013, the NCUA Board also committed the agency to
revisit the Regulatory Flexibility Act threshold in 2015 and every 3
years thereafter. \6\ The Board took this action to ensure the
definition of a small credit union would keep pace with changes in the
marketplace.
---------------------------------------------------------------------------
\6\ This triennial review of the small credit union definition
under the Regulatory Flexibility Act is in addition to NCUA's rolling
3-year review of all regulations.
---------------------------------------------------------------------------
As a result, next week the Board will consider a proposed rule to
include hundreds of additional credit unions under the definition of a
small entity. Increasing the threshold from $50 million to $100 million
would provide special consideration for regulatory relief for an
additional 745 credit unions in future rulemakings.
Should the Board adopt a $100 million threshold, 77 percent of all
credit unions would be covered in future considerations of regulatory
relief. \7\ Taking this action also would recognize the challenges
encountered by credit unions below $100 million in assets, which have
slower deposit growth rates, slower membership growth rates, and higher
operating costs than peer credit unions above the threshold.
---------------------------------------------------------------------------
\7\ Credit unions with less than $100 million in assets hold 11
percent of the system's assets.
---------------------------------------------------------------------------
Regulatory Review Efforts
NCUA is ever mindful of the impact of regulations on credit unions,
especially smaller ones. We are proactive in our efforts to identify
outdated, ineffective, or excessively burdensome regulations. We also
continually review and take appropriate steps to eliminate or ease
burdens, whenever possible, without compromising safety and soundness.
Rolling Regulatory Review
Since 1987, NCUA has followed a well-delineated and deliberate
process to continually review its regulations and seek comment from
stakeholders, such as credit unions and trade associations. Through
this agency-initiated process, NCUA conducts a rolling review of one-
third of its regulations each year, meaning that we review all of our
regulations at least once every 3 years.
This long-standing regulatory review policy helps to ensure NCUA's
regulations:
Impose only the minimum required burdens on credit unions,
their members, and the public.
Are appropriate for the size of the credit unions regulated
by NCUA.
Are issued only after full public participation in the
rulemaking process.
Are clear and understandable.
This rolling review is fully transparent. NCUA publishes on our Web
site a list of the applicable regulations up for review each year and
invites public comment on any or all of the regulations. \8\
---------------------------------------------------------------------------
\8\ See http://www.ncua.gov/Legal/Regs/Pages/Regulations.aspx.
---------------------------------------------------------------------------
Economic Growth and Regulatory Paperwork Reduction Act
Further, NCUA is voluntarily participating in the interagency
review process created by the Economic Growth and Regulatory Paperwork
Reduction Act of 1996. \9\ EGRPRA requires the Federal Financial
Institutions Examination Council and its member Federal banking
agencies to review their regulations at least once every 10 years to
identify any rules that might be outdated, ineffective, unnecessary,
insufficient, or excessively burdensome. NCUA is not required to
participate in this process, but the agency has elected once again to
do so.
---------------------------------------------------------------------------
\9\ 12 U.S.C. 3311.
---------------------------------------------------------------------------
Under the EGRPRA review, each agency is issuing several categories
of rules for public comment at regular intervals over 2 years--with an
eye towards streamlining, modernizing, or even repealing regulations
when appropriate. The categories are:
Agency Programs,
Applications and Reporting,
Capital,
Consumer Protection,
Corporate Credit Unions,
Directors,
Officers and Employees,
Money Laundering,
Powers and Activities,
Rules of Procedure, and
Safety and Soundness.
In May 2014, 33 NCUA regulations in the Applications and Reporting
and Powers and Activities categories were released for review. In a
second notice in December 2014, NCUA opened 17 rules for comment in
three additional categories: Agency Programs, Capital, and Consumer
Protection.
As part of NCUA's voluntary participation in the latest EGRPRA
review, NCUA will evaluate the burden on credit unions for those
regulations within NCUA's control. NCUA, however, has no authority to
provide relief from requirements imposed by other regulators.
Regulatory Modernization Initiative
In 2011, NCUA Board Chairman Debbie Matz launched the agency's
Regulatory Modernization Initiative. The initiative balances two
principles:
Safety and soundness--strengthening regulations necessary to
protect credit union members and the Share Insurance Fund.
Regulatory relief--revising and removing regulations that
limit flexibility and growth, without jeopardizing safety and
soundness.
In implementing this initiative, NCUA also has held regular in-
person and online town hall meetings to solicit feedback from
stakeholders. These events have identified regulatory relief issues on
which the agency has since acted.
Ultimately, NCUA under the initiative has taken 15 actions to cut
red tape and provide lasting benefits to credit unions. \10\
Specifically, NCUA during the last 3 years has worked to ease eight
regulations, providing regulatory relief to thousands of credit unions.
NCUA has also streamlined three processes--facilitating more than a
thousand new low-income credit union designations, increasing blanket
waivers for member business loans, and establishing an expedited
process for examinations at smaller credit unions. \11\ NCUA has
additionally issued four legal opinions, allowing more flexibility in
credit union operations.
---------------------------------------------------------------------------
\10\ See Appendix I for a complete list of these actions.
\11\ A low-income credit union is one in which a majority of its
membership (50.01 percent) qualifies as low-income members. Low-income
members are those members who earn 80 percent or less than the median
family income for the metropolitan area where they live, or the
national metropolitan area, whichever is greater. In nonmetropolitan
areas, the qualification threshold is a median family income at or
below 80 percent of the State median family income for nonmetropolitan
areas, or, if greater, the national median family income for
nonmetropolitan areas. Under the Federal Credit Union Act, the low-
income designation offers certain benefits and regulatory relief, such
as an exemption from the cap on member business lending, eligibility
for Community Development Revolving Loan Fund grants and low-interest
loans, ability to accept deposits from nonmembers, and authorization to
obtain supplemental capital.
---------------------------------------------------------------------------
Rulemaking Process
In developing any regulation, NCUA strives to ensure the agency's
rulemakings are reasonable and cost-effective. NCUA additionally
conducts an analysis to inform the agency's decisions in advance of
regulatory actions. The analysis also ensures that regulatory choices
are made after appropriate consideration of the likely consequences.
NCUA's safety and soundness regulations protect credit unions and
the members who own them, as well as strengthen the credit union system
the agency supervises and insures. \12\ The benefit of these
regulations is that they reduce the likelihood of credit union failures
and, in doing so, promote stability and protect the Share Insurance
Fund.
---------------------------------------------------------------------------
\12\ NCUA has a number of regulations that address issues other
than safety and soundness, such as those rules related to field of
membership, the Community Development Revolving Loan Fund, payday
alternative loans, the organization of Federal credit unions, agency
procedures, and examiner postemployment restrictions, among others.
---------------------------------------------------------------------------
Any loss to the Share Insurance Fund is ultimately borne by
surviving credit unions, which may be required to pay increased
premiums. As member-owned cooperatives, this means the members, who are
the owners and consumers of the credit unions, may ultimately have to
repay these costs. As the developments of the last decade have
demonstrated, the cost of regulatory inaction can result in failures
that impose a greater cost to credit unions and society than the cost
of action. \13\
---------------------------------------------------------------------------
\13\ The collapse of five corporate credit unions during the 2007-
2009 financial crisis best illustrates this point. To date, credit
unions have paid $4.8 billion in assessments and experienced $5.6
billion in losses in the form of contributed capital. These costs
incurred during the financial crisis reduced credit union earnings and
assets and, as a result, during that time may have decreased interest
paid on share deposits, increased loan rates, and constrained credit
union services for their members.
---------------------------------------------------------------------------
Through the public comment process, the NCUA Board gains insights
on potential costs, unintended consequences, and alternative strategies
directly from the credit unions the agency supervises and insures, as
well as other interested stakeholders. The Board then uses this
information to make adjustments before issuing a final rule. A good
example of this process in action is NCUA's October 2013 final rule on
emergency liquidity and contingency funding.
The proposed liquidity rule applied to all federally insured credit
unions with more than $50 million in assets, but the public comment
period yielded a number of important observations about the compliance
requirements associated with establishing emergency lines of credit.
Based on this information, the NCUA Board reconsidered the balance
between costs and benefits specifically for credit unions between $50
million and $250 million in assets. The final rule exempted credit
unions with assets up to $250 million from establishing emergency lines
of credit with the Federal Reserve's Discount Window, or NCUA's Central
Liquidity Facility, or both. Instead, the Board only required credit
unions of this size to develop contingency funding plans that clearly
set out strategies for meeting emergency liquidity needs.
Examples of Scaled Regulation
In addition to calibrating the liquidity and contingency funding
rule, NCUA has recently scaled other regulations based on the asset
size of the credit union. Examples of such tailored regulations include
the agency's 2012 interest rate risk rule and the revised proposed
risk-based capital rule issued last month. \14\
---------------------------------------------------------------------------
\14\ See Appendix II for a more complete listing of efforts to
scale regulations, calibrate examinations, and provide assistance
designed to address the unique circumstances of smaller credit unions.
---------------------------------------------------------------------------
Interest Rate Risk Rule
NCUA's focus on interest rate risk management has been constant and
pronounced for more than 15 years, as evidenced by a steady issuance of
guidance to examiners and credit unions on asset-liability management.
Since 2010, interest rate risk management has been a heightened focus
for NCUA, and it is a primary supervisory focus for the agency again in
2015.
NCUA's focus on interest rate risk exposure has increased due to
the extraordinary low level of interest rates and the overall
lengthening of asset durations in the credit union system. NCUA is
mindful that a period of rapidly rising rates could be a particularly
challenging scenario for some credit unions. To stay ahead of the curve
and maintain stable earnings, credit unions need to have policies in
place to survive adverse rate environments.
These concerns led the NCUA Board to issue a final rule 3 years ago
aimed at managing interest rate risk. Generally, the rule categorizes
credit unions based on size, which is correlated to risk exposure, to
determine the need to adopt a written policy on interest rate risk.
Consistent with the Board's policy to exempt small credit unions from
regulations when prudent, the size and exposure criteria in the
interest rate risk rule exempt credit unions with less than $50 million
in assets, while protecting the Share Insurance Fund by covering most
of the system's assets.
The NCUA Board exempted smaller credit unions because they
customarily have very low interest rate risk profiles as they are not
as active in residential mortgage lending or long-term investing. \15\
Also, smaller credit unions typically have much higher capital levels
and hold relatively more cash and short-term investments on their
balance sheets. \16\
---------------------------------------------------------------------------
\15\ As of September 30, 2014, real estate loans at credit unions
with more than $50 million in assets accounted for 33.2 percent of
total assets, compared to 15.8 percent at credit unions below this
threshold.
\16\ As of September 30, 2014, credit unions with $50 million or
less in assets maintained cash and short-term investment balances at
22.9 percent of total assets, compared to 12.5 percent for credit
unions above this threshold.
---------------------------------------------------------------------------
Revised Proposed Risk-Based Capital Rule
After reviewing 2,056 comments on the original risk-based capital
proposal, last month the NCUA Board issued a revised proposed rule.
NCUA's primary goals for the revised proposed risk-based capital rule
remain the same:
To prevent or mitigate losses to the Share Insurance Fund by
having a better calibrated, meaningful, and more forward-
looking capital requirement to ensure credit unions can
continue to serve members during economic downturns without
relying on Government intervention or assistance, and
To modernize the risk-based capital calculations and
framework, in accordance with the Federal Credit Union Act's
directives.
The new proposal significantly narrowed the proposed rule's scope
by redefining ``complex'' credit unions. Under this rulemaking, the
NCUA Board has proposed to limit the risk-based capital requirement to
credit unions with more than $100 million in assets, rather than the
$50 million threshold contained in the current rule and the earlier
proposal.
By increasing the asset threshold, the revised proposed rule
exempts over three-quarters of credit unions. Through this targeted
improvement, the revised proposed rule covers 1,455 credit unions that
hold 89 percent of the system's assets. \17\ In comparison, the
original proposal covered 2,237 credit unions representing 94 percent
of the system's assets. \18\ The revised proposal also would result in
the downgrade of fewer credit unions. \19\
---------------------------------------------------------------------------
\17\ Data as of December 31, 2013.
\18\ Same as above.
\19\ The reformulated risk-based capital proposal would downgrade
the capital status of just 19 of 1,455 covered credit unions, based on
data as of December 31, 2013. For more information about the revised
risk-based based capital proposed rule, see http://www.ncua.gov/
Resources/Pages/risk-based-capital-resources.aspx.
---------------------------------------------------------------------------
As requested by stakeholders, including several members of the
Senate Banking Committee, the revised proposed rule includes
significant changes to the risk weights for investments, real estate
loans, member business loans, corporate credit unions, and credit union
service organizations. The risk weights contained in the new proposal
are generally comparable to or more favorable than the risk weights
applied to banks by Federal banking agencies.
Finally, the revised proposed rule extends the implementation date
to January 1, 2019. This date aligns with the risk-based capital rule
implementation deadline for banks. It also allows credit unions covered
under the rule ample time to prepare for the change.
Other Regulatory Relief Proposals Under Consideration
Going forward, NCUA is already working to provide additional
regulatory relief for credit unions. For example, NCUA is drafting a
proposal to modernize our member business lending rule. The primary
changes being considered involve removing prescriptive underwriting
criteria and other outdated restrictions, thereby eliminating the need
for credit unions to request waivers from NCUA to conduct business.
In April 2014, the NCUA Board also issued a proposed rule to define
more clearly which associational groups do and do not qualify for
membership in a Federal credit union. The proposed rule would provide
automatic approval for seven types of associations. To facilitate
greater access to credit union membership, commenters suggested several
more categories of well-established associational groups that should
also be considered for automatic approval. The Board is now carefully
reviewing these suggested regulatory improvements.
NCUA is additionally working to fine-tune a proposed rule on asset
securitization. Approved in June 2014, this proposal would allow
qualified Federal credit unions to securitize loans they have
originated under certain conditions. Once finalized, this rule would
provide these Federal credit unions with greater flexibility to manage
interest rate and liquidity risks.
Finally, the NCUA Board in July 2014 proposed to streamline the
agency's fixed-assets rule. This proposal would eliminate the current
requirement to obtain a waiver from NCUA for a Federal credit union
with assets of $1 million or more that wants to make investments in
fixed assets exceeding 5 percent of shares and retained earnings. The
proposed rule also would make it easier for Federal credit unions to
acquire property to accommodate plans for future expansions.
The NCUA Board is expected to consider a final fixed-assets rule by
the end of the second quarter. This rule would allow Federal credit
unions to make business decisions on upgrading technology, updating
facilities, or making other purchases without filing waivers.
Improvements in the Examination Program
Beyond providing targeted relief by issuing regulatory exemptions
and adopting tailored rules, NCUA is providing regulatory relief
through revisions to our examination process.
Small Credit Union Examination Program
Since 2002, NCUA has followed a risk-focused exam program. This
approach is designed to efficiently allocate agency resources to credit
unions and areas of operations that exhibit the greatest potential risk
exposure to the Share Insurance Fund. The program relies on examiner
judgment to determine the areas that need review. Over time, NCUA has
adjusted this approach by adding minimum scope requirements and
establishing the National Supervision Policy Manual to ensure
consistency of supervisory actions across all regions of the country.
While the risk-based examination program has generally worked well,
in 2011 we determined that the resources used to complete examinations
were not in balance with the credit union system's risks. NCUA was
spending more exam hours on the smallest credit unions rather than the
largest credit unions that have the greatest concentration of the
system's assets and the greatest potential risk exposure to the Share
Insurance Fund.
NCUA has since moved to concentrate supervision on credit union
activities that pose the most risk. In recognition that larger, more
complex credit unions require more attention, NCUA began streamlining
exams for the smallest credit unions and deploying examiners where
their work will be most effective in protecting the Share Insurance
Fund.
NCUA now has in place a streamlined examination program for
financially and operationally sound credit unions with less than $30
million in assets. Through the Small Credit Union Examination Program,
NCUA spends less time on average in small, well-managed credit unions.
This decreased examination burden reflects a reduced overall scope but
is more precisely focused on the most pertinent areas of risk in small
credit unions--lending, record keeping, and internal control functions.
NCUA is now expanding the Small Credit Union Examination Program to
include Federal credit unions with up to $50 million in total assets
that received a composite CAMEL rating of 1, 2, or 3 at their last
examination. \20\ After completing training, NCUA anticipates fully
implementing the new procedures by the end of the first quarter of
2015. \21\
---------------------------------------------------------------------------
\20\ The CAMEL rating system is based upon an evaluation of five
critical elements of a credit union's operations: Capital adequacy,
Asset quality, Management, Earnings and Liquidity. The CAMEL rating
system is designed to take into account and reflect all significant
financial, operational and management factors that examiners assess in
their evaluation of a credit union's performance and risk profile.
CAMEL ratings range from 1 to 5, with 1 being the highest rating.
\21\ For larger, more complex credit unions, NCUA will continue to
perform risk-focused exams.
---------------------------------------------------------------------------
Broader Examination Reforms
NCUA is further working to streamline the examination process for
all credit unions by harnessing technology. Improvements in computers,
software, and security are allowing NCUA to design a new Automated
Integrated Regulatory Examination System and revise our Call Report
system to improve off-site monitoring capabilities and thereby
potentially reduce the overall time NCUA spends on-site inside credit
unions conducting examinations.
To improve consistency in the way field staff develop and use
documents of resolution, NCUA also revised our policy and procedures in
2013. \22\ NCUA clarified how and when documents of resolutions should
be used. The new policy states that documents of resolution should be
used to address issues significant enough that a credit union's failure
to correct the problem would necessitate the examiner recommending an
informal or formal enforcement action. In addition, examiners must cite
the appropriate law, regulation, or authoritative NCUA policy when
including an issue as a finding or document of resolution in the
examination report.
---------------------------------------------------------------------------
\22\ Examiners use documents of resolution to outline plans and
agreements reached with credit union officials to reduce areas of
unacceptable risk. An area of unacceptable risk is one for which
management does not have the proper structure for identifying,
measuring, monitoring, controlling, and reporting risk.
---------------------------------------------------------------------------
The result has been clearer expectations for credit unions and NCUA
field staff, and greater consistency in the examination process. Credit
unions generally have supported the change. As a result of these
changes and an improved economy, the agency has additionally
experienced a decline in the number of documents of resolution issued.
Regulatory Relief Legislation
Finally, the Committee has asked NCUA to identify ways to ease
credit union regulatory burdens through legislation.
NCUA is very appreciative of the Senate's efforts last December to
enact into law the Credit Union Share Insurance Fund Parity Act and the
American Savings Promotion Act. \23\ The first law allows federally
insured credit unions to offer the same level of insurance on deposits
as banks and thrifts for lawyers' trust accounts. The second law
permits federally insured financial institutions to offer prize-linked
accounts to promote saving.
---------------------------------------------------------------------------
\23\ P.L. 113-252 and P.L. 113-251, respectively.
---------------------------------------------------------------------------
Looking ahead, NCUA has several proposals to share with the
Committee related to regulatory flexibility, field of membership
requirements, member business lending, supplemental capital, and vendor
authority.
Regulatory Flexibility
Today, there is considerable diversity in scale and business models
among financial institutions. As noted earlier, many credit unions are
very small and operate on extremely thin margins. \24\ They are
challenged by unregulated or less-regulated competitors, as well as
limited economies of scale. They often provide services to their
members out of a commitment to offer a specific product or service,
rather than a focus on any incremental financial gain.
---------------------------------------------------------------------------
\24\ See Appendix III for a breakdown of credit union performance
by asset class over time.
---------------------------------------------------------------------------
The Federal Credit Union Act contains a number of hard-coded
provisions that limit NCUA's ability to revise regulations and provide
relief to such credit unions. Examples include limitations on the
eligibility for credit unions to obtain supplemental capital, field of
membership restrictions, curbs on investments in asset-backed
securities, and the 15-year loan maturity limit, among others. \25\
---------------------------------------------------------------------------
\25\ 12 U.S.C. 1751 and what follows.
---------------------------------------------------------------------------
To that end, NCUA would encourage Congress to consider providing
regulators like NCUA with flexibility to write rules to address such
situations, rather than imposing rigid requirements. Such flexibility
would allow the agency to effectively limit additional regulatory
burdens, consistent with safety and soundness. As previously noted,
NCUA continues to modernize existing regulations with an eye toward
balancing requirements appropriately with the relatively lower levels
of risk smaller credit unions pose to the credit union system. By
allowing NCUA discretion on scale and timing to implement new laws, we
could more flexibly mitigate the cost and administrative burdens of
these smaller institutions while balancing consumer and prudential
priorities.
Field of Membership Requirements
The Federal Credit Union Act currently only permits Federal credit
unions with multiple common-bond charters to add underserved areas to
their fields of membership. We recommend that Congress act to modify
the Federal Credit Union Act to give NCUA the authority to streamline
field of membership changes and permit all Federal credit unions to
grow their membership by adding underserved areas.
Allowing Federal credit unions that have a community or single
common-bond charter the opportunity to add underserved areas would open
up access for many more unbanked and underbanked households to credit
union membership. This legislative change could also eventually enable
more credit unions to participate in the programs offered through the
congressionally established Community Development Financial
Institutions Fund, thus increasing the availability of credit and
savings options in distressed areas. \26\
---------------------------------------------------------------------------
\26\ Located within the U.S. Department of the Treasury, the
Community Development Financial Institutions Fund's mission is to
expand the capacity of financial institutions to provide credit,
capital, and financial services to underserved populations and
communities in the United States.
---------------------------------------------------------------------------
Congress also may want to consider other field of membership
statutory reforms. For example, Congress could allow Federal credit
unions to serve underserved areas without also requiring those areas to
be local communities. Congress may also want to simplify the
``facilities'' test for determining if an area is underserved. \27\
NCUA stands ready to work with the Committee on these ideas, as well as
other options for adjusting field of membership requirements.
---------------------------------------------------------------------------
\27\ The Federal Credit Union Act presently requires an area to be
underserved by other depository institutions, based on data collected
by NCUA or Federal banking agencies. NCUA has implemented this
provision by requiring a facilities test to determine the relative
availability of insured depository institutions within a certain area.
Congress could instead allow NCUA to use alternative methods to
evaluate whether an area is underserved to show although a financial
institution may have a presence in a community, it is not qualitatively
meeting the needs of an economically distressed population.
---------------------------------------------------------------------------
Outside of the legislative process, Chairman Matz recently
established a working group to discuss existing regulatory field of
membership constraints and options for ensuring the Federal credit
union charter remains relevant in today's marketplace. This group is
requesting candid feedback from stakeholders to help the agency
identify potential regulatory or procedural changes to enable Federal
credit unions to more readily promote access to populations with
limited alternatives for financial services.
Member Business Lending
NCUA reiterates the agency's support for legislation to adjust the
member business lending cap, such as the Small Business Lending
Enhancement Act from the 113th Congress. This bill contains appropriate
safeguards to ensure NCUA can protect safety and soundness as qualified
credit unions gradually increase member business lending.
For federally insured credit unions, the Federal Credit Union Act
limits member business loans to the lesser of 12.25 percent of assets
or 1.75 times net worth, unless the credit union qualifies for a
statutory exemption. \28\ For smaller credit unions with the membership
demand and the desire to serve the business segments of their fields of
membership, the restriction makes it very difficult or impossible to
successfully build a sound member business lending program. As a
result, many credit unions are unable to deliver commercial lending
services cost effectively, which denies small businesses in their
communities access to an affordable source of credit and working
capital.
---------------------------------------------------------------------------
\28\ 12 U.S.C. 1757a.
---------------------------------------------------------------------------
These credit unions miss an opportunity to support the small
business community and to provide a service alternative to the small
business borrower. Small businesses are an important contributor to the
local economy as providers of employment and as users and producers of
goods and services. NCUA believes members that are small business
owners should have full access to financial resources in the community,
including credit unions, but this is often inhibited by the statutory
cap on member business loans.
NCUA additionally supports the Credit Union Residential Loan Parity
Act introduced in the House during the 113th Congress. This legislation
addresses a statutory disparity in the treatment of certain residential
loans made by banks and credit unions.
When a bank makes a loan to purchase a 1- to 4-unit, non-owner-
occupied residential dwelling, the loan is classified as a residential
real estate loan. If a credit union were to make the same loan, it is
classified as a member business loan and therefore subject to the
member business lending cap. To provide policy parity between banks and
credit unions for this product, this bill would exclude such loans from
the cap. The legislation also contains appropriate safeguards to ensure
NCUA will apply strict underwriting and servicing standards for these
loans.
Supplemental Capital
NCUA supports legislation to allow healthy and well-managed credit
unions to issue supplemental capital that will count as net worth. This
legislation would help protect the Share Insurance Fund by adding a new
layer of capital, in addition to retained earnings, to absorb losses at
credit unions.
Most Federal credit unions only have one way to raise capital--
through retained earnings. Without access to other ways to raise
capital, credit unions are exposed to risk when the economy falters.
Financially strong and well-capitalized credit unions also may be
discouraged from allowing healthy growth out of concern it will dilute
their net worth ratios and trigger prompt corrective action-related
supervisory actions.
A credit union's inability to raise capital outside of retained
earnings limits its ability to expand into fields of membership more
effectively and to offer greater options to eligible consumers.
Consequently, NCUA has previously encouraged Congress to authorize
healthy and well-managed credit unions, as determined by the NCUA
Board, to issue supplemental capital that will count as net worth. If
reintroduced in the 114th Congress, NCUA would again be supportive of
the Capital Access for Small Businesses and Jobs Act.
Vendor Authority
Finally, and most critically, NCUA requests that the Senate Banking
Committee consider legislation to provide the agency with examination
and enforcement authority over third-party vendors--including credit
union service organizations, or CUSOs for short. Obtaining this
authority is the agency's top legislative priority. \29\
---------------------------------------------------------------------------
\29\ NCUA has two other legislative priorities. The first priority
would enhance access to emergency liquidity for the credit union system
by making targeted changes to the Central Liquidity Facility and
expanding the agency's access to the U.S. Treasury. The second priority
would permit NCUA to charge risk-based premiums for the Share Insurance
Fund much like the Federal Deposit Insurance Corporation charges for
the Deposit Insurance Fund. Risk-based premiums would lessen the
funding burden on small credit unions, which generally pose less risk
to the Share Insurance Fund.
---------------------------------------------------------------------------
While providing important services and helping smaller credit
unions achieve economies of scale, there are inherent risks in some
CUSOs. Since 2008, NCUA estimates that nine CUSOs have caused more than
$300 million in direct losses to the Share Insurance Fund and led to
the failures of credit unions with more than $2 billion in aggregate
assets. In one such example, one CUSO caused losses in 24 credit
unions, some of which failed.
CUSOs provide products and services that can significantly affect
financial well-being, and, in the case of technology service providers,
the security of credit unions and the members they serve. During the
third quarter of 2014, credit unions using the services of a CUSO
accounted for $974 billion in assets or 88 percent of system assets.
This figure is up from 79 percent of assets at year-end 2009.
The Government Accountability Office has noted that NCUA has a
limited ability to assess the risks third-party vendors, including
CUSOs, pose for credit unions and, ultimately the Share Insurance Fund,
and to respond to any problems. NCUA may only examine vendors with
their permission and cannot enforce any corrective actions. NCUA can
merely make recommendations and present findings to each vendor's
credit union clients. This lack of authority stands in contrast to
Federal banking agencies and most State regulators.
NCUA's inability to oversee third-party vendors also poses a
regulatory burden for credit unions, as the agency must rely on credit
unions to report certain information on the vendors with which they do
business. Additionally, NCUA must work through each credit union that
uses third-party vendors or CUSOs to obtain material about the vendor
or CUSO. This duplication of efforts creates a burden on all credit
unions, particularly smaller credit unions that rely more heavily on
vendors for many products and services.
A legislative fix would close a growing gap in NCUA's authority and
provide some regulatory relief for credit unions. Specifically, NCUA
would be able to work directly with key infrastructure vendors,
including those with a cybersecurity dimension, to obtain necessary
information to assess risks and deal with any problems at the source.
The need for NCUA to have vendor authority is best illustrated by
the growth of cybersecurity threats, which are a major concern for the
agency. The complexity of online communications is growing, as is the
number and sophistication of hackers, thieves, and terrorists seeking
to exploit vulnerabilities in the system. Moreover, credit unions are
increasingly using third-party vendors to provide technological
services, including security, and there is a greater interconnectedness
among vendors.
Today, the top five technology service providers serve more than
half of all federally insured credit unions representing 75 percent of
the credit union system's assets. Thus, a failure of even one vendor
represents potential risk to the Share Insurance Fund.
These vendors also provide an array of products and services to
credit unions, and credit unions, like other small and community
institutions, rely heavily on third parties to deliver services and
manage technology in providing services. Credit unions often use common
third-party services designed specifically for small cooperative
institutions. Vendors perform functions that include online banking,
transaction processing, fund transfers, and loan underwriting. Member
data are being stored on these vendors' servers.
NCUA therefore needs the same authority as the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency,
and the Board of Governors of the Federal Reserve System to examine
third-party vendors. To achieve this objective, NCUA has developed a
legislative proposal which we believe would afford the agency the
appropriate statutory authority. NCUA stands ready to work with the
Committee on legislation to effectuate the necessary changes so that
all credit unions can responsibly and effectively utilize the services
of CUSOs and technology service providers.
Thank you again for the invitation to testify. I am happy to answer
any questions.
PREPARED STATEMENT OF CANDACE A. FRANKS
Commissioner, Arkansas State Bank Department, on behalf of the
Conference of State Bank Supervisors
February 10, 2015
Introduction
Good morning, Chairman Shelby, Ranking Member Brown, and
distinguished Members of the Committee. My name is Candace Franks. I
serve as the Bank Commissioner for the State of Arkansas and I am the
current Chairman of the Conference of State Bank Supervisors (CSBS). It
is my pleasure to testify before you today on behalf of CSBS.
CSBS is the nationwide organization of banking regulators from all
50 States, the District of Columbia, Guam, Puerto Rico, and the U.S.
Virgin Islands. State banking regulators charter and supervise more
than 5,000 insured depository institutions. Additionally, most State
banking departments also regulate a variety of nonbank financial
service providers, including mortgage lenders, mortgage servicers, and
money services businesses. For more than a century, CSBS has given
State supervisors a national forum to coordinate supervision of their
regulated entities and to develop regulatory policy. CSBS also provides
training to State banking and financial regulators and represents its
members before Congress and the Federal financial regulatory agencies.
In my 35 years with the Arkansas State Bank Department, it has
become abundantly clear that community banks are vital to economic
development, job creation, and financial stability. I know this
Committee shares my convictions, and I appreciate your efforts to
examine the State of our country's community banks and regulatory
approaches to smaller institutions.
State regulators have a long history of innovating to improve our
regulatory and supervisory processes to better meet the needs of
community banks, their customers, and our States. Because of our roles
and where we fit in the broader regulatory framework, State banking
departments are able to pilot programs at the local level based on our
particular needs, especially in the area of bank supervision. This
often leads to innovative practices bubbling up from individual States
and expanding into other States. At the same time, each State has the
authority to choose what works best in their local context.
This regulatory flexibility is a strength of the State banking
system. After all, community banks in Arkansas might face local issues
that my department should address in one manner, while another State's
banking regulator might have a different set of supervisory challenges
to address. The Appendix to my testimony highlights a few cases in
which State regulators have proven to be particularly adept at
developing and implementing flexible practices to better serve our
smaller institutions. \1\
---------------------------------------------------------------------------
\1\ Also see: Vice, C. ``Examining the State of Small Depository
Institutions''. Committee on Banking, Housing, and Urban Affairs.
United States Senate. September 16, 2014. Available at: http://
www.banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=6e89b188-c24a-40d5-99e9-
754868914674.
---------------------------------------------------------------------------
My testimony today will highlight the importance of community banks
and their relationship-based business model, the shortcomings of our
current community bank regulatory approach, and State regulators'
vision for a new framework for community bank regulation. I will also
discuss specific ways in which Congress and the Federal banking
agencies can adopt right-sized policy solutions for community banks and
highlight State regulators' current outreach initiatives with community
banks. Finally, my testimony will discuss the States' efforts to
produce new and enhanced research to promote a better understanding
among policymakers about the role of community banks and the impact
they have upon our local, State, and national economies and
communities.
Community Banks and Relationship Lending Are Essential
The U.S. banking system is incredibly diverse, ranging from small
community banks to global financial conglomerates. This diversity is
not a mistake, but rather a product of our unique dual banking system.
The dual banking system, consisting of State and national banks
chartered by State and Federal regulators, has encouraged financial
innovation and institutional diversity for more than 150 years.
Community banks are essential to the U.S. financial system and
economy. The Federal Deposit Insurance Corporation (FDIC) classifies
nearly 93 percent of all U.S. banks as community banks, meaning there
are 6,107 community banks embedded in local communities throughout the
country. \2\ The defining characteristic of a community bank is its
relationship-based business model--a business model that relies on the
bank's knowledge of its local market, citizens, and economic
conditions. Community banks are able to leverage this personal, soft
data in a way that large, model-driven banks cannot. This is why
community banks have an outsized role in lending to America's small
businesses, holding 46 percent of the banking industry's small loans to
farms and businesses while only making up 14 percent of the banking
industry's assets. \3\ A community banker knows the entrepreneur
opening a new business around the corner. A community banker also knows
the local real estate market and the homebuyer seeking a mortgage loan.
These relationships allow community bankers to offer personalized
solutions designed to meet the specific financial needs of the
borrower.
---------------------------------------------------------------------------
\2\ ``Quarterly Banking Profile: Third Quarter 2014''. FDIC.
Available at: https://www2.fdic.gov/qbp/2014sep/qbp.pdf.
\3\ ``FDIC Community Banking Study''. FDIC, pp. 3-4 (December
2012). Available at: http://www.fdic.gov/regulations/resources/cbi/
study.html.
---------------------------------------------------------------------------
Community banks engage in relationship lending in the largest U.S.
cities and the smallest rural markets. Their role in providing credit
and banking services is just as vital as the largest financial
institutions. In fact, many consumers, businesses, and farms are not
served particularly well by standardized, model-driven lending. This is
especially the case in rural areas, where the FDIC has found that
community banks are three times more likely to operate a banking office
outside of a metro area than their large bank counterparts. \4\
---------------------------------------------------------------------------
\4\ Ibid.
---------------------------------------------------------------------------
There are more than 600 counties--or one out of every five U.S.
counties--that have no physical banking offices except those operated
by community banks. \5\ In my home State of Arkansas, there are 96
towns served by only one physical banking location, be it a bank's main
office or branch. In fact, 66 of these communities have populations
with less than 1,000 people. Community banks are the financial
lifeblood of these small Arkansas communities. To these parts of the
country, citizens do not differentiate between community banks,
regional banks, or the largest banks in the world. For these small or
rural towns, the community banking system is the banking system.
---------------------------------------------------------------------------
\5\ Ibid.
---------------------------------------------------------------------------
Simply put, community banks are a vital part of a very diverse
financial services marketplace and help ensure credit flows throughout
the Nation's diverse markets. They provide credit and banking services
in a flexible, innovative, and problem-solving manner, characteristics
that are inherent in the community bank relationship-based business
model.
The Shortcomings of Our Community Bank Regulatory Framework
State regulators believe that policymakers in Congress, the Federal
banking agencies, and State banking agencies must rethink how we all
approach regulating and supervising community banks. The statistics are
clear--most banks are community banks that operate in local markets:
Ninety percent of today's 6,589 banks have less than $1
billion in total assets.
The 5,908 banks with less than $1 billion in assets hold
less than 9 percent of the banking industry's total assets.
The average community bank has $225 million in total assets,
and employs 54 people on average.
On the other end of the industry spectrum, we find a very different
type of bank:
There are four U.S. banks that exceed $1 trillion in total
assets, and two of these have more than $2 trillion in total
assets.
Four banks hold around 41 percent of the banking industry's
total assets.
These four institutions each average 188,100 employees.
The community bank and megabank business model are also radically
different. Community banks serve local economies by tailoring their
loans and financial services around the customers within their
geographically limited markets. Conversely, the largest banks leverage
economies of scale in order to offer standardized mortgage and consumer
products across a diversity of U.S. and global markets, provide
financial services to multinational corporations, and engage in
extensive capital markets activity.
These are vastly different businesses, and policymakers must
regulate and supervise these financial institutions differently based
on their size, complexity, overall risk profile, and risk to the
financial system.
Recent regulatory reform efforts have rightfully centered on
addressing the problems posed by the largest, most systemically
important banks. However, there is also widespread concern among
policymakers and the banking industry that many of these new rules, in
addition to existing regulatory requirements, pose an undue burden for
community banks. To be sure, Congress and Federal regulators have
undertaken measures to provide community institutions with relief.
While these regulatory relief efforts are positive, there remains a
need for a more comprehensive approach based on a common and consistent
definition of community banks. A quick sampling of various asset
thresholds for community bank regulatory relief purposes illustrates
this point:
Federal Reserve Small Bank Holding Company (BHC) Policy
Statement--Exempts BHCs with assets less than $1 billion from
the consolidated BHC capital guidelines and grants them
simplified reporting requirements.
Consumer Financial Protection Bureau (CFPB) Jurisdiction--
The CFPB does not have direct supervisory authority over
institutions that fall below $10 billion in assets.
CFPB Small Creditor Definition--Residential mortgage loans
are granted Qualified Mortgage status if the bank has less than
$2 billion in total assets.
CFPB Balloon Loan Qualified Mortgages--Residential mortgage
loans are granted Qualified Mortgage status if the bank has
less than $2 billion in total assets and the institution
originates 50 percent or less of its mortgages in rural or
underserved areas.
CFPB Escrow Exemptions--Banks are exempt from escrow
requirements if the bank has less than $2 billion in total
assets and the institution originates 50 percent or less of its
mortgages in rural or underserved areas.
Treatment of Trust Preferred Securities (TruPS) Under the
Collins Amendment--Grandfathers TruPS issued before May 19,
2010, into regulatory capital for BHCs with less than $15
billion in assets.
Home Mortgage Disclosure Act (HMDA) Reporting Criteria--
Banks with less than $44 million in assets are exempt from
reporting HMDA data as required under Regulation C.
State regulators are concerned that an approach to regulatory
relief that relies solely or primarily on asset thresholds falls short
in granting small community banks real relief from regulations designed
for their larger competitors. True regulatory right-sizing for
community banks will require a holistic approach.
These are vastly different businesses, and policymakers
State Regulators Support a Definitional Approach for Right-Sizing
Community Bank Regulation and Supervision
Regulatory right-sizing requires a process for determining how
safety and soundness and consumer protection requirements can better
reflect the community banking business model. To start this process,
policymakers and regulators need to know which institutions should be
the focus of our regulatory right-sizing efforts. To date, a consensus
definition has eluded policymakers. CSBS is confident that regulators
and policymakers can more accurately define the universe of community
banks and tailor laws, regulations, and supervision for these
institutions.
A definitional approach would provide the necessary foundation for
a more appropriate regulatory framework for community banks. The
definitional approach could be used as a basis for a broad range of
regulatory right-sizing initiatives. Instead of crafting specific
exemptions in law or leaning on boilerplate statements like
``appropriate for the size and complexity of the institution,'' there
would be a clear process for defining a community bank. With a new
process in place to identify community banks, Congress and regulators
could then move forward in a holistic manner to provide regulatory and
supervisory right-sizing for these institutions.
After all, the more than 6,100 institutions identified as community
banks are not simply a number, but rather institutions that State
regulators know, license, supervise, and work with on a regular and
extensive basis. My banking department staff spends innumerable hours
with community bankers in Arkansas, supervising them and helping them
address today's banking challenges. This is the case for every
regulatory agency at this table--we all know which institutions are in
fact community banks, and we must begin to provide these institutions
with real regulatory relief in a comprehensive, holistic manner.
Community banks are best identified by a set of principles that can
be applied on a case-by-case basis, not by simple line drawing. CSBS is
committed to getting this right, and my colleagues and I would be glad
to work with Congress to create a process for community bank
identification that is not solely based on asset thresholds, but takes
qualitative criteria into account. For example, State regulators
believe characteristics such as the following can help identify
community banks:
Operating primarily in local markets;
Deriving funding primarily from a local market, specifically
through deposits of members of the community in which it
operates;
Its primary business is lending out the deposits it collects
to the community in which it predominately operates;
The lending model is based on relationships and detailed
knowledge of the community and its members, not volume-driven
or automated;
Focusing on providing high-quality and comprehensive banking
services; and
Locally based corporate governance.
Based on criteria such as these, I am confident we can identify the
universe of community banks. This will provide the necessary framework
for policymakers to move forward in a purposeful manner, designing
statutes and regulations that are consistent with and foster a diverse
economy and financial system.
Specific Areas for Community Bank Regulatory Relief
As the effort to address regulatory burden has evolved over the
last several years, State regulators have worked to identify specific
recommendations that we believe would be meaningful for community
banks. While these areas help to illustrate the inappropriate
application of regulation and negative effect on community banks, the
definitional approach presented earlier in this testimony would provide
a foundation to address many of these issues. For State regulators, the
objective is not necessarily less regulation, it is regulation and
supervision that reflects and appreciates the community banking
business model. The following represent specific actions that Congress
and the Federal banking agencies can undertake to promote right-sized
regulations for community banks.
Study Risk-Based Capital for Smaller Institutions
The Basel Committee on Banking Supervision designed risk-based
capital standards for internationally active banks. These standards are
overly complex and inappropriate for community banks and their business
model. Indeed, research presented at the Community Bank Research
Conference has shown that a simple leverage requirement would be
equally, if not more, effective than risk-based capital requirements
for community banks, and would be much less burdensome. \6\
---------------------------------------------------------------------------
\6\ Moore, R., and M. Seamans. ``Capital Regulation at Community
Banks: Lessons From 400 Failures''. Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/
Capital_Regulation_at_Community_Banks.pdf.
---------------------------------------------------------------------------
Congress should mandate the U.S. Government Accountability Office
(GAO) investigate the value and utility of risk-based capital for
smaller institutions. The resulting GAO study should seek to understand
how risk weights drive behavior in the volume and type of credit a bank
originates, as well as the burden of providing the necessary data for
calculating capital ratios.
Mortgage Rules Should Better Reflect the Realities of Community Bank
Portfolio Lending
Community banks that hold the full risk of default of a loan are
fully incented to determine the borrower's repayment ability. Laws and
regulations regarding mortgage lending should reflect this reality.
Qualified Mortgage Status for Mortgages Held in Portfolio
When a community bank makes a mortgage and holds that loan in
portfolio, the interests of the bank and the borrower are inherently
aligned, furthering the objective of safe and sound business practices
that protect consumers. Yet, a national community bank survey and
community bank town hall meetings conducted in conjunction with the
2014 Community Banking in the 21st Century research conference point to
a problem: while many community banks' existing mortgage businesses are
consistent with the Ability-to-Repay (ATR) and Qualified Mortgage (QM)
requirements, complying with the regulations is not only creating an
outsized regulatory burden but also curtailing lending. One solution
that would tailor the requirement to the nature of community bank
mortgage lending is to grant the QM liability safe harbor to all
mortgage loans held in portfolio by a community bank. Congress explored
this issue through hearings and CSBS-supported legislation during the
113th Congress. We encourage this Congress to pursue similar
legislation to promote portfolio lending by community banks.
Improving the CFPB's Rural Designation Process
The Dodd-Frank Act's ATR requirement's restrictions on balloon
loans and the CFPB's efforts to provide limited relief for balloon
loans made by smaller institutions in rural areas illustrate the need
for regulatory right-sizing and for a conscious effort to understand
and adapt regulation to the community bank business model. When used
responsibly, balloon loans are a useful source of credit for borrowers
in all areas. Properly underwritten balloon loans are tailored to the
needs and circumstances of the borrower, including situations where the
borrower or property is otherwise ineligible for standard mortgage
products. Because banks can restructure the terms of a balloon loan
more easily than an adjustable rate mortgage, they are able to offer
the borrower more options for affordable monthly payments, especially
in a rising interest rate environment.
As a regulator, I prefer that lenders and borrowers in my State
have flexibility and options when selecting consumer products and
mortgages. Since the mortgage is held in portfolio, community banks
must work to ensure that the product is tailored to take into
consideration all risks associated with the credit in order to avoid
default.
Community banks retain balloon mortgages in portfolio as a means of
offering credit to individuals that do not fit a standard product but
nonetheless can meet the monthly mortgage obligation. That is the logic
behind the Dodd-Frank Act provision providing balloon loans with QM
status if those loans are originated in rural or underserved areas by a
small creditor. However, the CFPB's original approach to identifying
such areas relied solely on the Department of Agriculture's Urban
Influence Codes, producing many illogical and problematic outcomes for
community banks.
CSBS raised this concern shortly after the original rule was
proposed, and we worked with Congress to develop a petition process for
interested parties to seek rural designation. We applaud Congress for
its focus on this issue, and we appreciate the CFPB's recent efforts to
improve its rural and underserved designation framework by adding rural
census blocks as defined by the U.S. Census Bureau.
More fundamentally, portfolio lending is not a ``rural'' issue or
an ``underserved'' issue; it is a relationship-based lending issue for
all community banks. Eliminating the rural or underserved balloon loan
limitations for qualified mortgages would go a long way in expanding
the CFPB's Small Creditor QM framework to include all loans held in
portfolio by community banks. Similarly, removing the rural or
underserved requirements from the exception to mandatory escrow
requirements for higher-priced loans would make right-sized regulations
business model focused, not geographically focused.
Tailor Appraiser Qualifications for 1-4 Family Loans Held
in Portfolio
Current appraisal regulations can curtail mortgage lending in
markets that lack qualified appraisers or comparable sales. Congress
should require regulations to accommodate portfolio loans for owner-
occupied 1-4 family loans, recognizing the lender's proximity to the
market and the inherent challenge in securing an accurate appraisal by
a qualified appraiser.
Community Bank Fair Lending Supervision Must Acknowledge the Business
Model and Be Applied Consistently
State regulators take the difficulties that many underserved
borrowers have had in obtaining access to fair credit very seriously,
especially in regards to mortgage lending and home ownership. State
regulators are committed to enforcing institutions' compliance with the
letter and spirit of our fair lending laws, but we are concerned about
regulators' overreliance on opaque statistical models that use small
samples to judge fair lending performance and inconsistencies in
Federal regulators' approach to fair lending supervision. Many times it
is not the statute that creates the problem, but the interpretation,
guidance, and the examination techniques utilized. Federal agency
leadership must commit to a more pragmatic and transparent approach to
fair lending supervision.
Federal regulators should not use one-size-fits-all techniques and
tools on community banks in fair lending examinations. A smaller
institution makes case-by-case lending decisions based on local
knowledge and local relationships. While statistical analysis plays a
role in fair lending supervision, it is not the beginning and end of
the analysis. Supervisors must utilize their flexibility to look beyond
statistical models to take a more holistic view of the lending
decision.
Despite assurances of consistent approaches from ``headquarters''
to ``the field'' and of continued collaboration to ensure consistency,
State regulators have observed meaningful differences in how the three
Federal banking agencies treat community banks on fair lending issues
and as well as a disconnect within the individual agencies. Federal
agency leadership has the responsibility to make sure this is not the
case, and they must be accountable for ensuring transparency and
consistency.
The current approach to fair lending for community banks is having
a chilling effect on credit availability, as banks, frustrated by the
examination process, are curtailing or exiting consumer credit
products. From a public policy perspective, we should want community
banks doing this business. If there were only 66 banks that had
compliance or Community Reinvestment Act problems in 2013, \7\ and
referrals to the Department of Justice are minimal, why are banks
experiencing such in-depth and extensive reviews?
---------------------------------------------------------------------------
\7\ ``FDIC Annual Report 2013''. FDIC. Available at: https://
www.fdic.gov/about/strategic/report/2013annualreport/AR13section1.pdf.
---------------------------------------------------------------------------
The Application Process for Community Banks Must Reflect the Business
Model
Community bank applications submitted to Federal banking agencies
for transactions such as mergers and capital investments can take an
extended time to process because the agencies have to ensure the
decision will not establish a precedent that could be exploited by
larger institutions. The approval of a merger, acquisition, or
expansion of activities should be related to the overall size and
complexity of the transaction, and community banks should not be
unnecessarily penalized for the potential action of larger financial
institutions. Federal law, an agency rule, or a clause in an approval
letter could provide the necessary protection by stating that
application decisions for community banks do not establish a precedent
for systemically important financial institutions.
To further address the length of time the agencies take to review
community bank applications, the application review and approval
process for a defined subset of community institutions should be
decentralized with more final decision-making authority given to FDIC
Regional Offices and the regional Federal Reserve Banks.
Federal Regulatory Agency Leadership and State Supervisory
Representation
A key to the success of the dual banking system is robust
coordination among regulators. Meaningful coordination in regulation
and supervision means diversity at the highest governance levels at the
Federal regulatory agencies. The current FDIC Board does not include an
individual with State regulatory experience as required by law. \8\ The
Federal Deposit Insurance (FDI) Act and congressional intent clearly
require that the FDIC Board must include an individual who has worked
as a State official responsible for bank supervision. As the chartering
authority for more than 76 percent of all banks in the United States,
State regulators bring an important regulatory perspective that
reflects the realities of local economies and credit markets. State
regulators were pleased to see bipartisan legislation introduced last
Congress in the Senate and the House that refined the language of the
FDI Act to ensure that Congress' intent is met and that the FDIC Board
includes an individual who has worked in State government as a banking
regulator. We hope to see this proposal reintroduced this Congress.
---------------------------------------------------------------------------
\8\ 12 U.S.C. 1812(a)(1)(C).
---------------------------------------------------------------------------
We thank Congress for its efforts to require community bank or
community bank supervisory representation on the Federal Reserve Board
of Governors (the Board) through the Terrorism Risk Insurance Program
Reauthorization Act of 2014. In 2013, CSBS released a white paper \9\
on the composition of the Board of Governors and an infographic \10\
that illustrates the background and experience of the members of the
Board of Governors throughout the Board's history. The white paper
highlights two key trends: Congress' continuing efforts to ensure the
Board's composition is representative of the country's economic
diversity, and the Board's expanding supervisory role. The infographic
illustrates the growing trend of naming academics to the Board. Passage
of Senator Vitter's provision reinforces Congress' consistent intent to
bring together a range of perspectives on the Board, and reaffirms the
important role of community banks in the financial marketplace.
---------------------------------------------------------------------------
\9\ ``The Composition of the Federal Reserve Board of Governors''.
CSBS. Available at: http://www.csbs.org/news/csbswhitepapers/Documents/
Final CSBS White Paper on Federal Reserve Board Composition (Oct 23
2013).pdf.
\10\ Available at: http://goo.gl/eCKVrS.
---------------------------------------------------------------------------
Practical Privacy Policy Notice Requirements
State regulators firmly believe that financial institutions have an
affirmative and continuing obligation to respect customer privacy.
However, there are commonsense practices for communicating privacy
policies. If a bank's privacy policy does not change, the bank should
not be required to repeatedly inform customers of the policy. Redundant
notifications are costly and limit the effectiveness of important
privacy communications with customers. Accordingly, CSBS supports any
commonsense fix to the Gramm-Leach-Bliley Act that exempts financial
institutions from mandatory annual privacy policy mailings if the
institution's privacy policy does not change.
State Regulators Are Engaging Community Banks
State regulators regularly and actively engage with community banks
to try to reduce regulatory burden and to help meet the pressing needs
these institutions face. State regulators are currently working to
facilitate the Economic Growth and Regulatory Paperwork Reduction Act
process. We are providing guidance to and conducting outreach with
community banks to help them navigate cybersecurity threats.
Economic Growth and Regulatory Paperwork Reduction Act
The Federal Financial Institutions Examination Council (FFIEC)
allows State regulators and our Federal counterparts to better
coordinate bank supervision, which helps reduce the supervisory burden
for community institutions. State regulators are involved in the FFIEC
through the State Liaison Committee, which is currently chaired by
Massachusetts Banking Commissioner David Cotney.
One of the FFIEC's current major projects is the review of banking
regulations mandated by the Economic Growth and Regulatory Paperwork
Reduction Act (EGRPRA). \11\ State regulators, through our presence on
the FFIEC, are committed to using this review as an opportunity to
pinpoint regulations that may not be properly suited to the business
model of community banks. We are excited to participate in this process
through the FFIEC with our Federal colleagues at the FDIC, Federal
Reserve Board, and the Office of the Comptroller of the Currency.
---------------------------------------------------------------------------
\11\ 12 U.S.C. 3311.
---------------------------------------------------------------------------
State regulators are attending and participating in the regional
outreach events. I am particularly pleased that there will be an event
later this year focused on rural banks. Additionally, the feedback
received during the outreach events and through the ongoing comment
process will provide important input to the State Liaison Committee and
State regulators as a whole as we continue to seek ways to minimize
duplicative regulation and to make supervision of State-chartered banks
more efficient.
The FFIEC and Federal regulatory agencies are contributing
significant time and resources to ensure the EGRPRA process is a
fruitful endeavor. The Federal regulators' commitment to this effort is
evidenced by the attendance of Comptroller Curry, Federal Reserve
Governor Powell, and FDIC Chairman Gruenberg at EGRPRA outreach
meetings throughout the country. Their commitment shows that this will
not merely be a check-the-box exercise, but a meaningful process of
reducing regulatory burden.
While the comment process and outreach events have just begun, they
are already yielding meaningful areas for us to consider changes,
including burdens associated with the quarterly call report, other
regulatory filings, and Bank Secrecy Act compliance. The industry is
also building a reasonable case for extending the examination cycle for
certain institutions. We also greatly appreciate Comptroller Curry's
comments that there are changes we can start making now before we
complete the EGRPRA process.
Executive Leadership of Cybersecurity
We appreciate Congress' ongoing efforts to address cybersecurity
challenges. Cybersecurity is a national priority, and State regulators
are fully engaging community banks on this vital issue. The persistent
threat of cyber attacks is a widespread problem facing all industries,
especially the financial services industry. Through regular dialogue
with our State-chartered financial institutions, State regulators have
learned that the issue of cybersecurity can be daunting for small bank
executives who often have limited resources and assets to dedicate to
cybersecurity.
State regulators have heard from small bank executives that while
they understand the harm cyber attacks can cause to their financial
institutions, the abundance of information available on cybersecurity
is overwhelming and largely technical, making many bankers uncertain as
to what information applies to their particular institution. This
feedback from State-chartered banks prompted State regulators, through
CSBS, to launch the Executive Leadership of Cybersecurity (ELOC)
initiative in 2014. \12\ The ELOC program seeks to raise awareness
among bank CEOs that managing an institution's cybersecurity risks is
not just a ``back office'' issue, but also an executive and board level
issue. ELOC is part of a larger State and Federal effort to help combat
the threat of cyber attacks in the financial services sector.
---------------------------------------------------------------------------
\12\ ``Executive Leadership of Cybersecurity''. CSBS. Available
at: http://www.csbs.org/cybersecurity.
---------------------------------------------------------------------------
With the launch of the ELOC initiative, CSBS established a
cybersecurity resources Web page that, for over a period of 9 weeks,
served as a key resource for bank executives to receive comprehensive,
nontechnical, and easy-to-read information on cybersecurity tailored to
community bank CEOs. By the conclusion of the Web campaign, more than
500 community bankers had signed up to receive CSBS's exclusive ``Cyber
101: A Resource Guide for Bank Executives'', a resource guide that
compiles recognized industry standards for cybersecurity and financial
services industry best practices into one document. The ELOC Web
campaign and resource guide provided community bank executives with the
knowledge and necessary tools to better understand cyberthreats at
their institutions, better prepare for and protect against
cyberthreats, and to better understand their role as bank executives in
managing cybersecurity risks at their banks.
The high level of community banker interest in the ELOC initiative
sent a strong message to State regulators that community banks are
looking for more leadership and clear guidance on how to address
cybersecurity risks at their institutions. To that end, CSBS has made
cybersecurity one of its highest priorities. In addition to the ELOC
Web site and the cyber resource guide, CSBS will be working with State
banking departments to host a series of cybersecurity industry outreach
events throughout 2015. My department will take part in hosting one of
these events in Arkansas this year.
These examples demonstrate the willingness of State regulators to
seek innovative solutions and methods to provide comprehensive and
effective supervision, while tailoring our efforts to the business
models of banks. Banks should be in the business of supporting their
communities. We are working to enact supervision that ensures safety
and soundness and consumer protection, while allowing State-chartered
banks to serve their customers most effectively and contribute to the
success of our local communities, our States, and our Nation.
The Need for Robust Community Bank Research
State regulators recognize that designing a right-sized regulatory
framework requires us to truly understand the state of community
banking, the issues community banks face, and the nuances within the
community banking industry. Data-driven and independently developed
research on community banks is sorely lacking when compared to the
breadth of research dedicated to the largest financial institutions. To
address the need for research focused on community banks, State
regulators, through CSBS, have partnered with the Federal Reserve to
conduct the annual Community Banking in the 21st Century research
conference. \13\ Bringing together State and Federal regulators,
industry experts, community bankers, and academics, the research
conference provides valuable data, statistics, and analysis about
community banking. Our hope is that community bank research will inform
legislative and regulatory proposals and appropriate supervisory
practices, and will add a new dimension to the dialogue between the
industry and regulators.
---------------------------------------------------------------------------
\13\ ``Community Banking in the 21st Century''. Federal Reserve
System/CSBS. Available at: https://www.stlouisfed.org/banking/
community-banking-conference-2014/.
---------------------------------------------------------------------------
The research conference represents an innovative approach to
research. The industry informs many of the themes studied, providing
their perspective on issues through a national survey and local town
hall meetings. At the same time, academics explore issues raised by the
industry in a neutral, empirical manner, while also contributing their
own independent research topics. This approach ensures that three
research elements--quantitative survey data, qualitative town hall
findings, and independent academic research--all enhance and refine one
another, year after year. The research conference's early success
underscores the interest and need for community bank research: in 2014,
more than 1,000 community bankers participated in the national survey,
more than 1,300 bankers attended local town hall meetings, and more
than 37 research papers were submitted by academics for consideration,
a considerable increase from the number of papers submitted for the
inaugural 2013 conference.
I would like to share some of the findings we have gathered through
our community bank research conferences from academic research, the
national survey of community banks, and our town hall meetings with
community banks. I would also like to illustrate how our holistic
approach to research can lead to better policy outcomes for community
banks.
Academic Research on Community Banks
While there have only been two community bank research conferences
thus far, we have already benefited from valuable data and research
findings that show the importance of community banks and the centrality
of their relationship-based lending model. For example, we now know
that community bank failures lead to measurable economic
underperformance in local markets. \14\ Research also shows that the
closer a business customer is to a community bank, the more likely the
start-up borrower is to receive a loan. \15\ Community banks also have
a key advantage through ``social capital,'' which supports well-
informed financial transactions. This so called ``social capital'' is
the basis for relationship lending and exists because community bankers
live and work in the same communities that their banks do business. The
success of the community bank is tied directly to the success of
consumers and businesses in those communities. This is especially true
in rural areas, where the community bank relationship-based lending
model results in lower default rates on U.S. Small Business
Administration loans than their urban counterparts. \16\
---------------------------------------------------------------------------
\14\ Kandrac, J. ``Bank Failure, Relationship Lending, and Local
Economic Performance''. Available at: https://www.stlouisfed.org//
media/Files/PDFs/Banking/CBRC-2013/Kandrac_BankFailure_CBRC2013.pdf.
\15\ Lee, Y., and S. Williams. ``Do Community Banks Play a Role in
New Firms' Access to Credit?'' Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/
Lee_Williams.pdf.
\16\ DeYoung, R., et al. ``Small Business Lending and Social
Capital: Are Rural Relationship Different?'' Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2013/
DGNS_2012_SBA_lending.pdf.
---------------------------------------------------------------------------
We are also discovering the extent to which governmental policies
can impact community banks. For example, research shows that more than
80 percent of community banks have reported a greater than 5 percent
increase in compliance costs since the passage of the Dodd-Frank Act.
\17\ Research has also informed us that the Federal banking agencies'
appeals processes are seldom used, inconsistent across agencies, and at
times dysfunctional. \18\ We can also see that macroprudential
regulation can have a meaningful impact on bank behavior, but that it
may also cause unintended consequences. \19\ We hope that findings like
these will inform policymakers' work designing a right-sized policy
framework for community banks.
---------------------------------------------------------------------------
\17\ Peirce, H., I. Robinson, and T. Stratmann. ``How Are Small
Banks Faring Under Dodd-Frank?'' Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/
SESSION3_Peirce_Robinson_Stratmann.pdf.
\18\ Hill, J. ``When Bank Examiners Get It Wrong: Financial
Institution Appeals of Material Supervisory Determinations''. Available
at: https://www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/
SESSION2_AndersonHill.pdf.
\19\ Bassett, W., and W. Marsh. ``Assessing Targeted
Macroprudential Financial Regulation: The Case of the 2006 Commercial
Real Estate Guidance for Banks''. Available at: https://
www.stlouisfed.org//media/Files/PDFs/Banking/CBRC-2014/
SESSION2_Bassett_Marsh.pdf.
---------------------------------------------------------------------------
National Survey of Community Banks
The community banker survey we conducted as part of the research
conference provides us with crucial information straight from the
industry. \20\ For example, bankers have been very vocal about the
compliance burdens associated with the new Ability-to-Repay and
Qualified Mortgage rules. Our research finds that community banks
continue to see residential mortgage lending as a meaningful business
opportunity, but have a mixed view of making non-QM loans, with 26
percent of respondents indicating that they would not originate non-QM
loans and an additional 33 percent only originating non-QM on an
exception basis. Assessing the new ATR and QM mortgage standards
against existing loans, 67 percent of bankers identified a low level of
nonconformance, suggesting the two rules generally align with existing
bank practices.
---------------------------------------------------------------------------
\20\ The survey data is available at: https://www.stlouisfed.org/
bank-supervision/2014-community-banking-conference/2014-survey-data.
---------------------------------------------------------------------------
Community banks have long voiced concerns about increasing
regulatory compliance costs, but these costs have been difficult to
quantify historically. To encourage additional data and research in
this area, the national survey sought to identify how increased
compliance costs are realized in community banks' operations. Survey
data show that rising compliance costs primarily take the shape of
spending additional time on compliance, hiring additional compliance
personnel, and increasing reliance on third-party vendors.
The survey also showed us that less than a quarter of respondents
plan to add new products and services in the next 3 years. We must take
this as an important red flag. Any industry that is not in a position
to innovate while the world around it is innovating has questionable
long-term viability.
Community Banker Town Hall Meetings
Community bankers in the town hall meetings were quite clear: the
ATR and QM mortgage rules have required banks to make significant
operational changes in order to comply. These changes have increased
the cost of origination, the cost to the consumer, and have reduced the
number of loans a bank can make.
Bankers also indicated that compliance burdens and security
concerns are significant headwinds to launching new products and
innovation. Similarly, bankers expressed that new regulations have
changed how they approach serving their customers, shifting their
mentality away from creating flexible products for customers and
towards what regulations allow them to do.
Holistic Research Can Lead to Better Policy Outcomes
Looking at these research conference findings together should cause
policymakers to ask serious questions about our approach to regulating
community banks. In the context of the ATR and QM mortgage rules, if
new requirements are generally consistent with most community banks'
practices, should implementation of these rules result in increased
costs and a reduction in credit availability? When we think about
community banking products, should regulatory compliance burdens
inhibit community banks from offering innovative products to their
customers? These are not outcomes any policymaker should want, and we
must be responsive to what the industry and empirical research are both
telling us.
More importantly, this information can lead policymakers to better
policy outcomes, if we let it. We are seeing more clearly the role and
value that community banks play in our economies. This should inform
and inspire us to not establish broad asset thresholds out of political
pressure, but to craft a meaningful regulatory framework for a
community banking business model that provides real value and presents
limited risk to the financial system.
The 2015 Community Banking in the 21st Century research conference
will be held this fall at the Federal Reserve Bank of St. Louis. We are
pleased that Chair Yellen is planning on attending and addressing the
conference. We have already issued a call for research papers and are
planning our national survey and town hall events. State regulators
have been encouraged by the overwhelming demand for this conference. We
have been pleased at the growing response to the call for papers over
the past 2 years and expect the response and interest in the conference
to continue to grow.
Moving Forward
Congress, Federal regulators, and State regulators must focus on
establishing a new policymaking approach for community banks. We must
do so by moving away from an inconsistent, piecemeal regulatory relief
strategy that uses hard asset thresholds. We will need a new
definitional framework based upon the easily identifiable attributes of
a community bank. Only then will we be able to provide community banks
with a regulatory framework that effectively complements and supervises
their unique relationship-based lending model.
Policymakers are capable of right-sizing regulations for these
indispensable institutions, but we must act now to ensure their long-
term viability. CSBS remains prepared to work with members of Congress
and our Federal counterparts to build a new right-sized framework for
community banks that promotes our common goals of safety and soundness
and consumer protection.
Thank you again for the opportunity to testify today, and I look
forward to answering any questions you have.
Appendix
This Appendix highlights just a few cases in which State regulators
have proven to be particularly adept at developing and implementing
flexible practices to better serve our smaller institutions. Some of
these examples are broad, historic initiatives that have significantly
shaped the trajectory of U.S. banking regulation and supervision, such
as the joint and coordinated bank examination framework. Other examples
provide local snapshots highlighting the flexibility that individual
States exercise on a regular basis. The significance that these are
State-based solutions cannot be understated. States have the dexterity
to experiment with supervisory processes in ways that the Federal
Government cannot without applying sweeping changes to the entire
industry. This is by design and a trademark of our dual banking system.
As States develop these practices, CSBS has developed several vehicles
for States to share techniques and best practices with one another,
allowing for the speedy deployment of successful models nationwide and
maximizing regulatory efficiency.
Joint Examinations of Multicharter Holding Companies
Joint bank examinations trace their roots back more than two
decades, when due to interstate branching restrictions, bank holding
companies would often own independently chartered banks in different
States. To improve regulatory efficiency, State banking agencies began
conducting joint examinations of multicharter holding companies with
other State regulators.
Before the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (Riegle-Neal), States like Iowa and Indiana were already
coordinating with other State banking regulators to conduct joint State
examinations for multicharter holding companies. This approach
eliminated regulatory duplication, reduced the regulatory burden on the
individual banks and the holding company, and helped the regulators
develop a holistic view of the entire holding company. Once Riegle-Neal
was passed, States built upon their existing practices in order to
coordinate with Federal supervisors, crafting examination plans across
State and agency lines. In 1996, the States formalized cooperative and
coordination agreements, the Nationwide Cooperative Agreement \21\ and
Nationwide State-Federal Supervisory Agreement, \22\ to facilitate the
supervision of multistate banks and to define the nature of State-
Federal supervision. These agreements set up a model centered on the
examination team of the holding company or lead institution and, while
close to 20 years old, still form the basis for State-Federal
supervisory interaction. These agreements foster effective coordination
and communication among regulators and have led to a supervisory model
that reduces burden and enhances responsiveness to local needs and
interests in an interstate banking and branching environment.
---------------------------------------------------------------------------
\21\ Nationwide Cooperative Agreement (Revised 1997). Available
at: http://www.csbs.org/regulatory/Cooperative-Agreements/Documents/
nationwide_coop_agrmnt.pdf.
\22\ Nationwide State/Federal Supervisory Agreement (1996).
Available at: http://www.csbs.org/regulatory/Cooperative-Agreements/
Documents/nationwide_state_fed_supervisory_agrmnt.pdf.
---------------------------------------------------------------------------
This process ultimately leads to a more consistent examination
experience for these community institutions. Rather than the holding
company having to handle numerous examinations throughout the year,
regulators conduct coordinated examinations of all the holding
company's institutions at the same time, satisfying State and Federal
supervisory requirements in a streamlined manner.
This is just one of many illustrations of how State regulatory
agencies have shown great flexibility and willingness to reduce burden
for their State-chartered institutions, all while maintaining the same
level of effective oversight.
Arkansas Self-Examination Program
A State-specific example of regulatory innovation can be found in
my own department. The Arkansas Self-Examination Program serves both as
an off-site monitoring program and an effective loan review report for
bank management. Since its introduction in 1986, the program has
created significant regulatory efficiencies and benefits to
participating community banks.
When an Arkansas bank volunteers to participate in the Self-
Examination Program, it provides the Arkansas State Bank Department
with roughly three pages of financial information each month. We use
this information to spot problem areas and trends that may threaten the
bank's safety and soundness. In exchange for this data, we provide
participating institutions with reports that reflect the bank's month-
by-month performance, a performance comparison with peer institutions,
and early warnings that flag issues of concern. Both the information
provided by the banks and reports generated by my staff remain
confidential. While the program is not a replacement for examinations,
it is an excellent supplement that benefits our agency and the bank.
Although the program is optional, the participation rate of
Arkansas banks typically exceeds 90 percent. By creating a simple,
direct, and valuable tool for community banks, we can better protect
consumers and the marketplace and ensure the continuing success of our
State's financial institutions.
Central Point of Contact
Many State banking departments follow the practice of assigning a
single individual as a central point of contact to specific
institutions to conduct ongoing off-site surveillance and monitoring.
The off-site portion of this process promotes efficient and effective
State supervision, allowing examiners to carry out their work away from
the bank, freeing up bankers' time and office space. At the same time,
central points of contact also provide banks with a single person to
turn to when they have supervisory questions and issues, ensuring a
more direct, faster response to their needs.
CSBS Loan Scoping Job Aid
In addition to coordination with the industry to make supervision
more efficient, State regulators are increasingly turning to technology
to enhance and streamline supervision. In 2012, CSBS published a Loan
Scoping Job Aid (job aid) for examiners that encourages State
regulators to consider institution-specific criteria that may lead to a
smaller, yet more effective, loan review methodology. \23\ Loan review
is the cornerstone of safety and soundness examinations, providing
examiners the best avenue for determining a bank's health. The CSBS job
aid provides methods for examiners to improve their loan scope by
reviewing a different sample of loans than would otherwise be the case.
This more thoughtful, risk-focused, yet surgical approach will help
regulators identify new risks and provide community banks with more
meaningful and useful examination results.
---------------------------------------------------------------------------
\23\ Available at: http://www.csbs.org/regulatory/resources/Pages/
JobAids.aspx.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
FROM DOREEN R. EBERLEY
Q.1. According to the OCC, the Federal banking agencies have
agreed to undertake a comprehensive review of all Call Report
items and schedules. When will this review be completed? Who
from your agency is in charge of this review? Will this review
result in a formal, publicly available report?
A.1. At the December 2014 meeting of the Federal Financial
Institutions Examination Council, Council members directed the
Council's Task Force on Reports to undertake certain actions to
address concerns raised by bankers about the burden of
preparing the Consolidated Reports of Condition and Income
(Call Report). This formal initiative is intended to identify
potential opportunities to reduce burden associated with the
Call Report requirements for community banks. The comprehensive
review of all Call Report items and schedules is one of the
actions under this initiative.
Section 604 of the Financial Services Regulatory Relief Act
of 2006 requires the Federal banking agencies to ``review the
information and schedules that are required to be filed by an
insured depository institution'' in the Call Report. The
deadline for the next statutorily mandated review is the fourth
quarter of 2017. The Task Force on Reports and the agencies
have accelerated the start of this review of the existing Call
Report items and schedules to 2015. This review is planned for
completion by the fourth quarter 2017 statutory deadline.
In conducting the comprehensive review, the Task Force on
Reports and the agencies will require Call Report users at the
Council's member entities to provide more robust justifications
for Call Report items than in previous reviews. Users would
need to explain how they use each data item, the frequency with
which it is needed, and the population of institutions from
which it is needed. Data items or schedules for which users
provide insufficient justification for continued collection
from some or all institutions in all four quarters would be
candidates for elimination, less frequent collection, or the
creation of a new or an upward revision of an existing
reporting threshold, which can be size and/or activity-based.
Call Report schedules would be prioritized for review over the
next 2 years based on their perceived burden.
Mr. Robert Storch, Chief Accountant, Division of Risk
Management Supervision, is in charge of the review for the
FDIC. A formal, publicly available report on the results of the
comprehensive review of the Call Report is not currently
planned. However, the Federal banking agencies will publicly
propose to implement burden-reducing Call Report changes
identified as a result of this review in joint Federal Register
notices that will be issued for comment in accordance with the
Paperwork Reduction Act. Burden-reducing Call Report changes
identified as a result of this review would be proposed on a
flow basis annually as they are identified rather than waiting
until the completion of the entire comprehensive review.
Q.2. Kansas Fed President, Esther George, said at a 2014
conference that the community bank ``business model is one in
which the incentives of banks are aligned with outcomes that
benefit their customers and the economy. When incentives are
aligned in this way, the need for an `ability to repay rule,'
for example, seems unnecessary.''
Do you agree that banks that hold mortgages on portfolio
have a vested interest to perform an analysis of a customer's
ability to repay irrespective of whether such mortgage meets
the requirements of a ``Qualified Mortgage''?
A.2. Analyzing a borrower's ability to repay a loan is a
longstanding, fundamental tenet of safe and sound underwriting
that also is in the best interest of the borrower. This is true
in residential, commercial, consumer, and other lending. The
Ability-to-Repay/Qualified Mortgage rule (ATR/QM) is consistent
with this important principle. When originating mortgages,
FDIC-supervised institutions have traditionally established
borrowers' ability to repay loans, and we are finding that they
are continuing to meet this standard in the normal course of
their business.
Meeting the requirements of the current regulation is
consistent with how community banks do business. Indeed, we are
hearing anecdotally that most of our institutions are meeting
the QM standard as well. As you may know, the CFPB recently
proposed to expand the definition of small and rural creditors.
This will make it easier for a larger number of lenders to meet
the more flexible standards that apply to these creditors and
loans. Indeed, if finalized as proposed, the new rule would
allow most FDIC-supervised institutions to originate mortgages
consistent with QM standards nearly without limit, as long as
those mortgages are held in portfolio.
Q.3. Do you agree that mortgages held on portfolio should be
afforded a ``Qualified Mortgage'' status? If not, why not?
A.3. QM status involves important safeguards for lenders,
borrowers, and the financial system, including product
requirements that encompass basic underwriting standards and
protections against products that proved to be particularly
risky in the crisis, such as option ARMs, negatively amortizing
loans, and certain balloon loans. Extending safe harbor status
to such risky products that performed so poorly in recent
years, even if they were held in a bank's portfolio, would
raise significant policy concerns.
Most community banks meet the current definition of ``small
creditor,'' so they can take advantage of an exception that
allows them to make balloon loans, as long as they meet the
other product requirements and hold the loan in their
portfolios. This exception is particularly important to small
and rural banks that are more likely than larger banks to
originate balloon loans, and the recent proposal to expand the
universe of small and rural creditors could result in even more
lenders taking advantage of the balloon loan exception.
Q.4. The OCC acknowledged in its testimony that the Volcker
Rule contains no exemption for community bank, and that the
regulatory burden is not justified by the risk these
institutions present. The OCC has drafted a legislative
proposal to exempt from the Volcker Rule banks with total
consolidated assets of $10 billion or less.
Do you support exempting from the Volcker Rule banks with
total consolidated assets of $10 billion or less? Do you
support OCC's proposal? If not, why not?
If you believe that the $10 billion threshold for an
exemption from the Volcker rule is not appropriate, what
threshold or other criteria would be more appropriate to use as
the basis for the exemption?
A.4. The idea underlying the Volcker Rule is that the Federal
banking safety net should not, as a general rule, be used to
support proprietary trading activities and investments in hedge
funds and private equity. As a practical matter, community
banks generally do not engage in proprietary trading, although
a few community banks hold exposures to covered funds that
would be prohibited by the Volcker Rule. Safety and soundness
considerations would support the idea that community banks
should remain disengaged from the practice of proprietary
trading and that the few that do hold covered funds dispose of
these high-risk exposures by the end of the Volcker Rule
conformance period, including any extensions of the conformance
period that may be granted by the Federal Reserve Board under
their authority provided by the Volcker Rule.
In adopting the implementing regulations for the Volcker
Rule, the FDIC along with the other agencies recognized that
while the requirements of the implementing statute apply to all
banking entities regardless of size, larger banks generally
conduct the covered activities. Accordingly, the agencies
designed the Volcker Rule to reduce the burden placed on banks
that do not engage in proprietary trading activities or only
have limited exposure to fund investments.
Under the Volcker Rule, a bank is exempt from all of the
compliance program requirements and all of the associated
costs, if it limits its covered activities to those that are
excluded from the definition of proprietary trading. This
exemption applies to the vast majority of community banks. For
community banks that have less than $10 billion in assets but
do engage in activities covered by the Volcker Rule, compliance
program requirements can be met by simply including references
to the relevant portions of the rule within the banks' existing
policies and procedures. This should significantly reduce the
compliance burden on smaller banks that may engage in a limited
amount of covered activities.
If the agencies' experience in implementing the Volcker
Rule shows that there is undue burden placed on community banks
by even the minimal compliance requirements under the
implementing regulations, we believe there is authority under
the current statute to modify the regulation as appropriate.
Q.5. The OCC also recommended increasing the asset-size
threshold from $500 million to $750 million to determine
whether a community bank can qualify for an examination every
18 months.
Do you support increasing the asset-size threshold from
$500 million to $750 million to determine whether a community
bank can qualify for an examination every 18 months? Do you
support OCC's proposal? If not, why not?
A.5. In general, it is our experience that most banks within
the $500 million to $750 million fit the community bank model--
conducting noncomplex, traditional activities within their
community. The FDIC is open to considering an increase in the
asset size threshold for institutions to be subject to an 18-
month examination interval.
Currently, about 80 percent of banks (5,150) have total
assets of $500 million or less, and most of these are well-
capitalized and well-managed and would qualify for the extended
examination interval. Another approximately 380 banks would
qualify if the asset-size threshold was raised to $750 million.
However, it is important to continue a program of regular
on-site examinations because unfortunately, community banks do
fail. Of the 500 plus banks that failed since 2008, the median
size was just $242 million. There is no substitute for regular,
on-site examinations to address specific problems at individual
institutions. Call Reports and other financial reporting can
give a snapshot of the bank's financial position, but the only
way to truly assess the quality of capital and assets is to
examine them on-site. Moreover, there is no effective way for
examiners to evaluate the quality of management and
management's risk management practices without a regular
program of on-site examination. No amount of capital will be
able to save poorly managed banks with significant and
increasing levels of risky and problem assets.
Q.6. If you believe that the $750-million threshold is not
appropriate, what threshold or other criteria would be more
appropriate to use as the basis for this change?
A.6. The FDIC is open to considering an increase in the
institution asset size threshold to $750 million for an 18-
month examination interval.
Q.7. Would you support allowing any institution to petition to
qualify for an exam every 18 months?
A.7. Section 10 of the Federal Deposit Insurance Act and Part
337 of the FDIC Rules and Regulations specify institutions that
are well-managed and well-capitalized and with total assets of
less than $500 million may qualify for an examination interval
of 18 months. While we are open to raising the thresholds, the
FDIC prefers to maintain a threshold to ensure a consistent
examination schedule for institutions rather than conducting
case-by-case analyses of petitions, which could result in
inconsistent regulatory treatment.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM DOREEN R. EBERLEY
Q.1. Your agency put out an interagency statement on your
approach to QM loans just over a year ago. In the statement,
you stated that financial institutions should continue to
originate QM and non-QM loans and that you would not criticize
loans based solely on their QM status.
How have you made sure this message is heard by all of your
examiners at all financial institutions, particularly small
ones?
A.1. On December 13, 2013, the FDIC, FRB, NCUA, and the OCC
jointly issued an interagency statement on the supervisory
approach for residential mortgage loans. The FDIC recognizes
that many institutions are assessing how to implement the
Ability-to-Repay (ATR) and Qualified Mortgage (QM) Standards
Rule issued by the CFPB and will not subject a residential
mortgage loan to regulatory criticism based solely on the
loan's status as QM or a non-QM.
As the FDIC supervises many small community banks, we have
made it a top priority to develop a deeper understanding and
sensitivity to the challenges and opportunities facing
community banks. In order to ensure that all FDIC examiners are
aware of the new rules, the FDIC has (1) provided comprehensive
training to all examiners prior to the effective date of the
mortgage rules; (2) incorporated training on new rules into the
curricula used in connection with our schools for new
examiners; (3) provided regular alerts on up-to-date changes to
all examiners through our internal distribution channels; and
(4) held quarterly meetings with field examination supervisors
in the regional offices.
The FDIC provides a substantial amount of technical
assistance to help our supervised banks and their staff keep
current on the latest consumer compliance issues and changes,
including those associated with the new mortgage rules, through
a variety of channels. Examples include a Technical Assistance
Video Program that covers a wide variety of topics (e.g., CRA,
Flood Insurance, Fair Lending, Mortgage Rules, etc.) and
nationwide banker teleconferences, designed to maintain open
lines of communication with financial institution staff on
important regulatory and emerging issues.
Q.2. What impact has the rule had on small banks making non-QM
loans?
A.2. Preliminary observations by FDIC examiners suggest that
the extent to which FDIC-supervised banks are originating non-
QMs varies from institution to institution; a number of FDIC-
supervised banks are originating non-QM loans while others are
focusing their lending on QM loans. While it is still early in
the implementation process, and we do not have concrete data
about loan originations outside of the QM safe harbor, we have
heard feedback from some community bankers that they have long
been documenting borrowers' ability to repay and, as a result,
their underwriting and lending has been relatively unchanged
since the new ATR/QM rule became effective.
We note recent data showing that the growth in residential
lending among community banks since the rule became effective
has actually outpaced the industrywide rate of growth. While
the data does not tell us why that happened, of course, it may
be that this reflects the sound lending practices of community
banks such that the mortgage rules did not require significant
changes to their business practices.
Q.3. Is the QM standard the only standard that a lender can use
to establish a borrower's ability-to-repay their mortgage at
the time of origination?
A.3. No, it is not. The ATR can be established outside of the
QM framework. The ATR Rule sets forth eight basic requirements
as to what must be considered and verified in determining
ability to repay for non-QM loans. They include assessing
current or reasonably expected income or assets, among other
things. It is important to note that while these common sense
underwriting standards must be considered generally, the rule
does not mandate any specific target ratios or other metrics
around these underwriting standards. Lenders are free to
develop their own specific underwriting metrics and processes
as long as they are consistent with the ATR/QM Rule.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM DOREEN R. EBERLEY
Q.1. The first Economic Growth and Regulatory Paperwork Act
(EGRPRA) review submitted to Congress in 2007 states: ``Besides
reviewing all of our existing regulations in an effort to
eliminate unnecessary burdens, the Federal banking agencies
worked together to minimize burdens resulting from new
regulations and current policy statements as they were being
adopted.'' The report submitted to Congress specifically
discussed consumer financial regulations, anti-money laundering
regulations, and recently adopted rules. However, included in
the Federal Register for this 10-year review are two footnotes
that suggest that CFPB rules, anti-money laundering rules, and
new regulations that have recently gone into effect will not be
included in the review.
Rather than predetermine which rules should or should not
be reviewed, shouldn't the agencies review all existing
regulations and eliminate or recommend statutory changes that
are needed to eliminate any regulatory requirements that are
outdated, unnecessary, or unduly burdensome?
A.1. In carrying out the statutory mandate to conduct a
comprehensive regulatory review pursuant to section 2222 of
EGRPRA, the FDIC, OCC, and FRB (collectively, the Federal
banking agencies or FBAs) are required to categorize their
regulations by type and publish, at regular intervals, one or
more categories of regulations for public comment, asking
commenters to identify any outdated, unnecessary, or unduly
burdensome regulatory requirements.
However, commenters are free to comment on any regulations
and, to the extent the FBAs receive comments on regulations
outside of their respective jurisdictions (such as the CFPB's
consumer protection rules or the anti-money laundering rules
promulgated by the Department of the Treasury's Financial
Crimes Enforcement Network), the FBAs will share those comments
with the appropriate agencies. Generally, comments that pertain
to regulations promulgated by agencies other than the FBAs are
most effectively addressed by the agencies that have authority
to amend or eliminate those rules, as appropriate.
In accordance with EGRPRA, the FBAs initially decided to
exclude new FBA regulations that had only recently gone into
effect or rules that have yet to be fully implemented. \1\ In a
March 6, 2015, letter to Chairman Shelby, however, the FBAs
committed to expand the scope of the EGRPRA review to include
newly issued FBA regulations. Specifically, the FBAs indicated
their intention to solicit comment on regulations that have
been finalized before we complete the EGRPRA review. To that
end, the FBAs indicated that future Federal Register notices
soliciting public comment under the EGRPRA review, including
the next notice expected to be issued in May 2015, will no
longer exclude new regulations.
---------------------------------------------------------------------------
\1\ For similar reasons, during our first EGRPRA review that was
completed in 2006, the FBAs excluded recently issued regulations
implementing the Community Reinvestment Act (CRA) and several capital
rulemaking initiatives. See 71 Fed. Reg. 287, 289 (Jan. 4, 2006).
Q.2. Does Congress need to update the EGRPRA statute to include
the CFPB to ensure the review is comparable in scope to what
---------------------------------------------------------------------------
was reviewed last time?
A.2. Section 2222 of EGRPRA requires the FFIEC and each
appropriate FBA to conduct a review of their regulations. \2\
---------------------------------------------------------------------------
\2\ The FFIEC currently is comprised of the Office of Comptroller
of the Currency (OCC), the Board of Governors of the Federal Reserve
System (FRB), the Federal Deposit Insurance Corporation (FDIC), the
National Credit Union Administration (NCUA), the Consumer Financial
Protection Bureau (CFPB), and the State Liaison Committee.
---------------------------------------------------------------------------
The FDIC notes that, in a regulatory review process
separate from the EGRPRA process, the Consumer Financial
Protection Bureau (CFPB) is required to review its significant
rules and to publish a report of its review no later than 5
years after the rules take effect. See 12 U.S.C. 5512(d). The
agencies participating in the EGRPRA review process have
publicly committed to share any comments with the CFPB (or
other appropriate agency) if the reviewing agencies receive a
comment about a regulation that is within the other appropriate
agency's jurisdiction.
Should Congress determine that it would be beneficial to
include the CFPB as a participating agency in future EGRPRA
reviews, we will collaborate with the CFPB as we have with the
other banking agencies participating in the current EGRPRA
process.
Q.3. If not, what specific steps will be taken to ensure that
the review will include all existing regulations, including
consumer financial regulations, anti-money laundering rules,
and new regulations?
A.3. As noted above, the FBAs have committed to solicit comment
on our regulations that have been finalized before we complete
the EGRPRA review. To that end, future Federal Register notices
soliciting public comment under the EGRPRA review, including
the next notice expected to be issued in May 2015, will no
longer exclude new regulations. In addition, the FBAs will
accept comments on our regulations at the remaining public
outreach meetings. The agencies participating in the EGRPRA
review process also have publicly committed to share any
comments with the CFPB (or other appropriate agency) if the
reviewing agencies receive a comment about a regulation that is
within the other appropriate agency's jurisdiction.
Q.4. A main criticism of the last review was that the banking
regulators subsequently repealed or eliminated only a few
substantive regulations. To ensure that the current review has
a more successful outcome, will your agencies set up a
Government Web site that posts the feedback and list the 10
most burdensome regulations identified?
A.4. The FBAs have established a publicly accessible,
interagency EGRPRA Web site at http://egrpra.ffiec.gov/ similar
to the EGRPRA Web site that was set up during the last EGRPRA
process. On that Web site, the FBAs post all of the Federal
Register notices seeking public comment on the regulations
subject to EGRPRA review and, in an effort to promote
transparency, also post every comment letter received in
response to our requests for public comment. The EGRPRA Web
site also includes an archive of Web casts and transcripts from
every outreach meeting. In addition, the FDIC has its own
publicly accessible EGRPRA Web page that provides related
information and a link to the interagency EGRPRA Web site.
Although the FBAs consider each comment received during the
EGRPRA process regardless of when it is received, the FBAs have
divided their regulations into groups and are seeking comments
on the various groups of regulations through a series of
Federal Register notices. Because the comment process is still
ongoing, it would be premature to identify the most burdensome
regulations identified by the commenters. To the extent there
are significant issues raised by commenters, however, the FFIEC
will identify those in the Report to Congress that is required
to be submitted pursuant to section 2222 of EGRPRA.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
FROM DOREEN R. EBERLEY
Q.1. Last Congress, legislation was introduced in the House
(H.R. 2673, 113th Congress) that would provide financial
institutions protection from the liability associated with
Section 1411 of the Dodd-Frank Act, so long as the loan appears
on the institution's balance sheet. I understand that the CFPB
partially addressed this issue for some institutions through
its Notice of Proposed Rulemaking. Please answer the following
questions related to the proposed legislation:
Do you believe the proposed legislation would have a
material impact on the safety and soundness of covered
financial institutions?
A.1. QM status involves important safeguards for lenders,
borrowers, and the financial system, including product
requirements that encompass basic underwriting standards and
protections against products and features that proved to be
particularly risky in the crisis, such as option ARMs,
negatively amortizing loans, not underwriting to the fully
indexed rate, and certain balloon loans. Extending safe harbor
status to such risky products and features that performed so
poorly in recent years, even if they were held in a bank's
portfolio would raise significant policy concerns.
Additionally, it is important to note that most community
banks meet the current definition of ``small creditor,'' so
they can take advantage of an exception that allows them to
make balloon loans, so long as they meet the other product
requirements and hold the loans in their portfolios. This
exception is particularly important to small and rural banks,
which are more likely than larger banks to originate balloon
loans; and the recent proposal to expand the universe of small
and rural creditors could result in even more lenders taking
advantage of the balloon loan exception.
Q.2. If so, do you believe the current supervisory process and
capital requirements are sufficient to address any perceived
risks that may come from this change?
A.2. The recent crisis reflects that the financial industry is
vulnerable to significant losses if large numbers of borrowers
receive loans they cannot afford to repay. While the
supervisory process and capital requirements mitigate against
potential losses, there is no substitute for the prudent
underwriting of loans.
Q.3. Do you have additional comments, concerns, or proposed
changes to the legislation?
A.3. The evidence so far is that the existing balance of
regulation and flexibility with respect to QM is working.
Recent data showing that the growth in residential lending
among community banks since the rule became effective has
actually outpaced the industrywide rate of growth. While the
data do not tell why that happened, it may be that this
reflects the preexisting sound lending practices of community
banks such that the mortgage rules did not require significant
changes to their business practices. Until and unless there is
sound data to the contrary, we believe that it would be
premature to make any portfolio loan--regardless of actual
underwriting or product design--presumptively one that meets an
ability-to-repay standard.
Q.4. The Bipartisan Policy Center recently suggested creating a
pilot program for a ``consolidated examination force'' for the
institutions subject to supervision by all three of the Federal
prudential regulators. Such a program would force coordination
between the agencies and minimize the costs associated with
examinations for banks. It appears that the Federal Financial
Institutions Examination Council (FFIEC) could provide the
vehicle to run the pilot program. Do you believe your agencies
currently have the statutory authority to undertake such a
joint pilot program through FFIEC? If so, why haven't the
agencies taken steps to initiate such a pilot program?
A.4. Coordinated Examinations. The agencies already coordinate
their examination programs when their supervisory oversight
overlaps.
Examination Activities. For FDIC-supervised institutions,
we coordinate primarily with the relevant State authority.
Since 1992, we have had working agreements with the Conference
of State Bank Supervisors (CSBS) that cover such topics as the
frequency of examinations, the types of examinations on banks
of supervisory concern, preexamination procedures, the
responsibilities of each agency for processing reports of
examination and for conducting specialty examinations, the
coordination of enforcement actions, the processing of joint
applications, and the sharing of supervisory information.
The FDIC has entered into agreements for conducting
alternate examinations with the State banking regulators to
avoid duplication of efforts. The FDIC is constantly looking
for ways to reduce burden and streamline supervisory processes
and has received some constructive comments on how to do this
in the EGRPRA outreach, including raising thresholds for
extended exam cycles and continuing to improve communication
between bankers and examiners.
The FDIC also coordinates with the Federal Reserve when
there is a holding company, with the depth of coordination
being driven by the extent of nonbank entities under the
holding company and the size of the institution. In 1995, the
FDIC, the Federal Reserve, and the CSBS formed a State-Federal
working group to streamline and improve the coordination of the
examination and supervision of State-chartered institutions
operating in an interstate environment.
The Shared National Credit (SNC) Program is an interagency
initiative administered jointly by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, and the
Office of the Comptroller of the Currency. The program was
founded in 1977 for the purpose of ensuring consistency among
the three Federal banking regulators in the classification of
large syndicated credits.
Technology service provider (TSP) examinations are
examinations authorized by the Bank Service Company Act (12
U.S.C. 1867(c)). Because many TSPs provide services to more
than one class of banking charter, the Federal banking
regulators typically conduct examinations of TSPs on a joint
basis, with rotating responsibility for serving as agency-in-
charge. For the largest TSPs, the Federal banking regulators
coordinate the examinations at the national level through the
Federal Financial Institution Examination Council (FFIEC) IT
Subcommittee. Regional TSPs are coordinated by each agency's
regional office.
Backup Authority. The FDIC's statutory authority gives it a
degree of supervisory responsibility, in its role as insurer,
for insured depository institutions (IDIs) for which it is not
the primary Federal supervisor. The FDIC's examiners have the
authority to make recommendations and take enforcement action
against such IDIs. The FDIC also has staff in each of its
regional offices that regularly review examination reports and
other available information from the primary Federal regulators
for those institutions. The FDIC also performs off-site
monitoring of those institutions on an ongoing basis,
particularly for institutions with more than $10 billion in
assets.
Under a 2010 agreement with the OCC and the Federal
Reserve, the FDIC has the other regulators' ongoing consent to
participate in examinations of large, complex IDIs, as defined
in the document. Pursuant to this agreement, the FDIC has
dedicated examiners participating with the OCC and the Federal
Reserve in continuous examination activities at every IDI that
has more than $100 billion in total assets. The FDIC
collaborates with the OCC and the Federal Reserve in their
development of supervisory strategies. The FDIC also
participates in a variety of other periodic supervisory
activities at these institutions, including capital and
liquidity stress tests.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
FROM DOREEN R. EBERLEY
Q.1. During the hearing, Mr. Toney Bland stated, ``But I would
say that the OCC, as part of our normal practice, we look at on
an ongoing basis whether rules are appropriate in terms of
still relevant, and we will make changes, if they need to,
without waiting for the next EGRPRA process.'' Within your
respective agency's jurisdiction, please provide the number and
a list of regulations you're your agency eliminated or changed
due to irrelevance or undue burden since 2006 along with a
brief description of each.
A.1. See Appendix A attached.
Q.2. Within your respective agency's jurisdiction, please
provide the total number and a list of new rules and
regulations that have been adopted since the last EGRPRA review
along with a brief description of each.
A.2. See Appendix B attached.
Q.3. During the last EGRPRA review, Federal banking agencies
hosted a total of 16 outreach sessions around the country. To
date only six outreach sessions have been announced. During
this current EGRPRA review, how many total outreach meetings
will be held and will there be at least 16 meetings as before?
A.3. The Federal banking agencies have scheduled a total of six
outreach meetings in centrally located cities around the Nation
and may consider additional forms of outreach. During the last
EGRPRA review, the Federal banking agencies conducted a total
of 16 outreach sessions that hosted approximately 500 people in
total. As part of the current EGRPRA review, the Federal
banking agencies have conducted two outreach meetings to date
that have already hosted over 200 people in total. In addition,
the current EGRPRA outreach sessions will provide a live-stream
and transcript of every outreach meeting via the EGRPRA Web
site, which was not available during the previous EGRPRA
review.
Q.4. To date only one EGRPRA outreach meeting, focusing on
rural banking issues, has been scheduled in Kansas City. How
many more rural banking outreach meetings do you plan on
scheduling? Given the diversity of rural banking needs around
the country, in what other geographic regions would those
meetings take place?
A.4. We believe that rural banking plays a critical role in
providing consumers and businesses across the Nation with
essential financial services and access to credit. To ensure
that rural bankers have an opportunity to address their
concerns directly to regulators, the Federal banking agencies
have scheduled an outreach meeting in Kansas City, which will
focus specifically on rural banking issues. The FFIEC's EGRPRA
Web site will provide a live-stream Web cast and a transcript
of the entire meeting to ensure all interested parties from
other geographic regions have access to the meeting. In order
to make the live-stream more interactive, the Federal banking
agencies are looking to make phone participation available, if
possible, to people who may wish to participate in the rural
outreach session via Web cast.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM DOREEN R. EBERLEY
Q.1. Some are very concerned that implementing certain Basel
III capital requirements relating to mortgage servicing could
substantially alter business models adopted by banks in
Nebraska and elsewhere designed to complete certain mortgage
services on their own behalf and for other banks.
Have you completed or otherwise reviewed analyses that show
whether the adoption of these requirements would affect
mortgage servicing operations?
If so, have these analyses shown that smaller institutions
would limit mortgage servicing operations as a result?
What entities are likely to perform the mortgage servicing
operations instead?
A.1. In adopting the revised Basel III regulatory capital rule,
the FDIC took careful action to ensure the rule appropriately
reflects the risks inherent in banking organizations' business
models. The FDIC believes the rule's treatment of mortgage
servicing assets (MSA) contributes to the safety and soundness
of banking organizations by mitigating against MSA market value
fluctuations that may adversely affect banking organizations'
regulatory capital base. The FDIC, together with the other
Federal banking agencies, have long limited the inclusion of MS
As and other intangible assets in regulatory capital due to the
high level of uncertainty regarding the ability of banking
organizations to realize value from these assets, especially
under adverse financial conditions. Moreover, the financial
crisis demonstrated that the liquidity--in the form of sales,
exchanges, or transfers--of MSAs may become unreliable at a
time when banking organizations are especially in need of
reliable liquidity. Furthermore, the FDIC, as receiver of
failed insured depository institutions, has generally found
MSAs to be unmarketable during periods of adverse economic and
financial conditions.
Prior to issuing the revised rule, the agencies conducted a
pro forma impact analysis that suggested the vast majority of
banking organizations would meet the revised risk-based capital
requirements after incorporating the treatment for MSAs,
without having to make any changes to their business models.
The rule also provides a lengthy transition period to allow
banking organizations sufficient time to modify their capital
structure or adjust business models, as appropriate. Based on
these considerations, the FDIC believes the rule's treatment of
MSAs is appropriate and strengthens the quality and required
level of capital.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM DOREEN R. EBERLEY
Q.1. One of the most consistent things I hear from Kansas banks
and credit unions is that they are continually being required
to comply with new regulations that were never intended to
affect them. I am in the process of drafting a small lending
regulatory relief package along with Sen. Tester that seeks to
address some of these problems by clarifying that small lenders
are very different than the regulations' intended targets. Do
you believe that some of the rules intended for our most
complex financial institutions have trickled down to community
banks? If so, what specific portions of the law under your
individual area of jurisdiction have you identified as
problematic for small lenders?
A.1. As a general rule, FDIC examinations adhere to statutory
and regulatory thresholds and do not encompass a review of
guidance or regulations that are not applicable to an
organization. Our communications to examiners and bankers on
supervisory matters clearly identify to whom the guidance or
regulations applies. Additionally, we continually encourage
bankers to contact our regional offices to discuss any
questions they may have regarding our regulations and guidance,
including issues of applicability.
Q.2. The burden of regulation does not necessarily come from a
single regulation, but the aggregate burden of regulations,
guidance, and size-inappropriate best practices. The burden
grows when small lenders are required to comply with several
new rules concurrently. In isolation, the impact of one
regulation may appear small, but when added to the growing list
of compliance requirements, the cost is skyrocketing. What is
your agency doing to identify and reduce aggregate burden?
A.2. As the primary Federal regulator for the majority of
smaller, community institutions, the FDIC is keenly aware of
the challenges facing community banks and already tailors its
supervisory approach to consider the size, complexity, and risk
profile of the institutions it oversees. The FDIC has taken a
number of actions to identify and reduce aggregate burden.
Examination Process
Since 2011, FDIC letters to the industry (Financial
Institution Letters or FILs) include a Statement of
Applicability to institutions with less than $1 billion
in total assets. If an industry letter is targeted to
larger, more complex institutions, we let community
institutions know that upon issuance.
The FDIC tailors certain examination and reporting
requirements to consider institution size. For example,
our programs for periodic on-site examinations of risk
management and compliance with the Community
Reinvestment Act (CRA) follow extended frequency cycles
for smaller, well-managed institutions. Similarly,
certain annual audit reporting requirements either
exempt smaller institutions or reduce their reporting
scope. For certain well-managed, well-capitalized
institutions with less than $500 million in total
assets, the FDIC is able to extend the cycle (reduce
the frequency) of statutorily mandated risk management
examinations from 12 months to 18 months.
In 2013, in response to concerns about pre- and
post-examination processes, the FDIC developed a Web-
based tool (e-Prep) that generates a preexamination
document and information request list tailored to a
specific institution's operations and business lines.
Examination and enforcement procedures related to
the Home Mortgage Disclosure Act (HMDA) have been the
subject of significant attention by the FDIC over the
past several years as we have sought to refine our
processes to best achieve our key supervisory objective
of the accurate reporting of loan-level mortgage data
by the 60 percent of FDIC-supervised institutions
subject to HMDA reporting thresholds. Key changes
include: (1) revising sampling techniques for small
reporters (less than 100 reportable transactions) to
avoid triggering additional file review for minor
errors; and (2) limiting imposition of civil money
penalties to situations where an institution's level of
errors is significantly above the threshold for
resubmission and the violations are deemed egregious.
Application/Deposit Assessment Process
In response to what we heard in the first round of
comments from the EGRPRA review, the FDIC has already
acted on regulatory relief suggestions where we could
achieve rapid change. In November, we issued two
Financial Institution Letters (FILs) responding to
suggestions we received from bankers.
The first FIL released questions and answers
about the deposit insurance application process at
https://www.fdic.gov/news/news/financial/2014/
fill4056.html after commenters told us a clarification
of the FDIC's existing policies would be helpful.
The second FIL addressed new procedures that
eliminate or reduce the need to file applications by
institutions wishing to conduct permissible activities
through certain bank subsidiaries organized as limited
liability companies, subject to some limited
documentation standards. This will significantly reduce
application filings in the years ahead. See at https://
www.fdic.gov/news/news/financial/2014/fil14054.html.
In 2011, the deposit insurance assessment base was
changed from using adjusted domestic deposits to
average consolidated total assets minus average
tangible equity. This change resulted in larger, more
complex institutions paying a higher proportion of
total assessments. In addition, the assessment system
for larger institutions also results in higher
assessment rates for banks with high-risk asset
concentrations, less stable balance sheet liquidity, or
potentially higher loss severity in the event of
failure.
Technical Assistance
The Directors' Resource Center, available through
the FDIC's Web site, is dedicated to providing useful
information and resources for directors and officers of
FDIC-insured institutions.
The FDIC has issued a series of educational videos:
New Director Education Series, Virtual Directors'
College Program, Virtual Technical Assistance Program,
and Proposed Rulemaking Videos. These efforts are
ongoing, and most recently, the FDIC has issued several
technical assistance videos on the new mortgage rules
issued by the Consumer Finance Protection Bureau (CFPB)
pursuant to the Dodd-Frank Act. The video series is
designed to assist bankers in familiarizing themselves
with the new rules and meeting the regulatory
requirements. The first video, released in November
2014, covered the Ability to Repay and Qualified
Mortgage Standards Rule. The second video, released in
January 2015, covered the Loan Originator Compensation
Rule, and the third video, released in February 2015,
covers the Servicing Rule.
The Regulatory Calendar, which is updated on an
ongoing basis, alerts stakeholders to critical
information, as well as comment and compliance
deadlines relating to changes in Federal banking laws
and regulations. It includes notices of proposed
interim and final rulemakings, guidance affecting
insured financial institutions, and notices for
training opportunities such as banker conference calls.
Other Activities
In February 2012, the FDIC sponsored a national
conference to examine the unique role of community
banks in our Nation's economy and the challenges and
opportunities they face. Later in 2012, roundtable
discussions were conducted in each of the FDIC's six
supervisory regions that focused on the financial and
operational challenges and opportunities facing
community banks and the regulatory interaction process.
The FDIC has held subsequent roundtables each year
since 2012.
In December 2012, the FDIC released its Community
Banking Study, a data-driven review that explored
issues and questions about community banks. Subsequent
studies in this series have addressed banking industry
consolidation, the effect of rural depopulation on
community banks, the performance and social impact of
minority depository institutions, and the evolution of
branch office structures. In 2014, the FDIC added a
permanent section in its flagship Quarterly Banking
Profile report dedicated to tracking trends in the
community banking sector.
In 2009, the FDIC established its Advisory
Committee on Community Banking to provide advice and
guidance on a broad range of policy issues impacting
small community banks--and the local communities they
serve--with a focus on rural areas. The Advisory
Committee has provided valuable input on examination
policies and procedures, lending practices, deposit
insurance assessments, insurance coverage issues,
regulatory compliance matters, and obstacles to the
continued growth and ability to extend financial
services in their local markets.
Tailored Rules
The Dodd-Frank Act reforms were designed to improve
the competitive balance between small and large banks
by restoring market discipline and oversight of large
systemically important institutions. For example,
enhanced prudential standards, resolution planning, and
stress testing provisions apply only to banks over $10
billion, and incentive compensation provisions exempt
institutions with less than $1 billion in total assets.
The Volcker Rule provides that a bank with
consolidated assets of $10 billion or less may satisfy
the compliance program requirements of the Volcker Rule
by including in its existing compliance policies and
procedures appropriate references to the requirements
of section 13 of the BHC Act and adjustments as
appropriate given the activities, size, scope, and
complexity of the banking entity, rather than a full
Volcker Rule compliance program.
The full Liquidity Coverage Ratio applies only to
large internationally active banking organizations at
the consolidated level and their IDI subsidiaries with
assets of at least $10 billion. Banking organizations
that are at least $50 billion, but which are not
considered internationally active, are subject to a
less stringent Modified Liquidity Coverage Ratio only
at the holding company level.
In connection with the promulgation of the new
capital rules in 2013, the FDIC issued a 14-page
Community Bank Guide, designed to assist community
bankers in their understanding of the new capital
rules. In the final capital rule, the Federal banking
agencies retained the existing treatment of residential
mortgage exposures and Accumulated Other Comprehensive
Income, and also grandfathered certain Trust Preferred
Stock for small bank holding companies, all in response
to the concerns of community banks.
Additionally, in July 2014 we issued a FIL to FDIC-
supervised institutions describing how the FDIC will
consider requests from FDIC-supervised S corporation
banks to pay dividends to their shareholders to cover
taxes on their pass-through share of bank earnings when
those dividends are otherwise not permitted under the
new capital rules. We informed FDICsupervised banks
that we would generally approve those requests for
well-rated banks, barring any significant safety and
soundness issues. Many community banks are S
corporation banks, and we issued this guidance because
of feedback from concerned S corporation banks and
their shareholders.
Q.3. The EGRPRA process was brought about to identify redundant
or excessively burdensome regulation. I think the EGRPRA
process has the potential to be an important tool to begin
rebuilding some semblance of trust between Federal regulators
and the financial institutions they oversee. However, the first
iteration revealed little agency will to utilize the process.
Resulting reductions in regulatory burden were, in a word,
insignificant. Various EGRPRA listening sessions have been
conducted across the country. What is the most consistent
message you are hearing from participants? What are you doing
differently in the current EGRPRA review, and what actual,
tangible relief can our smallest lenders expect?
A.3. The EGRPRA review is still ongoing, and the Federal
banking agencies (FBAs) continue to solicit input from the
public via Federal Register notices and outreach meetings on
various categories of regulations. Several commenters have
indicated it is not so much a single regulation, but the total
impact of all financial institution regulations that concerns
regulated entities. This message is most frequently received
from community banks. The FBAs are keenly aware of the role
that community banks play in providing consumers and businesses
across the Nation with essential financial services and access
to credit, and will carefully consider comments that provide
insight on ways to provide regulatory relief to such
institutions. To address these comments, the FDIC has
implemented some burden-reduction measures during the EGRPRA
review process, rather than at the conclusion of the process.
For example, on November 19, 2014, the FDIC announced in
Financial Institution Letter 54-2014 the elimination of certain
filing requirements for State bank subsidiaries engaged in
activities that are permissible for a national bank subsidiary
when the State bank subsidiary is organized as a limited
liability company.
Q.4. Major changes to mortgage disclosures and timing
requirements are set to go into effect on August 1st of this
year. These regulatory changes will impact every participant in
the mortgage lending process and every consumer mortgage
transaction. The financial institutions that are still engaged
in residential mortgage lending are making every effort to be
ready by the August deadline. I am concerned that, if poorly
crafted or hastily implemented, these additional rules will
result in fewer borrowing options in communities I represent as
small lenders exit the business altogether. Are your respective
examiners already being trained on how to assess these changes
over the course of their reviews?
A.4. As you know, the need for greater harmony between the two
major mortgage disclosure laws--RESPA and Truth in Lending--has
long been recognized and sought. The new disclosures were
developed through testing that involved both consumers and
industry representatives. It does, of course, represent a
substantial change to make the initial switch, which is why
there was substantial lead time and industry outreach built
into the implementation process.
We are sensitive to the implementation challenges for
community banks. We are in the process of preparing extensive
training for our examiners and intend to have them trained
before the new requirements take effect. We also are working on
an interagency basis to develop examination procedures for
examiners to use as they examine institutions for compliance
with the regulation. In addition, the CFPB is doing outreach to
the industry, and also has a number of resources available to
help community banks with the new rule [http://
www.consumerfinance.gov/regulatory-implementation/tila-respa/].
The FDIC will monitor the impact of this rule on community
banks.
Q.5. Is your agency prepared to be flexible in implementing
these new rules while small institutions struggle to implement
these changes effectively?
A.5. The FDIC, like other bank regulatory agencies, appreciates
the magnitude of this initial change in disclosures. As with
the rules that became effective in 2014, our initial
examination will look at whether the institution has developed
a plan and timeline for implementation, including training to
assure that the appropriate personnel are familiar with the
rule's requirements. FDIC examiners will consider the overall
compliance efforts of an institution and take into account
progress the institution has made in implementing its plan.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM DOREEN R. EBERLEY
Q.1. I remain concerned about consolidation in the industry. In
a State like Montana we had 65 community banks before the
crisis, and as of yesterday we had 54. That means a sixth of
our institutions have either gone out of businesses or
consolidated with some of the larger institutions. I'm
concerned that if consolidation continues the whole nature of
small institutions being able to serve, particularly rural
communities, is going to disappear.
Can you tell me what trends you've seen with respect to
community bank consolidation since the crisis and how this rate
compares to before the crisis?
A.1. Consolidation is a long-term banking industry trend that
dates back to the mid-1980s. Two waves of bank failures have
removed more than 2,700 banking charters from the industry
since 1985. But community banks were a little less likely than
non-community banks to fail during the recent crisis. Just 5
percent of community banks operating at the end of 2004 failed
through 2014, compared to 6 percent of non-community banks.
Voluntary mergers and consolidations have been responsible
for the disappearance of more than 13,000 banking charters
since 1985. As documented in FDIC research published last year,
the most rapid period of voluntary consolidation was between
1993 and 2001, immediately following the relaxation of
geographic restrictions on banking.
In all, community banks have seen much lower rates of
charter consolidation than non-community banks in recent years.
Our 2014 research shows that the total rate of charter
attrition for community banks between 2003 and 2013 (29
percent) was less than half the rate for non-community banks
(61 percent). Moreover, when community banks were acquired as a
result of failure or merger, in 65 percent of the cases the
acquirer was another community bank.
So while consolidation appears likely to continue as a
long-term trend for the banking industry, it does not appear to
pose a threat to the viability of the community banking model.
At year-end 2014, some 93 percent of FDIC-insured institutions
met the FDIC's community bank definition, an increase from 87
percent back in 1984.
Q.2. Why do you think we are seeing this in the industry?
A.2. The long-term trend of consolidation in banking has
particularly affected the smallest institutions. At the end of
1984, there were over 6,000 federally insured banks and thrifts
with assets less than $25 million. But by the end of 2014,
there were just 180 institutions with assets less than $25
million. This trend speaks to the presence of economies of
scale that operate among the smallest institutions.
The 2012 FDIC Community Banking Study identified declining
average cost with greater asset size for some community bank
lending specialties, but found that most of these economies of
scale were realized by the time an institution reached a size
of around $100 million. This is consistent with trends that
have been observed in the size distribution of community banks
over time. While the median community bank held $36 million in
assets in 1984, by 2014 the median community bank held total
assets of $167 million.
In all, the long-term trend of banking industry
consolidation has resulted in fewer independent charters and
increases over time in the median and average size of community
banks and, especially, non-community banks. But this trend has
not resulted in any decline over time in the percent of
institutions that operate as community banks according to the
FDIC's research definition.
Q.3. Are you seeing a difference in consolidation in urban
areas vs. rural areas?
A.3. The FDIC has not specifically compared the rate of
consolidation between institutions headquartered in urban vs.
rural areas. However, results published in the 2012 FDIC
Community Banking Study show that community banks are more
likely to be headquartered in a non-metro county than non-
community banks (47 percent to 17 percent in 2011). Moreover,
the share of community banks headquartered in metro counties
actually increased slightly from 46 percent in 1987 to 47
percent in 2011, while the share of total community bank
offices located in non-metro counties increased from 34 percent
to 38 percent. These figures do not point to a disproportionate
decline in the community bank presence in non-metro counties
during the long-term trend of banking industry consolidation.
Q.4. And specifically, what impact does this consolidation have
on rural parts of the country?
A.4. As indicated above, community banks are an integral part
of local economies in non-metro U.S. counties. In 2014, the
FDIC published a study of the long-term trend of rural
depopulation and the effect that it has had on the community
banking sector. Over one half of U.S. rural counties lost
population between 1980 and 2010, and the overall trend toward
depopulation appears to be accelerating. Notwithstanding this
long-term demographic trend, community banks operating in rural
areas have performed relatively well in recent years, owing to
a strong farm economy and relative stability in rural housing
markets compared to those in some major metropolitan areas.
Still, depopulation does create certain challenges for rural
community banks, as it tends to limit their opportunities for
growth and also can make it difficult to attract and maintain
managerial talent.
Q.5. Community Institution Viability--What do you consider to
be the biggest threat to small institutions livelihood and what
are you all doing to address those risks?
A.5. Currently, the prolonged low interest rate environment and
slow economic recovery are pressuring margins, have contributed
to increased interest rate risk, and can limit a community
bank's options for revenue growth. Additionally, emerging
trends and risks will continue to challenge community banks'
ability to plan for the future, such as the increasing volume
and sophistication of cyberthreats and attacks.
The FDIC has responded to the low interest rate environment
by enhancing its review of institutions' sensitivity to
interest rate risk and has provided a technical assistance
video for community bankers regarding interest rate risk.
Moreover, we have dedicated an entire issue of our Supervisory
Insights journal to interest rate risk issues.
Regarding cybersecurity, the FDIC issued a list of free
resources from which community banks can obtain cyberthreat
information and has assisted financial institutions in
identifying and shutting down ``phishing'' Web sites that
attempt to fraudulently obtain and use an individual's
confidential personal or financial information. This year, the
FDIC will add additional videos to our existing Cyber Challenge
simulation exercise and work as a member of the FFIEC to
implement actions to enhance the effectiveness of
cybersecurity-related supervisory programs, guidance, and
examiner training. The FDIC will continue to work with
community banks to address these and other emerging threats.
Q.6. Review of Existing Regulation--Can you elaborate on how
your review is going and share with us the major areas of
consensus the agencies and the industry have found so far?
A.6. The EGRPRA review is still ongoing, and the Federal
banking agencies (FBAs) continue to solicit input from the
public via Federal Register notices and outreach meetings on
various categories of regulations. Both the FDIC and the FFIEC
have posted copies of relevant Federal Register notices on
their respective Web sites. In addition, the FFIEC has posted
video recordings and transcripts of outreach meetings, as well
as copies of public comments received by the FBAs on their
respective Web sites. The FDIC and the other Federal banking
agencies participating in the EGRPRA review process have begun
a thorough review of all comments received, whether they were
provided by participants in EGRPRA outreach sessions or through
the more traditional public comment process. Although the
EGRPRA review process has not concluded, we have heard from
commenters, especially community banks, that it is the
cumulative effect of all regulations that concerns regulated
entities, and not just a single regulation.
Q.7. Can you share anything about your future plans as this
review moves forward?
A.7. The Federal banking agencies will continue to solicit
public input to identify outdated or otherwise unnecessary
regulations that impact insured depository institutions. To
accomplish that, the FBAs will publish additional Federal
Register notices seeking comment on various categories of
rules. In addition, the FBAs plan to hold four more outreach
meetings this year, with one meeting focusing on rural banks.
Comments related to the EGRPRA review process will be posted
electronically on the FFIEC's and FDIC's Web sites. Once the
EGRPRA review is complete, the FFIEC will provide Congress with
a joint report that summarizes any significant issues raised in
the public comments received by the FFIEC and the participating
EGRPRA agencies along with the relative merits of such issues.
The report will include an analysis of whether the FBAs will be
able to address the regulatory burdens associated with such
issues or whether these burdens must be addressed by
legislative action. In the meantime, the FDIC has implemented
some burden-reduction measures during the EGRPRA review
process, rather than at the conclusion of the process. For
example, on November 19, 2014, the FDIC announced in Financial
Institution Letter 54-2014 the elimination of certain filing
requirements for State bank subsidiaries engaged in activities
that are permissible for a national bank subsidiary when the
State bank subsidiary is organized as a limited liability
company.
Q.8. Appraisal--In Montana, I continue to hear concerns from
our community banks about appraisals. On several occasions I've
heard stories about appraisers having to travel across the
State or come from neighboring States. And when you live in a
State like mine, you often find multimillion ranches next to
your average middle-class family farm. If you aren't from the
area, things like comparables become very tricky if you aren't
from the area. Can you share any thoughts you have about ways
to make the appraisal process more effective and less time
consuming? Especially for institutions that keep mortgages in
portfolio, considering they keep the risk on their books.
A.8. The Federal financial institution regulatory agencies'
appraisal regulations require an appraisal for a federally
related transaction unless an exemption applies. The primary
exemption permits using an evaluation for transactions of
$250,000 or less with the exception of certain higher-priced
mortgage loans. Industry data reflects the median home price
was $199,600 as of January 2015, indicating an evaluation was
permitted for the vast majority of residential mortgage loans.
We recognize that individuals performing evaluations and
appraisals in rural areas may face challenges in identifying
and locating comparable sales. However, exempting all real
estate loans in rural areas from valuation requirements
(appraisal or evaluation) could raise both safety and soundness
and consumer protection concerns.
The Interagency Appraisal and Evaluation Guidelines provide
a caveat for small or rural institutions or branches of large
institutions that recognizes that it is not always practical to
separate the collateral valuation program from the loan
production process, as follows:
For a small or rural institution or branch it may not
always be possible or practical to separate the
collateral valuation program from the loan production
process. If absolute lines of independence cannot be
achieved, an institution should be able to demonstrate
clearly that it has prudent safeguards to isolate its
collateral valuation program from influence or
interference from the loan production process. In such
cases, another loan officer, other officer, or director
of the institution may be the only person qualified to
analyze the real estate collateral. To ensure their
independence, such lending officials, officers, or
directors must abstain from any vote or approval
involving loans on which they ordered, performed, or
reviewed the appraisal or evaluation.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
FROM MARYANN F. HUNTER
Q.1. According to the OCC, the Federal banking agencies have
agreed to undertake a comprehensive review of all Call Report
items and schedules. When will this review be completed? Who
from your agency is in charge of this review? Will this review
result in a formal, publicly available report?
A.1. In December of 2014, the Federal Financial Institutions
Examination Council (FFIEC) agreed to undertake a comprehensive
review of the Consolidated Reports of Condition and Income
(Call Report) to identify potential opportunities to reduce
burden associated with the Call Report requirements for
community banks. This review is planned for completion by the
fourth quarter of 2017. The review is being conducted under the
direction of the Board's Chief Accountant Supervision in the
Division of Banking Supervision and Regulation. A formal,
comprehensive report on the results of the review is not
currently planned for release to the public. However, the
Federal Reserve and the other Federal banking agencies will
publicly propose changes to the Call Report that we agree upon
as a result of this review in joint Federal Register notices
which will be issued for public comment in accordance with the
Paperwork Reduction Act.
Q.2. Kansas Fed President, Esther George, said at a 2014
conference that the community bank ``business model is one in
which the incentives of banks are aligned with outcomes that
benefit their customers and the economy. When incentives are
aligned in this way, the need for an `ability to repay rule,'
for example, seems unnecessary.''
Do you agree that banks that hold mortgages on portfolio
have a vested interest to perform an analysis of a customer's
ability to repay irrespective of whether such mortgage meets
the requirements of a ``Qualified Mortgage''?
Do you agree that mortgages held on portfolio should be
afforded a ``Qualified Mortgage'' status? If not, why not?
A.2. As provided in a December 2013 interagency statement, the
Federal Reserve expects institutions to underwrite residential
mortgage loans in a prudent fashion and address key risk areas
in their residential mortgage lending, including loan terms,
borrower qualification standards, loan-to-value limits, and
documentation requirements, regardless of whether loan is a
qualified mortgage or nonqualified mortgage.
The Federal Reserve continues to expect institutions to
underwrite all residential mortgage loans in a prudent fashion.
It is not sufficient that mortgages only be held in portfolio
in order to be designated as qualified mortgages (QM). However,
if mortgages that are held in portfolio meet the specific QM
requirements, as defined in Consumer Financial Protection
Bureau regulations, including preclusion of certain features,
such as negative amortization, interest-only payments, or
certain balloon structures, and must meet limits on points and
fees and other underwriting requirements, then the QM
designation may be appropriate.
Q.3. The OCC acknowledged in its testimony that the Volcker
Rule contains no exemption for community banks, and that the
regulatory burden is not justified by the risk these
institutions present. The OCC has drafted a legislative
proposal to exempt from the Volcker Rule banks with total
consolidated assets of $10 billion or less.
Do you support exempting from the Volcker Rule banks with
total consolidated assets of $10 billion or less? Do you
support OCC's proposal? If not, why not?
If you believe that the $10 billion threshold for an
exemption from the Volcker rule is not appropriate, what
threshold or other criteria would be more appropriate to use as
the basis for the exemption?
A.3. Section 619 of the Dodd-Frank Act, which added a new
section 13 to the Bank Holding Company Act of 1956 (BHC Act),
also known as the Volcker Rule, generally prohibits any banking
entity, regardless of size, from engaging in proprietary
trading, and from acquiring or retaining an ownership interest
in, sponsoring, or having certain relationships with a covered
fund, subject to certain exemptions. Under the terms of the
statute, section 13 applies to any banking entity regardless of
its size. As a result, section 13 and the final rules apply to
community banks.
With respect to the Volcker Rule, the Federal Reserve, the
Federal Deposit Insurance Corporation (FDIC), and the Office of
the Comptroller of the Currency (OCC) (the Agencies) are
charged with implementing that statutory provision endeavored
to minimize the compliance burden on banking entities. As part
of the implementing rules, the Agencies reduced the compliance
program and reporting requirements applicable to banking
entities with $10 billion or less in total consolidated assets.
This was based in part on information that indicated that
banking entities of this size generally have little or no
involvement in prohibited proprietary trading or investment
activities in covered funds. \1\ Exempting community banks from
section 13 would provide relief for thousands of community
banks that face ongoing compliance costs incurred simply to
confirm that their activities and investments are indeed exempt
from the statute. At the same time, an exemption at this level
would not be likely to increase risk to the financial system.
The vast majority of activity and investment that section 13 of
the BHC Act is intended to address takes place at the largest
and most complex financial firms whose failure would have a
significant effect on the stability of the financial system.
Moreover, even with an exemption, the Federal banking agencies
could continue to use existing prudential authority to address
unsafe and unsound practices at a community bank that engaged
in imprudent investment activities.
---------------------------------------------------------------------------
\1\ See ``The Volcker Rule: Community Bank Applicability'' (Dec.
10, 2013), available at: http://www.federalreserve.gov/newsevents/
press/bcreg/bcreg20131210a4.pdf.
Q.4. The OCC also recommended increasing the asset-size
threshold from $500 million to $750 million to determine
whether a community bank can qualify for an examination every
18 months.
Do you support increasing the asset-size threshold from
$500 million to $750 million to determine whether a community
bank can qualify for an examination every 18 months? Do you
support OCC's proposal? If not, why not?
If you believe that the $750 million threshold is not
appropriate, what threshold or other criteria would be more
appropriate to use as the basis for this change?
Would you support allowing any institution to petition to
qualify for an exam every 18 months?
A.4. We are open to discussing with our colleagues at the other
agencies the potential impact of revising the current asset
threshold for the 18-month examination cycle. Any revisions to
the threshold need to consider the trade-offs of a less
frequent onsite examination cycle against the availability of
data to monitor a bank's condition between onsite examinations.
Therefore, an increase in the asset-size threshold for the
examination cycle would have to be weighed against any
proposals to lessen the regulatory reporting requirements for
community banking organizations, including the reporting
frequency and data collected, that could limit examiners'
ability to monitor a bank offsite. Further, Federal bank
supervisors still need the ability to conduct more frequent
onsite examination for safety and soundness purposes.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM MARYANN F. HUNTER
Q.1. The first Economic Growth and Regulatory Paperwork Act
(EGRPRA) review submitted to Congress in 2007 states: ``Besides
reviewing all of our existing regulations in an effort to
eliminate unnecessary burdens, the Federal banking agencies
worked together to minimize burdens resulting from new
regulations and current policy statements as they were being
adopted.'' The report submitted to Congress specifically
discussed consumer financial regulations, anti-money laundering
regulations, and recently adopted rules. However, included in
the Federal Register for this 10-year review are two footnotes
that suggests that CFPB rules, anti-money laundering rules, and
new regulations that have recently gone into effect will not be
included in the review.
Rather than predetermine which rules should or should not
be reviewed, shouldn't the agencies review all existing
regulations and eliminate or recommend statutory changes that
are needed to eliminate any regulatory requirements that are
outdated, unnecessary, or unduly burdensome?
A.1. The Federal Reserve, Office of the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation (the
Agencies) have included in the Economic Growth and Regulatory
Paperwork Act (EGRPRA) review all regulations over which we
have rulemaking authority. Since the publication of the first
request for comment, the Agencies have decided to expand the
scope of the EGRPRA review to cover all regulations, including
those that were enacted relatively recently. Future Federal
Register notices and public outreach meetings will make it
clear that the Agencies are accepting comment on all
regulations adopted by the Agencies. The final request for
comment, expected to be published by year end, will ask for
comment on all regulations that have been adopted in final form
by the time of the issuance of that request, even if the
regulation was adopted only shortly before such request. As was
stated in the Federal Register notice, comments that the
Agencies receive during this EGRPRA review on rules that are
administered by other agencies, such as the Consumer Financial
Protection Bureau (CFPB) and the Financial Crimes Enforcement
Network, will be provided to those agencies for their
consideration.
Q.2. Does Congress need to update the EGRPRA statute to include
the CFPB to ensure the review is comparable in scope to what
was reviewed last time?
A.2. Under 12 U.S.C. 5512(d)(2), the CFPB is required to
conduct a review of its significant rules every 5 years after
their effective dates. Accordingly, the Federal Reserve
believes that any consumer protection regulations transferred
from the banking agencies to the CFPB under the Dodd-Frank Wall
Street Reform and Consumer Protection Act will be reviewed in
accordance with that requirement. In addition, the Agencies
will send to the CFPB any comments received on regulations
administered by the CFPB.
Q.3. If not, what specific steps will be taken to ensure that
the review will include all existing regulations, including
consumer financial regulations, anti-money laundering rules,
and new regulations?
A.3. As noted above, we will provide other appropriate agencies
with copies of comments received on regulations under their
purview. The CFPB itself has its own statutorily mandated
review process of its regulations. In addition to providing the
appropriate regulator with any comments the Agencies receive
during the EGRPRA review for which they are the functional
regulator, the Agencies have expanded the scope of this EGRPRA
review to include all new regulations that will be issued in
final by the Agencies prior to the publication of the last
Federal Register notice for the EGRPRA review. We believe this
will enable the Agencies to conduct a thorough review of
relevant regulations.
Q.4. A main criticism of the last review was that the banking
regulators subsequently repealed or eliminated only a few
substantive regulations. To ensure that the current review has
a more successful outcome, will your agencies set up a
Government Web site that posts the feedback and list the 10
most burdensome regulations identified?
A.4. The Agencies intend to publish a report to Congress at the
end of this EGRPRA review. As was done in the report on the
last EGRPRA review, the Agencies will summarize the comments
provided and our responses to them. The report will summarize
the significant issues arising from the review and the
Agencies' responses thereto, in order to identify the feedback
we received and the most burdensome regulations identified.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
FROM MARYANN F. HUNTER
Q.1. Last Congress, legislation was introduced in the House
(H.R. 2673, 113th Congress) that would provide financial
institutions protection from the liability associated with
Section 1411 of the Dodd-Frank Act, so long as the loan appears
on the institution's balance sheet. I understand that the CFPB
partially addressed this issue for some institutions through
its Notice of Proposed Rulemaking. Please answer the following
questions related to the proposed legislation:
Do you believe the proposed legislation would have a
material impact on the safety and soundness of covered
financial institutions?
A.1. It is not readily apparent how the draft legislation would
work with the existing qualified mortgage requirements provided
in the Consumer Financial Protection Bureau's (CFPB) Ability-
to-Repay rule. If the loans held on balance sheet do not meet
the qualified mortgage criteria as set forth in the CFPB's
rule, the legislation could create an incentive for banking
organizations to originate mortgage loans that include features
that were problematic during the crisis, such as negative
amortization. Regardless of whether a mortgage loan is a
qualified mortgage or nonqualified mortgage, the Federal
Reserve continues to expect banking organizations to underwrite
residential mortgage loans in a prudent fashion and address key
risk areas in their residential mortgage lending, including
loan terms, borrower qualification standards, loan-to-value
limits, and documentation requirements. \1\
---------------------------------------------------------------------------
\1\ Interagency Statement on Supervisory Approach for Qualified
and Nonqualified Mortgage Loans (December 13, 2013).
---------------------------------------------------------------------------
Finally, the qualified mortgage definition would not affect
the regulatory capital treatment for residential mortgage
exposures. Under the revised regulatory capital rules, mortgage
exposures secured by a first-lien on an owner-occupied or
rented one-to-four family residential property that meet
prudential underwriting standards, are not 90 days or more past
due or carried on nonaccrual status, and are not restructured
or modified, receive a 50 percent risk weight. A banking
organization must assign a 100 percent risk weight to all other
residential mortgage exposures even if designated as a
qualified mortgage.
Q.2. If so, do you believe the current supervisory process and
capital requirements are sufficient to address any perceived
risks that may come from this change?
A.2. See response to Question 1.
Q.3. Do you have additional comments, concerns, or proposed
changes to the legislation?
A.3. We do not have any at this time.
Q.4. Mr. Bland and the OCC have suggested that banks under $10
billion could be exempt from the Volcker rule. With respect to
Volcker compliance, Governor Tarullo stated that he believes
``both community banks and supervisors would benefit from not
having to focus on formal compliance with regulation of matters
that are unlikely to pose problems at smaller banks.'' Do you
believe the $10 billion threshold proposed by the OCC is
appropriate?
A.4. Section 619 of the Dodd-Frank Act, which added a new
section 13 to the Bank Holding Company Act of 1956 (BHC Act),
also known as the Volcker Rule, generally prohibits any banking
entity, regardless of size, from engaging in proprietary
trading, and from acquiring or retaining an ownership interest
in, sponsoring, or having certain relationships with a covered
fund, subject to certain exemptions. Under the terms of the
statute, section 13 applies to any banking entity regardless of
its size. As a result, section 13 and the final rules apply to
community banks.
With respect to the Volcker Rule, the Federal Reserve, the
Federal Deposit Insurance Corporation (FDIC), and the Office of
the Comptroller of the Currency (OCC) (the Agencies) are
charged with implementing that statutory provision endeavored
to minimize the compliance burden on banking entities. As part
of the implementing rules, the Agencies reduced the compliance
program and reporting requirements applicable to banking
entities with $10 billion or less in total consolidated assets.
This was based in part on information that indicated that
banking entities of this size generally have little or no
involvement in prohibited proprietary trading or investment
activities in covered funds. \2\ Exempting community banks from
section 13 would provide relief for thousands of community
banks that face ongoing compliance costs incurred simply to
confirm that their activities and investments are indeed exempt
from the statute. At the same time, an exemption at this level
would not be likely to increase risk to the financial system.
The vast majority of activity and investment that section 13 of
the BHC Act is intended to address takes place at the largest
and most complex financial firms whose failure would have a
significant effect on the stability of the financial system.
Moreover, even with an exemption, the Federal banking agencies
could continue to use existing prudential authority to address
unsafe and unsound practices at a community bank that engaged
in imprudent investment activities.
---------------------------------------------------------------------------
\2\ See The Volcker Rule: Community Bank Applicability (Dec. 10,
2013), available at: http://www.federalreserve.gov/newsevents/press/
bcreg/bcreg20131210a4.pdf.
Q.5. The Bipartisan Policy Center recently suggested creating a
pilot program for a ``consolidated examination force'' for the
institutions subject to supervision by all three of the Federal
prudential regulators. Such a program would force coordination
between the agencies and minimize the costs associated with
examinations for banks. It appears that the Federal Financial
Institutions Examination Council (FFIEC) could provide the
vehicle to run the pilot program. Do you believe your agencies
currently have the statutory authority to undertake such a
joint pilot program through FFIEC? If so, why haven't the
---------------------------------------------------------------------------
agencies taken steps to initiate such a pilot program?
A.5. The three Federal banking agencies regularly coordinate
joint examination work in an effort to minimize the burden on
an institution. Further, to avoid duplication of efforts and to
share expertise, the staffs of the agencies regularly meet to
discuss supervisory activities and findings and rely on long
standing interagency agreements to conduct joint examinations
and to share supervisory information. The decision to conduct a
joint examination considers each agency's supervisory authority
over a particular institution and the need to share information
to support our various supervisory mandates. For instance, on
the resolution of a problem bank or thrift, the FDIC, as the
insurer of depository institutions, has backup examination
authority and coordinates with the primary Federal bank
regulator (either the Federal Reserve for state member banks
and the OCC for national banks and Federal thrifts) and as
applicable, the state banking department, on participation on
an examination. As the supervisor for holding companies, the
Federal Reserve coordinates its examination activities with OCC
and FDIC when the holding company and the bank or thrift
subsidiary share risk functions.
Since 1977, the Agencies have coordinated the Shared
National Credits (SNC) review program that is designed to
provide a uniform review and credit quality assessment of many
of the largest and most complex credits in the banking system.
The SNC review program provides an efficient and consistent
review of any loan or formal loan commitment extended to
borrowers by a federally supervised institution, its
subsidiaries, and affiliates that aggregates $20 million or
more and is shared by three or more unaffiliated supervised
institutions. In 2014, the agencies reviewed $975 billion of
the $3.39 trillion credit commitments in the SNC portfolio. \3\
---------------------------------------------------------------------------
\3\ Refer to the interagency press release announcing the 2014 SNC
review results on the Federal Reserve's public Web site at:
www.federalreserve.gov/newsevents/press/bcreg/20141107a.htm.
---------------------------------------------------------------------------
The Federal Reserve and the FDIC also coordinate the
examination of State banks with the responsible State banking
department. To foster consistency in the examination of State
community banks, the Federal Reserve, the FDIC, and the FFIEC
State Liaison Committee have adopted common examination
procedures (referred to as the Examination Documentation (ED)
Modules) and have an ongoing, interagency process for the
review and updating of the ED modules to reflect current
regulatory and policy mandates.
In addition, the agencies use the FFIEC to foster common
examination approaches among the agencies. Through the work of
the various FFIEC task forces and subcommittees, staffs of the
agencies come together to discuss the implementation of
supervisory guidance and to develop common reports and
examination tools. For example, the FFIEC member agencies are
coordinating various work streams on cybersecurity to improve
collaboration with law enforcement and intelligence agencies
and to communicate the importance of cybersecurity awareness
and best practices among the financial industry and regulators.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
FROM MARYANN F. HUNTER
Q.1. During the hearing, Mr. Toney Bland, ``But I would say
that the OCC, as part of our normal practice, we look at on an
ongoing basis whether rules are appropriate in terms of still
relevant, and we will make changes, if they need to, without
waiting for the next EGRPRA process.'' Within your respective
agency's jurisdiction, please provide the number and a list of
regulations your agency eliminated or changed due to
irrelevance or undue burden since 2006 along with a brief
description of each.
A.1. Per your request, attached please find a list of
regulations the Federal Reserve has eliminated or changed since
the last Economic Growth and Regulatory Paperwork Reduction Act
review (due to irrelevance or undue burden) along with a brief
description of each (Appendix to Question 1).
Q.2. Within your respective agency's jurisdiction, please
provide the total number and a list of new rules and
regulations that have been adopted since the last EGRPRA review
along with a brief description of each.
A.2. Per your request, attached please find a list of new
regulations the Federal Reserve has promulgated since January
1, 2007, along with a brief description of each (Appendix to
Question 2).
Q.3. During the last EGRPRA review, Federal banking agencies
hosted a total of 16 outreach sessions around the country. To
date only six outreach sessions have been announced. During
this current EGRPRA review, how many total outreach meetings
will be held and will there be at least 16 meetings as before?
A.3. At this time, the Federal Reserve, the Office of the
Comptroller of the Currency, and the Federal Deposit Insurance
Corporation (the Agencies) have held or scheduled six outreach
meetings. All meetings have been and will continue to be
streamed live for public viewing over the Internet. The
reaction from the public to being able to watch the meetings in
real time has been very positive. It has also allowed the
outreach meetings to reach a larger audience than was available
during the last Economic Growth and Regulatory Paperwork
Reduction Act review. In addition, the Agencies have scheduled
one meeting that will focus specifically on the interests and
concerns of rural depository institutions. This meeting, to be
held at the Federal Reserve Bank of Kansas City, on Tuesday,
August 4, will again be streamed live to allow viewing by
anyone who does not participate in person. Online participants
may provide oral comments during the meeting, subject to time
constraints. In addition, online participants may elect to use
the text chat feature to provide comments that will be saved as
part of the record of the meeting. A toll free telephone number
will also be provided for interested persons that wish to
listen to the meeting but do not have computer access. The
Agencies will monitor the need for additional meetings in
response to industry interest.
Q.4. To date only one EGRPRA outreach meeting, focusing on
rural banking issues, has been scheduled in Kansas City. How
many more rural banking outreach meetings do you plan on
scheduling? Given the diversity of rural banking needs around
the country, in what other geographic regions would those
meetings take place?
A.4. At this time, the Agencies are awaiting feedback from the
industry and the results of the participation at the Kansas
City outreach meeting in order to gauge the need for additional
rural outreach meetings. Given the livestreaming of the meeting
and the ability for persons from around the country to
participate, we anticipate that there will be opportunities for
all issues of interest to be aired or made part of the record.
We remain open to additional meetings should industry response
indicate there is a need for additional outreach meetings
focusing on rural issues.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM MARYANN F. HUNTER
Q.1. Some are very concerned that implementing certain Basel
III capital requirements relating to mortgage servicing could
substantially alter business models adopted by banks in
Nebraska and elsewhere designed to complete certain mortgage
services on their own behalf and for other banks.
Have you completed or otherwise reviewed analyses that show
whether the adoption of these requirements would affect
mortgage servicing operations?
A.1. The Federal Reserve Board, the Office ofthe Comptroller of
the Currency, and the Federal Deposit Insurance Corporation
(Agencies) took careful action to ensure the revised regulatory
capital rule appropriately reflects the risks inherent in
banking organizations' business models. Prior to issuing the
rule, the Agencies conducted a pro forma impact analysis that
showed that the vast majority of community and midsized banking
organizations (those with less than $10 billion in total
assets) would meet the rule's minimum common equity tier 1
capital requirement of 4.5 percent plus the 2.5 percent capital
conservation buffer on a fully phased-in basis (including the
treatment of Mortgage Servicing Assets (MSAs)). The Agencies
have long limited the inclusion of MSAs and other intangible
assets in regulatory capital and believe the rule's treatment
of MSAs contributes to the safety and soundness of banking
organizations by mitigating against MSA market value
fluctuations that may adversely affect banking organizations'
regulatory capital base during periods of economic stress.
Q.2. If so, have these analyses shown that smaller institutions
would limit mortgage servicing operations as a result?
A.2. Please see response for Question 1.
Q.3. What entities are likely to perform the mortgage servicing
operations instead?
A.3. It is important to note that the revised regulatory
capital rule does not prohibit mortgage servicing activity. The
decision to engage in such activity is, in part, a function of
a firm's preferred business model.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM MARYANN F. HUNTER
Q.1. Has the Federal Reserve ever studied, or does it intend to
study, the appropriate capital requirements for mortgage
servicing assets held by nonsystemic banking institutions,
separate from a generalized study of the impacts of the Basel
III capital regime?
A.1. The Federal Reserve, the Office of the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation (the
Agencies) took careful action to ensure the revised regulatory
capital rule appropriately reflects the risks inherent in
banking organizations' business models. Prior to issuing the
rule, the Agencies conducted a pro forma impact analysis that
showed that the vast majority of community and midsized banking
organizations (those with less than $10 billion in total
assets) would meet the rule's minimum common equity tier 1
capital requirement of 4\1/2\ percent plus the 2\1/2\ percent
capital conservation buffer on a fully phased-in basis
(including the treatment of mortgage service assets). The
Agencies have long limited the inclusion of mortgage service
assets (MSAs) and other intangible assets in regulatory capital
and believe the rule's treatment of MSAs contributes to the
safety and soundness of banking organizations by mitigating
against MSA market value fluctuations that may adversely affect
banking organizations' regulatory capital base during periods
of economic stress.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM MARYANN F. HUNTER
Q.1. One of the most consistent things I hear from Kansas banks
and credit unions is that they are continually being required
to comply with new regulations that were never intended to
affect them. I am in the process of drafting a small lending
regulatory relief package along with Sen. Tester that seeks to
address some of these problems by clarifying that small lenders
are very different than the regulations' intended targets. Do
you believe that some of the rules intended for our most
complex financial institutions have trickled down to community
banks? If so, what specific portions of the law under your
individual area of jurisdiction have you identified as
problematic for small lenders?
A.1. As we develop supervisory regulations and policies and
examination practices, we are mindful of community bankers'
concerns that new rules intended for complex financial
institutions could be applied to community banks in a way that
is inappropriate. For that reason, our supervision examination
process continues to be tailored to each organization's size,
complexity, risk, profile, and condition. Further, to promote
appropriate implementation of new regulations and supervisory
policies, the Federal Reserve continues to devote significant
resources and time to training our examiners and communicating
with examiners about the goals of a new regulation or guidance
for community banking organizations.
In developing a new regulation or policy, the Federal
Reserve weighs the burden on banks to implement new
requirements against the need to safeguard the safety and
soundness of the financial system in context of the statutory
requirements. We recognize that the cost of compliance can be
disproportionally greater on smaller banks versus larger
institutions, as they have fewer staff available to help comply
with additional regulations. Therefore, working within the
requirements of the law, we attempt to develop regulations that
impose requirements that are appropriate for community banks
and that do not impose unnecessary or unduly burdensome
requirements to implement. This is evident in many of the
Federal Reserve regulations implementing the Dodd-Frank Wall
Street Reform and Consumer Protection Act, where the most
stringent requirements only apply to the largest and most
complex banking organizations and not to community banks.
To assist community banks in understanding how a new rule
could possibly affect their business operations, the Federal
banking agencies have issued supplemental guides that focus on
which rule requirements are most applicable to community banks.
For example, the Federal banking agencies issued supplemental
guides for the capital requirements issued in July 2013, as
well as the Volcker rule issued in December 2013. \1\
---------------------------------------------------------------------------
\1\ The Federal Reserve, Federal Deposit Insurance Corporation
(FDIC), and Office of the Comptroller of the Currency (OCC), ``New
Capital Rule: Community Bank Guide'', July, 9, 2013,
www.federalreserve.gov/bankinforeg/basel/files/
capital_rule_community_bank_guide_20130709.pdf; and the Federal
Reserve, FDIC, and OCC, ``The Volcker Rule: Community Bank
Applicability'', December 10, 2013, www.federalreserve.gov/newsevents/
press/bcreg/bcreg20131210a4.pdf.
Q.2. The burden of regulation does not necessarily come from a
single regulation, but the aggregate burden of regulations,
guidance, and size-inappropriate best practices. The burden
grows when small lenders are required to comply with several
new rules concurrently. In isolation, the impact of one
regulation may appear small, but when added to the growing list
of compliance requirements, the cost is skyrocketing. What are
---------------------------------------------------------------------------
you doing to identify and reduce aggregate burden?
A.2. Besides the regulatory review mandated by Economic Growth
and Regulatory Paperwork Reduction Act (EGRPRA), the Federal
Reserve periodically reviews existing supervisory guidance to
assess whether the guidance is still relevant and effective.
For instance, the Federal Reserve conducted a policy review of
the supervision programs for community and regional banking
organizations to make sure the programs and related supervisory
guidance are appropriately aligned with current banking
practices and risks. The project entailed an assessment of all
existing supervisory guidance that apply to community and
regional banking organizations to determine whether the
guidance is still appropriate. As a result of this review, we
are likely to eliminate some guidance that is no longer
relevant and update other guidance for appropriateness to
current supervisory and banking industry practices and
relevance to the risks to these institutions.
Q.3. The EGRPRA process was brought about to identify redundant
or excessively burdensome regulation. I think the EGRPRA
process has the potential to be an important tool to begin
rebuilding some semblance of trust between Federal regulators
and the financial institutions they oversee. However, the first
iteration revealed little agency will to utilize the process.
Resulting reductions in regulatory burden were, in a word,
insignificant. Various EGRPRA listening sessions have been
conducted across the country. What is the most consistent
message you are hearing from participants? What are you doing
differently in the current EGRPRA review, and what actual,
tangible relief can our smallest lenders expect?
A.3. The most consistent message provided by commenters in this
EGRPRA review is that the Federal Reserve, OCC, and the FDIC
(the Agencies) must consider the impact our regulations have on
our institutions, especially on community banks; that the
Agencies should coordinate as much as possible to minimize the
effect of overlapping regulations; and that the agencies should
reduce regulatory burden as much as is possible.
The Agencies are conducting the current EGRPRA review with
a focus on the effect of regulatory burden on insured community
depository institutions. In each of the outreach meetings held
to date, the Agencies invited representatives of smaller
banking organizations to present their views directly to
participating agency principals and staff. The institutions
represented a variety of charters, geographic locations, and
size. In addition, the Agencies have scheduled a public meeting
at the Federal Reserve Bank of Kansas City that is specifically
targeted to the concerns of banks in rural markets. This
meeting will provide conferencing capability and two-way live
stream capability from some of the other offices of the Kansas
City Reserve Bank to enable management of depository
institutions that are not located near the Reserve Bank to have
the opportunity to participate in the meeting. The Agencies
also continue to invite the public to provide written comments
through the EGRPRA Web site, http://egrpra.ffiec.gov/, on any
regulations that they believe are outdated, unnecessary or
unduly burdensome.
The Federal Reserve is reviewing regulations as a result of
the comments received and, where possible, taking measures to
alleviate burden on insured community depository institutions.
For example, the Federal Reserve recently issued a final rule
on April 9, 2015, to expand the applicability of its Small Bank
Holding Company Policy Statement and also apply it to certain
savings and loan holding companies. The policy statement
facilitates the transfer of ownership of small community banks
and savings associations by allowing their holding companies to
operate with higher levels of debt than would normally be
permitted. Although holding companies that qualify for the
policy statement are excluded from consolidated capital
requirements, their depository institution subsidiaries would
continue to be subject to minimum capital requirements. The
final rule raises the asset threshold of the policy statement
from $500 million to $1 billion in total consolidated assets
and also expands the application of the policy statement to
savings and loan holding companies. The final rule implements a
law passed by the Congress in December 2014, and became
effective on May 15, 2015.
Q.4. Major changes to mortgage disclosures and timing
requirements are set to go into effect on August 1st of this
year. These regulatory changes will impact every participant in
the mortgage lending process and every consumer mortgage
transaction. The financial institutions that are still engaged
in residential mortgage lending are making every effort to be
ready by the August deadline. I am concerned that, if poorly
crafted or hastily implemented, these additional rules will
result in fewer borrowing options in communities I represent as
small lenders exit the business altogether. Are your respective
examiners already being trained on how to assess these changes
over the course of their reviews. Are your agencies prepared to
be flexible in implementing these new rules while small
institutions struggle to implement these changes effectively?
A.4. While the mandatory compliance date for the new Truth in
Lending--Real Estate Settlement Procedures Act integrated
disclosure rules was set by the Consumer Financial Protection
Bureau (CFPB), we understand that the new rules are significant
and complex. For that reason, we have conducted outreach to
ensure the institutions we supervise are aware of and
understand the new rules. Among other things, we have partnered
with the CFPB on a series of instructive webinars through our
Outlook Live platform. Outlook Live is an ongoing webinar
series on consumer compliance issues, available to the public
and our examiners. We also finalized and released interagency
examination procedures on April 15, 2015, that our examiners
will use and that are publicly available, and we are developing
additional examiner training.
We expect our examiners to take into account the size and
complexity of an institution and its products when deciding on
the scope of and performing an examination. If mortgages are
within scope, examiners will initially evaluate how an
institution manages regulatory changes and overall efforts to
come into compliance with the new mortgage rules. Among other
things, examiners will consider the institution's
implementation plan and actions taken to update the
institution's policies, procedures, and processes. Reviews of
individual loans covered by the new rules will not begin
immediately after the effective date, as examiners generally
review files that predate the examination. As with any new
regulation, our goal is to work with the institutions we
supervise to ensure they are on the right path.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM MARYANN F. HUNTER
Q.1. I remain concerned about consolidation in the industry. In
a State like Montana we had 65 community banks before the
crisis, and as of yesterday we had 54. That means a sixth of
our institutions have either gone out of businesses or
consolidated with some of the larger institutions. I'm
concerned that if consolidation continues the whole nature of
small institutions being able to serve, particularly rural
communities, is going to disappear.
Can you tell me what trends you've seen with respect to
community bank consolidation since the crisis and how this rate
compares to before the crisis?
A.1. As stated in my testimony, community banks have deep ties
to their local communities, which give them firsthand
perspectives on the local economic landscape; they focus on
customer relationships and often look beyond traditional credit
factors to consider unique borrower characteristics when making
credit decisions. To that end, community banks are a critical
component of our financial system and economy. The Federal
Reserve recognizes the important role of community banks and
seeks to supervise them in a way that fosters their safe and
sound operation without constraining their capacity to support
the financial needs of their communities. \1\
---------------------------------------------------------------------------
\1\ Maryann F. Hunter, Deputy Director, Division of Banking
Supervision and Regulation. Before the Committee on Banking, Housing,
and Urban Affairs, U.S. Senate, Washington, DC.
---------------------------------------------------------------------------
According to data, the number of community banks declined
37 percent from 12/31/1999 to 12/31/2014. \2\ Further, the
annual rate of decline appears to have increased since the
financial crisis. Figure 1 displays the annual percent decline
in the number of community banks year over year. \3\ As the
chart illustrates, the percent decline by year has increased
since the crisis, and does not show a clear sign of returning
to pre-crisis levels. Prior to the crisis, the number of
community banks declined an average of 2.3 percent per year;
while since the crisis, the number of community banks has
declined an average of 3.9 percent per year. \4\
---------------------------------------------------------------------------
\2\ A community bank is defined as an insured commercial bank with
less than $10 billion in assets.
\3\ The decline includes both failed banks and acquired banks.
\4\ The pre-crisis years comprise 12/31/1999-12/31/2007, while the
post-crisis years comprise 12/31/2008-12/31/2014.
This increase in post-crisis community bank consolidation
may be driven, in part, by banks acquiring less profitable
community banks. The return on average assets (ROAA) is a
standard measure of bank profitability. ROAA is a bank's net
income divided by its average assets. As shown in Figure 2
below, community banks that were acquired in the years
following the crisis tended to have lower ROAA than banks that
were not acquired during the same years. This has not always
been the case. As Figure 2 also illustrates, in the 4 years
immediately preceding the crisis, the average ROAA of community
banks that were acquired actually exceeded that for banks that
were not acquired. \5\ This may suggest that, post-crisis,
profitable banks continue to find opportunities to expand, but
are currently focused on acquiring less profitable banks.
---------------------------------------------------------------------------
\5\ Analysis excludes failed banks.
This trend, however, does not extend to rural banks.
Rather, the pre- and post-crisis differences in community bank
consolidation appear to be driven by banks outside rural areas.
For purposes of this response, rural is defined using the
USDA's Rural-Urban Continuum codes, also known as Beale codes.
According to the Beale codes, a rural area is defined as
either:
1. Non-metro--Completely rural or less than 2,500 urban
population, adjacent to a metro area
2. Non-metro-Completely rural or less than 2,500 urban
population, not adjacent to a metro area
As shown in Figure 3, pre- and post-crisis consolidation
since 12/31/1999 is very similar for rural banks, while the
average annual rate of consolidation for urban community banks
was much higher post-crisis than pre-crisis. In fact, at rural
community banks, the average annual rate of post-crisis
consolidation was lower than the pre-crisis rate.
The Beale definition of rural counties is fairly
restrictive, only 11 percent of community banks were located in
rural counties. However, if we expand that definition to also
include counties with small urban populations (2,500-19,999)
that are not adjacent to a metropolitan area, which then
encompasses 23 percent of community banks as of 12/31/2014, we
find a similar pattern (see Figure 4).
To summarize, community bank consolidation has increased
somewhat since the financial crisis and banks appear to be
acquiring less profitable banks. This post-crisis increase in
consolidation does not appear to have impacted rural banks,
however. The average annual rate of consolidation for rural
community banks remains just over 2.5 percent, well below the
post-crisis rate of non-rural community bank consolidation.
Q.2. Why do you think we are seeing this in the industry?
A.2. Please see the response to Question 1.
Q.3. Are you seeing a difference in consolidation in urban
areas vs. rural areas? And specifically, what impact does this
consolidation have on rural parts of the country?
A.3. Please see the response to Question 1.
Q.4. What do you consider to be the biggest threat to small
institutions livelihood and what are you all doing to address
those risks?
A.4. The Federal Reserve understands that the cost of
compliance can be disproportionately greater on smaller banks
when compared to larger institutions, as they have fewer staff
available to help comply with additional regulations. As such,
the Federal Reserve continues to make clear distinctions
between requirements applicable to community banks and those
applicable to larger institutions, especially those resulting
from the passage of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act). Efforts to
communicate these distinctions and clarify supervisory
expectations for community banks include adding a statement of
applicability to community banks on newly issued guidance and
issuance of supplemental guidance for to clarify expectations
related to stress testing and implementation of the Volcker
Rule and Basel III. Most important, new guidance aimed at
community banks is issued only when necessary to support
significant safety and soundness objectives. The Federal
Reserve also continues to refine its supervisory program for
community banks by enhancing its ability to risk focus
community bank examinations. By placing community banks into
one of three risk categories--low, medium, or high--based on
risk information gleaned from financial reports, a greater
proportion of resources and activities can be redirected from
the smaller, lower risk institutions to those engaging in
higher risk activities. Additionally, staff throughout the
Federal Reserve System are conducting more examination work
offsite, which can relieve some of the burden associated with
the onsite examination process.
Through interaction with the Community Depository
Institutions Advisory Council, comprised of representatives
from various segments of the national banking industry, Board
members receive regular firsthand input on matters of
importance to community banks. These matters will continue to
be explored and addressed under the direction of a special
subcommittee of the Board, which focuses on reviewing the
effects of regulatory actions on community and regional banks
because community banks continue to be an important part of our
financial system.
Q.5. Can you elaborate on how your review is going and share
with us the major areas of consensus the agencies and the
industry have found so far?
A.5. In accordance with the Economic Growth and Regulatory
Paperwork Reduction Act (EGRPRA), the Federal Reserve, the
other Federal banking agencies, and the Federal Financial
Institutions Examination Council are conducting a review of
regulations to identify outdated or otherwise unnecessary
regulatory requirements imposed on insured depository
institutions. The major categories of regulations covered in
the review include: applications and reporting; powers and
activities; international operations; banking operations;
capital; the Community Reinvestment Act; consumer protection;
directors, officers, and employees; money laundering; rules of
procedure; safety and soundness; and securities. The agencies
are soliciting comments on their regulations through notices in
the Federal Register. \6\ As explained in the March 6, 2015,
interagency letter to Senator Shelby, the agencies have decided
to expand the scope of the EGRPRA review in order to be as
inclusive as possible. Accordingly, the agencies will solicit
comment on all of our regulations issued in final form up to
the date that we publish our last EGRPRA notice for public
comment.
---------------------------------------------------------------------------
\6\ To date, the Board of Governors of the Federal Reserve System,
FDIC, and OCC have issued two notices as announced in joint press
releases on June 4, 2014, (www.federalreserve.gov/newsevents/press/
bcreg/20140604a.htm) and February 20, 2015, (www.federalreserve.gov/
newsevents/press/bcreg/20150220a.htm).
---------------------------------------------------------------------------
As part of the EGRPRA review process, the agencies are
holding several outreach meetings with bankers, consumer
groups, and other interested parties to engage individuals in a
public discussion about the agencies' regulations.
The agencies have conducted two outreach meetings to date
in Los Angeles and Dallas. Additional outreach meetings are
scheduled for the coming months, including: Boston on May 4,
2015; Kansas City on August 4, 2015; Chicago on October 19,
2015; and Washington, DC, on December 2, 2015. The Kansas City
outreach meeting will focus more specifically on issues
affecting rural institutions.
Several themes have arisen so far from discussions at the
outreach meetings. A recurring theme has been the question of
whether the agencies could reevaluate the various thresholds
and limits imposed in regulations that may constrain community
banks and their lending activities. For example, community
bankers in rural areas have noted that it can be difficult to
find an appraiser with knowledge about the local market at a
reasonable fee. Bankers have asked the agencies to consider
increasing the dollar threshold in the appraisal regulations
for transactions below which an appraisal would not be
required, which could allow them to use a less-formal valuation
of collateral for a larger number of loans.
A number of community banks have also suggested reducing
burden from the required quarterly filing of the Consolidated
Reports of Condition and of Income, commonly called the Call
Report. Working through the Federal Financial Institutions
Examination Council, the Federal Reserve is considering ways
the agencies could respond to industry concerns about Call
Report filing requirements and assess the potential impact of
collecting less data from banks.
Bankers have also asked whether the agencies could review
the statutorily mandated examination frequency for banks, which
varies based on a bank's asset size and condition, as a way to
ease burden from frequent onsite examinations. Other bankers
have commented that some longstanding interagency guidance may
now be outdated and warrant a fresh look and revision. The
agencies are still weighing these comments and will consider
all the feedback received in the assessment of their
regulations.
Q.6. Can you share anything about your future plans as this
review moves forward?
A.6. We are considering the comments received through the
EGRPRA process, as well as information obtained from the
supervisory process, to undertake certain initiatives. In this
regard, we are taking steps to tailor and improve our
examination processes to be more efficient and effective and
less burdensome on lower-risk community banks. For instance, we
are equipping our Federal Reserve examiners with technological
tools that enable them to conduct more work offsite and to
focus their attention on the areas of highest risk. With these
new tools, examiners are able to conduct some aspects of the
loan review process offsite for banks that maintain electronic
loan records and have the technical capability. We are also
seeking ways to utilize the financial information collected
from banks to tailor the examination process for institutions
with lower risk profiles.
In addition to the EGRPRA review, the Federal Reserve
periodically reviews its existing supervisory guidance to
assess whether the guidance is still relevant and effective.
For instance, the Federal Reserve recently completed a policy
review of the supervision programs for community and regional
banking organizations to make sure the programs and related
supervisory guidance are appropriately aligned with current
banking practices and risks. The project entailed an assessment
of all existing supervisory guidance that apply to community
and regional banking organizations to determine whether the
guidance is still appropriate. As a result of this review, we
are likely to eliminate some guidance that is no longer
relevant and to update other guidance for appropriateness to
current supervisory and banking industry practices and
relevance to the risks to these institutions.
Recently, the Board issued an interim final rule and
proposed rule to implement Public Law 113-250, which was
enacted by the Congress and signed into law by the President in
December 2014. Effective immediately, the interim final rule
adopted by the Board excludes small savings and loan holding
companies with less than $500 million in total consolidated
assets that meet certain qualitative requirements from the
Board's regulatory capital requirements. This effectively
places these savings and loan holding companies on equal
footing with comparably sized bank holding companies that are
subject to the Board's Small Bank Holding Company Policy
Statement (policy statement), which fosters local ownership of
small community banks by allowing their holding companies to
operate with higher levels of debt than would otherwise be
permitted.
On April 9, the Board issued a final rule to raise the
asset size threshold from $500 million to $1 billion for
determining applicability of the policy statement, and expand
its scope to include savings and loan holding companies.
Holding companies subject to the policy statement are not
subject to the Board's regulatory capital requirements,
although regulatory capital requirements will continue to apply
at the depository institution level.
In an action related to the expansion of the policy
statement's scope, the Board took steps to relieve regulatory
reporting burden for bank holding companies and savings and
loan holding companies that have less than $1 billion in total
consolidated assets and meet the qualitative requirements of
the policy statement. Specifically, the Board eliminated
quarterly and more complex consolidated financial reporting
requirements (FR Y-9C) for these institutions, and instead
required parent-only financial statements (FR Y-9SP)
semiannually. The Board also eliminated all regulatory capital
data items that were to be reported on the FR Y-9SP for savings
and loan holding companies with less than $500 million in total
consolidated assets. The Board made these changes effective on
March 31, 2015, and immediately notified the affected
institutions, so they would not continue to invest in system
changes to report revised regulatory capital data for only a
short period of time.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
FROM TONEY BLAND
Q.1. According to the OCC, the Federal banking agencies have
agreed to undertake a comprehensive review of all Call Report
items and schedules. When will this review be completed? Who
from your agency is in charge of this review? Will this review
result in a formal, publicly available report?
A.1. At the December 2014 meeting of the Federal Financial
Institutions Examination Council (FFIEC), Council members
directed the Council's Task Force on Reports (Task Force) to
undertake the Task Force's recommendations to address concerns
raised by bankers about the burden of preparing the
Consolidated Reports of Condition and Income (Call Report).
This formal initiative is intended to identify potential
opportunities to reduce burden associated with the Call Report
requirements for community banks.
The comprehensive review of all Call Report items and
schedules is one of the actions under this initiative. Section
604 of the Financial Services Regulatory Relief Act of 2006
requires the Federal banking agencies to ``review the
information and schedules that are required to be filed by an
insured depository institution'' in the Call Report. The
deadline for the next statutorily mandated review is the fourth
quarter of 2017. The Task Force and the agencies have
accelerated the start of this review of the existing Call
Report items and schedules to 2015. This review is planned for
completion by the fourth quarter 2017 statutory deadline.
In conducting the comprehensive review, the Task Force and
the agencies will require Call Report users at the agencies to
provide more robust justifications than in previous reviews.
Users would need to explain how they use each data item, the
frequency with which it is needed, and the population of
institutions from which it is needed. Data items or schedules
for which users provide insufficient justification for
continued collection from some or all institutions in all four
quarters would be candidates for elimination, less frequent
collection, or the creation of a new, or an upward revision of
an existing, reporting threshold, which can be size-and/or
activity-based. Call Report schedules would be prioritized for
review over the next 2 years based on their perceived burden.
Burden-reducing Call Report changes identified as a result of
this review would be proposed on a flow basis annually as they
are identified rather than waiting until the completion of the
entire comprehensive review.
Another action under this initiative, at the request of the
Council, is that the Task Force will develop a set of guiding
principles as the basis for evaluating potential additions or
deletions of data items to and from the Call Report.
The Office of the Chief Accountant is in charge of the
review for the OCC. The agencies will publicly propose to
implement burden-reducing Call Report changes identified as a
result of this review in joint Federal Register notices that
will be issued for comment in accordance with the Paperwork
Reduction Act.
Q.2. Kansas Fed President, Esther George, said at a 2014
conference that the community bank ``business model is one in
which the incentives of banks are aligned with outcomes that
benefit their customers and the economy. When incentives are
aligned in this way, the need for an `ability to repay rule.'
for example, seems unnecessary.''
Do you agree that banks that hold mortgages on portfolio
have a vested interest to perform an analysis of a customer's
ability to repay irrespective of whether such mortgage meets
the requirements of a ``Qualified Mortgage''?
Do you agree that mortgages held on portfolio should be
afforded a ``Qualified Mortgage'' status? If not, why not?
A.2. Regardless of whether a residential mortgage loan is a
Qualified Mortgage (QM) or non-QM, and whether or not it is
held in a bank's portfolio, the OCC expects institutions to
underwrite residential mortgage loans in a prudent fashion and
address key risk areas in their residential mortgage lending,
including loan terms, borrower qualification standards, loan-
to-value limits, and documentation requirements. Institutions
also should apply appropriate portfolio and risk management
practices. Our expectations are outlined in the OCC's
Comptroller's Handbook booklet, ``Mortgage Banking''.
Q.3. In your testimony you acknowledged that the Volcker Rule
contains no exemption for community banks, and that the
regulatory burden is not justified by the risk these
institutions present. The OCC has drafted a legislative
proposal to exempt from the Volcker Rule banks with total
consolidated assets of $10 billion or less. What is the basis
for the $10-billion threshold? Would a different threshold or
criteria be more appropriate?
A.3. The risks to the financial system of proprietary trading
and owning or sponsoring private equity and hedge funds
addressed by the Volcker Rule are far more significant when
larger institutions engage in these activities than they are if
community banks with assets of $10 billion or less do so.
However, the Volcker Rule contains no exemption for community
banks. Accordingly, community banks need to ascertain whether
their activities are covered by the Volcker Rule in order to
understand whether they have any compliance obligations. Making
this determination may require them to expend money and
resources--for example, by hiring attorneys and consultants.
The OCC's proposed exemption applies to community banks
with $10 billion or less in assets that do not have a holding
company, as well as community banks that are part of a small
holding company of $10 billion or less in assets. Small banks
that are part of a larger holding company are not eligible for
the exemption to ensure that large banking organizations are
not able to take advantage of this exclusion by moving
activities covered by the Volcker Rule to a small bank
controlled by the organization. Exempting community banks from
the Volcker Rule would relieve them of this regulatory burden
and would allow the Federal bank regulatory agencies to more
appropriately focus examination resources where the supervisory
concern is greatest. The $10 billion threshold in the OCC's
proposed exemption is consistent with the thresholds for small-
size banks in the Dodd-Frank Act. Applying this method, we
estimate that the amendment would exempt more than 6,000 small
banks from the requirement to comply with the regulations
implementing the Volcker Rule.
Q.4. The OCC also recommended increasing the asset-size
threshold from $500 million to $750 million to determine
whether a community bank can qualify for an examination every
18 months. What is the basis for the $750-million threshold?
Would a different threshold or criteria be more appropriate?
Would you support allowing any institution to petition to
qualify for an exam every 18 months?
A.4. The $750 million asset-size threshold will allow the
Federal banking agencies to focus their supervisory resources
on those small depository institutions that may present
capital, managerial, or other issues of supervisory concern,
while simultaneously reducing the regulatory burden on small,
well-capitalized and well-managed institutions. Under current
law, asset size is not the only criterion for an institution to
qualify for an 18-month examination cycle. The Federal banking
agencies must also consider whether the institution is well-
capitalized and well-managed, the composite rating of the
institution, whether the institution is subject to an
enforcement proceeding or order, and whether the institution
has recently undergone a change in control. Setting the
threshold at $750 million would allow more than 400 additional
institutions to qualify for an 18-month on-site examination
cycle if they meet these additional statutory criteria. The
OCC's proposal is consistent with the incremental approach that
Congress has taken over the years when increasing the threshold
amount of assets that would permit a small depository
institution to qualify for the 18-month examination cycle.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM TONEY BLAND
Q.1. The NCUA's testimony recommended a legislative change to
provide the agency with examination and enforcement authority
of third party vendors. In April 2013, the OCC testified that
it would recommend a legislative change that would facilitate
the OCC's ability to examine an independent contractor that
does significant work for a bank and to take enforcement
actions directly against independent contractors that engage in
wrongdoing. Does OCC still support this type of legislative
change?
A.1. Yes, the OCC continues to support the legislative changes
that we recommended in April 2013, and that we subsequently
shared with the Senate Banking Committee and the House
Financial Services Committee in July 2013.
The language we drafted allows a Federal banking agency
(FBA) to take enforcement action against an independent
contractor that participates in the conduct of the affairs of,
or conducts the business of, an insured depository institution,
if the FBA can establish grounds to take such action under
section 8 of the Federal Deposit Insurance Act (FDIA), 12
U.S.C. 1818. It also clarifies that an independent contractor
participates in the conduct of the affairs of, or conducts the
business of, an insured depository institution by performing
services for the institution. Finally, the amendment clarifies
that ``unsafe or unsound practice'' means ``any action, or lack
of action, which is contrary to generally accepted standards of
prudent operation, the possible consequences of which, if
continued, would be abnormal risk or loss or damage to an
institution, its shareholders, or the Deposit Insurance Fund.''
The amendment would be useful in cases where an insured
depository institution has outsourced significant activities to
an independent contractor that engages in unsafe or unsound
practices in providing services to the institution.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM TONEY BLAND
Q.1. The first Economic Growth and Regulatory Paperwork Act
(EGRPRA) review submitted to Congress in 2007 States: ``Besides
reviewing all of our existing regulations in an effort to
eliminate unnecessary burdens. the Federal banking agencies
worked together to minimize burdens resulting from new
regulations and current policy statements as they were being
adopted.'' The report submitted to Congress specifically
discussed consumer financial regulations, anti-money laundering
regulations, and recently adopted rules. However, included in
the Federal Register for this 10-year review are two footnotes
that suggest that CFPB rules, anti-money laundering rules, and
new regulations that have recently gone into effect will not be
included in the review.
Rather than predetermine which rules should or should not
be reviewed, shouldn't the agencies review all existing
regulations and eliminate or recommend statutory changes that
are needed to eliminate any regulatory requirements that are
outdated. unnecessary, or unduly burdensome?
A.1. The EGRPRA statute (12 U.S.C. 3311) requires the agencies
to divide their regulations into categories and issue notices
soliciting comment on those categories at regular intervals.
Consistent with the purposes of the EGRPRA review, the agencies
initially excluded newly issued regulations, those that had not
yet taken effect, and those that had yet to be fully
implemented. However, in order to be as inclusive as possible,
the agencies intend to solicit comment on any of their
regulations that have been finalized up to the date that we
publish our last notice for public comment and to report back
to Congress on all regulations.
Q.2. Does Congress need to update the EGRPRA statute to include
the CFPB to ensure the review is comparable in scope to what
was reviewed last time?
A.2. When Congress established the CFPB and transferred
authority to issue rules under the enumerated consumer laws, it
required the CFPB to undertake a review of its regulations at
least once every 5 years. Currently, the agencies participating
in the EGRPRA review will continue to forward any comments on
CFPB rules received during the EGRPRA review to the CFPB for
its consideration.
Q.3. If not, what specific steps will be taken to ensure that
the review will include all existing regulations, including
consumer financial regulations, anti-money laundering rules,
and new regulations?
A.3. Congress transferred the authority to issue many consumer
financial regulations to the CFPB, which is not required to
undertake the EGRPRA review. Anti-money laundering rules are
issued by the Financial Crimes Enforcement Network, which is
also not required to undertake the EGRPRA review. During this
decennial EGRPRA review, the Federal banking agencies will
continue to forward comments on rules not issued by the Federal
banking agencies to the appropriate agencies for their
consideration.
Q.4. A main criticism of the last review was that the banking
regulators subsequently repealed or eliminated only a few
substantive regulations. To ensure that the current review has
a more successful outcome, will your agencies set up a
Government Web site that posts the feedback and list the 10
most burdensome regulations identified?
A.4. At the beginning of the EGRPRA review process, the Federal
banking agencies established a dedicated Web site for the
EGRPRA review, http://egrpra.ffiec.gov, which allows members of
the public to submit comments and view all comments received
during the EGRPRA process. In addition to the Web site, the
agencies are Iive-streaming the EGRPRA outreach meetings to
allow members of the public to hear and view comments made at
those meetings. The agencies also intend to make public the
report to Congress required by the EGRPRA statute that will
identify unduly burdensome regulations.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
FROM TONEY BLAND
Q.1. Last Congress, legislation was introduced in the House
(H.R. 2673, 113th Congress) that would provide financial
institutions protection from the liability associated with
Section 1411 of the Dodd-Frank Act, so long as the loan appears
on the institution's balance sheet. I understand that the CFPB
partially addressed this issue for some institutions through
its Notice of Proposed Rulemaking. Please answer the following
questions related to the proposed legislation:
Do you believe the proposed legislation would have a
material impact on the safety and soundness of covered
financial institutions?
If so, do you believe the current supervisory process and
capital requirements are sufficient to address any perceived
risks that may come from this change?
Do you have additional comments, concerns, or proposed
changes to the legislation?
A.1. Sections 1411 and 1412 of the Dodd-Frank Act created new
section 129C of the Truth in Lending Act (TILA), which requires
lenders to assess consumers' ability to repay home loans before
extending credit. Borrowers may be able to recover actual and
special statutory damages for violations of section 129C and in
foreclosure actions, may assert such violations as a matter of
defense by recoupment or setoff. However, Section 129C also
provides creditors a safe harbor and a presumption of
compliance with the ability-to-repay requirement for a
``qualified mortgage'' (QM). The CFPB has implemented section
129C through amendments to Regulation Z, codified at 12 CFR
Part 1026.43.
H.R. 2673, the Portfolio Lending and Mortgage Access Act,
from the 113th Congress would amend TILA to provide that a QM
includes all covered mortgage loans that a creditor holds in
portfolio.
Regardless of whether a residential mortgage loan is a QM
or non-QM, the OCC expects institutions to underwrite
residential mortgage loans in a prudent fashion and address key
risk areas in their residential mortgage lending, including
loan terms, borrower qualification standards, loan-to-value
limits, and documentation requirements. Institutions also
should apply appropriate portfolio and risk management
practices. Our expectations are outlined in the OCC's
Comptroller's Handbook booklet, ``Mortgage Banking''.
Q.4. The Bipartisan Policy Center recently suggested creating a
pilot program for a ``consolidated examination force'' for the
institutions subject to supervision by all three of the Federal
prudential regulators. Such a program would force coordination
between the agencies and minimize the costs associated with
examinations for banks. It appears that the Federal Financial
Institutions Examination Council (FFIEC) could provide the
vehicle to run the pilot program. Do you believe your agencies
currently have the statutory authority to undertake such a
joint pilot program through FFIEC? If so, why haven't the
agencies taken steps to initiate such a pilot program?
A.4. The OCC is committed to fostering strong collaborative
relationships with not only the other two Federal prudential
regulators, the Federal Deposit Insurance Corporation (FDIC)
and the Federal Reserve System (FRB), but also with the
Consumer Financial Protection Bureau (CFPB) and international
supervisors. This commitment to collaboration and coordination
is reflected in the strategic initiatives that Comptroller
Curry set forth for the agency and has been incorporated into
the OCC's strategic plan and the business plans and performance
goals for our supervisory lines of business and their managers.
Our goal in such collaborative efforts is not only to minimize
costs and burden on supervised institutions but also to enhance
the effectiveness and efficiency of our supervision programs,
ensure clear and consistent communication to banks' boards of
directors and senior management, and avoid any supervisory
gaps.
The Federal banking agencies have a long history of
collaboration on key rulemakings and policy guidance. Indeed,
most significant regulatory rules are promulgated on a joint,
interagency basis. There is also strong collaboration at the
local field level among our agencies' examiners and district
offices. To further interagency coordination where we have
shared jurisdiction, we have developed and implemented
processes to share our supervisory strategies with the FDIC and
FRB and collaborate with these agencies on safety and soundness
examination programs for banks in our large and midsize bank
programs.
These steps include sharing supervisory strategies and
discussing key supervisory priorities with the FDIC and FRB for
their input and feedback, meeting with local FRB and FDIC teams
to discuss our supervisory plans to identify opportunities to
leverage each other's planned work. As part of these efforts,
we encourage and support efforts to collaborate on specific
exams. Such collaboration can run the gamut from providing
input to the scope of an examination to jointly conducting
examinations. One prominent example of where we have
coordinated specific examination work is the collective work
programs we have developed to assess large banking
organizations' compliance with the advanced approaches
standards for the new capital rules. We likewise share relevant
supervisory work products, such as Reports of Examination and
Supervisory Letters, and access to our electronic record
retention systems. We also consult on Matters Requiring
Attention and other enforcement actions that affect
organization structure, strategic direction, executive
personnel, or have a material impact on the entity under the
supervision of the other agency. Similar coordination efforts
take place with the CFPB on consumer compliance related
examination work.
We believe the processes we have implemented and that we
continue to refine allow us to achieve the benefits of
coordination and collaboration envisioned by the Bipartisan
Policy Center, without the costs that a more structured,
centralized process administered through the FFIEC would
entail.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
FROM TONEY BLAND
Q.1. During the hearing, you stated, ``But I would say that the
OCC, as part of our normal practice, we look at on an ongoing
basis whether rules are appropriate in terms of still relevant,
and we will make changes, if they need to, without waiting for
the next EGRPRA process.'' Within your respective agency's
jurisdiction, please provide the number and a list of
regulations your agency eliminated or changed due to
irrelevance or undue burden since 2006 along with a brief
description of each.
A.1. The following is a listing of regulations that the OCC has
eliminated or modified to mitigate burden.
Q.2. Within your respective agency's jurisdiction, please
provide the total number and a list of new rules and
regulations that have been adopted since the last EGRPRA review
along with a brief description of each.
A.2. A listing of the rules finalized by the OCC from Jan. 1,
2007, is attached (see Attachment 1). Some of these regulations
implemented changes as a result of the last EGRPRA review
process. Some were strictly ministerial such as the annual
inflation adjustment for CRA determinations.
Q.3. During the last EGRPRA review, Federal banking agencies
hosted a total of 16 outreach sessions around the country. To
date only 6 outreach sessions have been announced. During this
current EGRPRA review, how many total outreach meetings will be
held and will there be at least 16 meetings as before?
A.3. To date, we have planned a total of six outreach meetings.
Three have already taken place in Los Angeles on December 2,
2014, Dallas on February 4, 2015, and Boston on May 4. Our next
outreach meetings are scheduled for Kansas City on August 4,
Chicago on October 19, and Washington, DC, on December 2. These
outreach meetings have, and will include a larger number of
participants then during the last EGRPRA review. The previous
outreach meetings were planned as smaller gatherings and
included 50 or so bankers or consumer and community groups. The
current outreach meetings are open to as many as 200
participants. In addition, the agencies are leveraging
technology to broaden their reach to interested parties. For
example, the current outreach meetings are all live-streamed on
the EGRPRA.gov Web site, so that individuals throughout the
country may watch and listen to the proceedings at no cost.
Additionally, at our rural outreach meeting in Kansas City,
bankers and consumer and community groups will have the
opportunity to participate and provide comments via a two-way
audio link. This technology was not available during the last
EGRPRA process.
Q.4. To date only one EGRPRA outreach meeting, focusing on
rural banking issues, has been scheduled in Kansas City. How
many more rural banking outreach meetings do you plan on
scheduling? Given the diversity of rural banking needs around
the country, in what other geographic regions would those
meetings take place?
A.4. We have scheduled one outreach meeting focused on rural
banking issues in Kansas City on August 4, 2015. However, in
addition to the in-person program and the live-stream on
EGRPRA.gov, this meeting will support bankers' and consumer and
community groups' participation and comments via a two-way
audio link. The agencies believe that this will allow rural
bankers and other interested parties from around the country to
provide their input in the most cost-effective manner.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM TONEY BLAND
Q.1. Some are very concerned that implementing certain Basel
III capital requirements relating to mortgage servicing could
substantially alter business models adopted by banks in
Nebraska and elsewhere designed to complete certain mortgage
services on their own behalf and for other banks.
Have you completed or otherwise reviewed analyses that show
whether the adoption of these requirements would affect
mortgage servicing operations?
If so, have these analyses shown that smaller institutions
would limit mortgage servicing operations as a result?
What entities are likely to perform the mortgage servicing
operations instead?
A.1. The OCC, the FRB, and the FDIC (together, the agencies)
took careful action to ensure the new capital rules
appropriately reflects the risks inherent in banking
organizations' business models. Consistent with the treatment
of intangible assets generally, the inclusion of Mortgage
Servicing Assets (MSAs) in regulatory capital has long been
subject to strict limitations in the United States because of
the high level of uncertainty regarding the ability of banking
organizations to realize value from these assets, especially
under adverse financial conditions. The agencies believe that
the rules' treatment of MSAs contributes to the safety and
soundness of banking organizations by mitigating against MSA
market value fluctuations that may adversely affect banking
organizations' regulatory capital bases.
As part of the rulemaking process, the agencies considered
the potential impact of the regulatory capital rules on banking
organizations subject to the requirements. The impact analysis
was performed using regulatory reporting data, supplemented by
certain assumptions and estimates if data needed for certain
calculations were not available.
While the agencies conducted analyses that incorporated a
range of assumptions, the general conclusion of each agency was
that the vast majority of banking organizations, including
community banking organizations, already have capital
sufficient to meet the minimum requirements of the regulatory
capital rules on a fully phased-in basis. They also have
capital sufficient to exceed the fully phased-in capital
conservation buffer, such that they would not face restrictions
on distributions and certain discretionary bonus payments under
the rule. With respect to the small number of banking
organizations that currently have concentrations in MSAs that
exceed the limits in the capital rules, we note the capital
rules provide lengthy transition periods that should allow
these firms sufficient time to modify their capital structure
or adjust their business models to conform to the capital
rules. The capital rules also maintain the risk-weighting from
the prior risk-based capital rule for MSAs that are not
deducted from regulatory capital during the transition period.
Additionally, in response to comments, the agencies removed the
proposed 90 percent fair value limitation on MSAs that were
included in regulatory capital. Previously, the general risk-
based capital rules included that treatment in conformance with
section 475 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). However, FDICIA permits the
agencies to remove that limitation if the agencies make a joint
determination that its removal would not have an adverse effect
on the deposit insurance fund or the safety and soundness of
insured depository institutions.
Finally, to the extent some banking organizations pare back
their mortgage servicing operations, such business would likely
shift to other mortgage servicing firms that have the capacity
to absorb the additional processes.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM TONEY BLAND
Q.1. One of the most consistent things I hear from Kansas banks
and credit unions is that they are continually being required
to comply with new regulations that were never intended to
affect them. I am in the process of drafting a small lending
regulatory relief package along with Sen. Tester that seeks to
address some of these problems by clarifying that small lenders
are very different than the regulations' intended targets. Do
you believe that some of the rules intended for our most
complex financial institutions have trickled down to community
banks? If so, what specific portions of the law under your
individual area of jurisdiction have you identified as
problematic for small lenders?
The burden of regulation does not necessarily come from a
single regulation, but the aggregate burden of regulations,
guidance, and size-inappropriate best practices. The burden
grows when small lenders are required to comply with several
new rules concurrently. In isolation, the impact of one
regulation may appear small, but when added to the growing list
of compliance requirements, the cost is skyrocketing. What are
you doing to identify and reduce aggregate burden?
A.1. As I noted in my written testimony, the OCC recognizes
that community banks have different business models and more
limited resources than larger banks. Therefore, where we have
the legal flexibility, we factor these differences into the
rules and guidance we issue, and we tailor our supervision to
each bank's size and complexity. This allows us to avoid having
the rules and provisions intended for the most complex banks
trickle down to community banks.
The OCC has sought to minimize burden for community banks
when developing regulations. For example, in revising the
regulatory minimum capital rules we limited the application of
many new provisions, including the supplementary leverage ratio
and the countercyclical capital buffer, to the largest banking
organizations that engage in complex or risky activities. In
addition, to address the significant concerns expressed by
community bankers, the agencies' final rules retained the
previously existing capital treatment for residential mortgage
exposures. Similarly, while all banks need to maintain adequate
liquidity, community banks do not need the structured, explicit
standards for liquid assets required for the largest banks.
Therefore, we excluded community banks from our liquidity
coverage rule. More recently, the agencies' risk retention rule
allows all qualifying mortgages (QM) under the CFPB's mortgage
rules to qualify as qualified residential mortgages (QRM),
which should minimize the rule's impact on community banks that
engage in securitization activities.
We also take steps to help community banks transition to
new regulatory requirements. For example, the new capital
standards are phased-in to give community banks more time to
come into full compliance with the new rules. We also offer
webinars and easy-to-understand, quick reference guides on new
rules that may affect a significant number of community banks.
Our recent guides have covered the banking agencies' new
capital rules and the CFPB's new residential mortgage rules.
Q.2. The EGRPRA process was brought about to identify redundant
or excessively burdensome regulation. I think the EGRPRA
process has the potential to be an important tool to begin
rebuilding some semblance of trust between Federal regulators
and the financial institutions they oversee. However, the first
iteration revealed little agency will to utilize the process.
Resulting reductions in regulatory burden were, in a word,
insignificant. Various EGRPRA listening sessions have been
conducted across the country. What is the most consistent
message you are hearing from participants? What are you doing
differently in the current EGRPRA review, and what actual,
tangible relief can our smallest lenders expect?
A.2. We take the EGRPRA mandate very seriously, as demonstrated
by the attendance of the principals and senior staff from all
three Federal banking agencies at the EGRPRA outreach meetings.
We are committed to providing regulatory relief where possible,
consistent with the safe and sound operation of the
institutions we regulate.
The most consistent message we have heard so far in both
written comment letters and at the outreach meetings is that
community banks are finding it difficult to compete in this
regulatory and economic environment. With respect to specific
issues, community banks have noted, for example, that Call
Reports should be simplified and revised to reduce duplicative
reporting requirements; asset-size thresholds in our rules
should be raised to account for inflation; and the asset-size
threshold for the small bank examination cycle should be
raised. Unlike the last EGRPRA review, we will not wait until
the EGRPRA process is complete to implement changes at the OCC
where a good case is made for regulatory relief. We will review
all of the recommendations we receive, and where it is clear
that a regulation is outdated, unnecessary, or unduly
burdensome, we will act where we have the authority to do so.
Q.3. Major changes to mortgage disclosures and timing
requirements are set to go into effect on August 1st of this
year. These regulatory changes will impact every participant in
the mortgage lending process and every consumer mortgage
transaction. The financial institutions that are still engaged
in residential mortgage lending are making every effort to be
ready by the August deadline. I am concerned that, if poorly
crafted or hastily implemented, these additional rules will
result in fewer borrowing options in communities I represent as
small lenders exit the business altogether. Are your respective
examiners already being trained on how to assess these changes
over the course of their reviews. Is your agency prepared to be
flexible in implementing these new rules while small
institutions struggle to implement these changes effectively?
A.3. The OCC works with other members of the FFIEC toward the
development of uniform principles, standards, and guidance to
achieve consistency in the supervision of financial
institutions. To that end, the FFIEC's Task Force on Consumer
Compliance has approved interagency examination procedures to
reflect the Dodd-Frank Act amendments to the TILA and Real
Estate Settlement Procedures Act (RESPA). In addition, the task
force members collaborate on examination tools and training.
The OCC is responsible for supervising the compliance of
national banks and Federal savings associations with total
assets of $10 billion or less with the TILA and RESPA. When the
CFPB's mortgage rules became effective, OCC examiners focused
their efforts on discussing the changes with bank management
teams and reviewing the new policies and procedures
institutions implemented to comply with these new regulatory
requirements. When the OCC assesses compliance with the new
rules, we will take a reasonable approach with respect to our
supervisory response and take into consideration a bank's
progress in implementing the rules. The OCC continues to update
and enhance our training for examiners on the interagency
examination procedures developed by the Task Force on Consumer
Compliance of the FFIEC, as well as the other regulations that
implement the Dodd-Frank Act amendments to the TILA and RESPA.
The OCC also intends to work collaboratively with the other
prudential regulators and the CFPB to devise and share training
resources.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM TONEY BLAND
Q.1. I remain concerned about consolidation in the industry. In
a State like Montana we had 65 community banks before the
crisis, and as of yesterday we had 54. That means a sixth of
our institutions have either gone out of businesses or
consolidated with some of the larger institutions. I'm
concerned that if consolidation continues the whole nature of
small institutions being able to serve, particularly rural
communities, is going to disappear.
Can you tell me what trends you've seen with respect to
community bank consolidation since the crisis and how this rate
compares to before the crisis?
A.1. Before describing recent consolidation activity, we note
that consolidation in the banking industry has been steadily
occurring since the mid-1980s, thus reflecting a long-term
trend. That is, the number of banks and banking organizations,
including smaller ones, has been steadily declining for the
last 30 years.
Three different types of events account for most of the net
change in the number of banks over time. One is mergers. The
second is failures. The third is de novo entry or the opening
of newly chartered institutions. The change in the number of
community banks over time will also be affected by the
migration of surviving institutions into the larger non-
community bank group.
For purposes of the analysis below, the OCC looked at
trends at the bank (rather than the holding company level) and
used a $1 billion size threshold (in 2009 dollars) to define
community banks. We also chose year-end 2007 to demarcate two
time intervals, since recession-related bank failures did not
start to increase until 2008. The 7 years ending on year-end
2007 (2001-2007) constitute the pre-crisis period. The
following 7 years (2008-2014) are the post-crisis period.
Consolidation During the Pre-Crisis Period
Examining the three most important types of structural
change individually is useful because they have differing
causes and their contribution to the overall pace of
consolidation can vary over time. At the start of the pre-
crisis period, a total of 9,904 banks and thrifts existed in
the United States. Of this total, 9,282 or 93.7 percent of all
banks met the community bank definition used in this analysis.
The asset share of community banks was 16.2 percent of total
bank assets at that time.
As has been the case in the years prior to 2001, mergers
accounted for much of the consolidation immediately prior to
the crisis. For the 7-year period ending in 2007, 2,312 banks
merged out of existence and 2012 (87.0 percent) were community
banks. Relatively good economic conditions kept failures
relatively low during the pre-crisis interval. A total of 21
banks failed and 18 of these were community institutions.
Community bank numbers were supplemented by the 1,034 new banks
that began operations in the pre-crisis period. Of the
surviving 7,186 banks meeting the community bank definition at
the start of the pre-crisis period, 302 exceeded the size
threshold in 2007 and so were no longer counted as part of the
community bank group.
By the end of the pre-crisis period, the number of banks
fell to 8,534 (a 7-year change of -1,370). The number of
community banks declined to 7,856 (a 7-year change of -1,426).
Community banks still accounted for 92.1 percent of all banks
at year-end 2007. The asset share of community banks also
declined by about 5 percentage points over the pre-crisis
period, from 16.2 to 11.4 percent.
Consolidation in the Post-Crisis Period
During the post-crisis period the number of all banks and
community banks continued to fall. The number of all banks
declined by 2,025 (-23.7 percent) from 2007-2014 while the
number of community banks fell by 1,987 (-25.3 percent). Still
in 2014, community institutions represented 90.2 percent of all
banks at that time. The asset share of community banks
decreased from 11.4 percent to 9.5 percent over the post-crisis
period. But this decline of 1.8 percentage points is roughly
half the asset share decline over the pre-crisis period (-4.8
percentage points).
Mergers continued to be the most prominent driver of
consolidation. A total of 1,577 institutions merged during the
post-crisis period and 1,417 of these were community banks. Not
surprisingly, failures were considerably higher after 2007 than
they were in the pre-crisis period. There were 506 bank
failures from 2008-2014 and 442 were community banks.
Approximately 145 new banks were chartered in the post-crisis
period so there was much less of an offset to the decline in
community banks stemming from mergers and failures. An
additional 207 banks that met the community bank definition
used for this analysis in 2007 survived until 2014 but had
assets above the $1 billion threshold at the end of the post-
crisis period and so contribute to the measured decrease in
community banks.
Q.2. Why do you think we are seeing this in the industry?
A.2. A number of different factors have contributed to the
banking consolidation and community bank decline evident since
2000. The elimination of geographic barriers to bank expansion,
especially interstate expansion, in the mid-90s fueled merger
activity. Banks merged to diversify geographically and reduce
risk, to become larger and so lower costs through the
realization of size-related economies, and to enter attractive
new markets through the purchase of an existing franchise
instead of the more expensive route of starting from scratch.
Multibank holding companies also merged subsidiary banks that
they already owned to lower costs. The removal of these
geographic barriers also exposed banks to increased competition
from more efficient organizations pressuring relatively
inefficient ones to sell out. Changes in information processing
and telecommunications technology also allowed out-of-market
banks and nonbank firms to compete in local markets without
having a significant brick-and-mortar presence. Attractive
merger offers also induced some bankers to sell out to realize
value for their shareholders. Bankers in rural markets also
might be motivated to sell out due to slower rates of
population and economic growth in nonurban areas.
The surge in failures during the post-crisis period
contributed to consolidation after 2007. The severe recession,
commercial real estate exposures and the large number of
relatively vulnerable immature banks opened in the pre-crisis
period contributed to the failure wave. The marked decline in
new bank charters in the post-crisis period also promoted
consolidation over the 2008-2014 period. Profit expectations of
potential new bank organizers were undoubtedly adversely
affected by the deep lengthy recession.
Q.3. Are you seeing a difference in consolidation in urban
areas vs. rural areas?
And specifically, what impact does this consolidation have
on rural parts of the country?
A.3. Consolidation is also evident in rural markets over both
the pre- and post-crisis periods but the data show that
community banks continue to play an important role in these
markets in 2014.
In the analysis below a rural market is defined as a county
that is not part of either a metropolitan or micropolitan
statistical area. There are more than 1,300 such markets in the
United States. On their financial reports, banks report
consolidated data only for their headquarters location and so a
bank is considered rural if its headquarters is located in a
rural county.
Consolidation in Rural Markets During the Pre-Crisis Period
Virtually all of the banks in rural markets meet the
community bank definition used here and so all of the
discussion will focus exclusively on community bank
consolidation. At the end of 2000, 2,541 community banks,
accounting for $192.4 billion in total assets, were
headquartered in 1,057 different rural markets. These community
banks represented 27.4 percent of all community banks existing
at this time and held 15.9 percent of total community bank
assets.
During the pre-crisis period, 401 rural community banks
disappeared through mergers and just five failed. Only five new
banks were chartered in rural markets from 2001-2007 out of the
industry total of 1,034. Thirteen of the 2,000 cohort of
community banks survived in 2007 but exceeded the $1 billion
asset threshold and so drop out of the community bank group. At
the end of 2007, 2,097 community banks were headquartered in
rural markets and accounted for roughly the same percentages of
the total number and total assets of community banks that they
did in 2000.
Consolidation in Rural Markets During the Post-Crisis Period
During the post-crisis period, 274 rural community banks
merged. A total of 45 rural community banks failed in the 7
years after 2007. Given that 2,097 rural community banks
existed in 2007, this implies a failure rate of 2.1 percent.
The comparable failure rate for all community banks over this
period is 5.6 percent (442 failures divided by 7,856 community
banks existing in 2007) which indicates that urban community
bank failure rates were higher than they were for rural
community banks. As in the pre-crisis periods only a handful
(six) of new banks were chartered in rural markets accounting
for 4 percent of all new banks opened after 2007. A total of 17
of the 2007 cohort of community banks survived until 2014 but
grew out of the community bank group.
At the end of 2014, 1,725 rural community banks continued
to exist with total assets of $273 billion. These numbers
represented 29.4 percent of all community banks and 18.4
percent of all community bank assets in 2014, which were both
slightly higher than the comparable figures in 2007. Community
banks are headquartered in 880 different rural markets in 2014.
The number of community banks in rural markets fell by 372
during the post-crisis period.
One disadvantage in using data from bank financial reports
to analyze changes in consolidation at the local level is that
the information does not reveal the extent of bank operations
in all of the geographic markets where they operate. This lack
of detail is important because most banks operate in more than
a single geographic area and it is not unusual that significant
percentages of assets and income come from offices outside the
locality they are headquartered. There is another data source
called the Summary of Deposits (SOD) produced annually by the
FDIC which can provide additional insight on consolidation in
local markets. This data shows the geographic location of each
bank and thrift office in the United States on June 30 of each
year along with the deposits in that office. In particular, SOD
data can show the percentage of deposits in local markets
controlled by institutions that are not local community banks.
One reason observers are concerned about the impact of
consolidation on community banks is the possibility that such
institutions will be acquired or replaced in local markets by
larger banks that are headquartered elsewhere. The presumption
is that these larger institutions will be unwilling or unable
to serve customers in rural markets.
With SOD data it is possible to measure the extent to which
bank affiliates of holding companies headquartered out-of-State
control deposits in rural (or non-rural) markets in each year
and track how this indicator changes over time. SOD data for
the year 2000, shows at least one out-of-State holding company
had an office in 685 of the 1,339 rural markets at that time.
The average aggregate deposit market share of these companies
was 18.1 percent and the median market share was just 2.5
percent. In 2007, this type of institution had at least one
office in 734 of the 1,334 rural markets. The average deposit
share was slightly higher at 18.7 percent and the median share
had risen to 6.9 percent. Using the most recent 2014 report,
out of State holding companies had offices in 715 rural markets
(out of 1,313 total), and both their average (17.7 percent) and
median (5.4 percent) deposit share were lower in 2014 than they
were in 2007. This finding is consistent with recent trends in
office closures and sales by larger banking organizations
outside the urban markets where most of their offices are
concentrated. So this evidence supports the conclusion that
community banks are still able to compete effectively against
larger, nonlocal competitors in rural markets.
Q.4. Community Institution Viability--What do you consider to
be the biggest threat to small institutions livelihood and what
are you doing to address those risks?
A.4. Strategic risk remains the top risk for midsize and
community banks. Banks continue to face difficult choices to
meet earnings targets and keep pace with competition. We have
communicated to OCC examiners the need to assess banks'
strategic decision making and execution processes to determine
if plans are well researched, realistic, and supported by
appropriate expertise and risk management infrastructures. We
have also discussed this strategic risk in our semi-annual risk
perspective report that is publicly available to banks. We
communicated that banks' boards of directors and senior
managers should ensure that strategic planning and product
approval processes appropriately consider expertise, management
information systems, and risk controls for the banks' business
lines and activities. Banks also should incorporate management
succession and retention of key personnel into their strategic
planning process. Compliance programs should keep pace with the
volume and complexity of regulatory changes, as well as the
changing nature of bank customers and transactions.
Q.5. Growth and Regulatory Paperwork Reduction Act Review--Can
you elaborate on how your review is going and share with us the
major areas of consensus the agencies and the industry have
found so far?
A.5. We believe the EGRPRA review process is providing us with
helpful information about our regulations. The outreach
meetings have offered the agencies an opportunity to hear
directly about how our regulations affect community banks. As
part of these efforts, community banks have told us that they
are finding it difficult to compete in this regulatory
environment and that regulations should be tailored to fit the
size and complexity of the institution. To the extent that we
have significant flexibility to amend existing regulations, and
draft new ones, in ways to reduce the regulatory burdens on
community institutions without compromising the safety and
soundness of these institutions, we will do so.
With respect to specific issues, many community banks have
told us that our Call Reports should be simplified and revised
to reduce duplicative reporting requirements. The OCC
understands these concerns and, along with the other Federal
banking agencies and under the auspices of the FFIEC, is
undertaking a comprehensive review of all Call Report items and
schedules. This project includes a review of every line item of
every schedule in the Call Report to identify information that
is essential for the agencies and must be collected.
Q.6. Can you share anything about your future plans as this
review moves forward?
A.6. Through 2015, we plan to issue additional Federal Register
notices requesting public comments on our remaining
regulations. We also will hold three additional outreach
meetings where financial institutions and consumer and
community groups can provide their comments directly to agency
principals and senior agency staff. Our next outreach meetings
are scheduled for Kansas City on August 4, Chicago on October
19, and Washington, DC, on December 2. We note that the
agencies recently have expanded the scope of the EGRPRA review
to include all of our regulations issued in final form up to
the date that we publish our last EGRPRA notice for public
comment. We will include these additional regulations in a
future Federal Register notice requesting EGRPRA-related
comments, and accept comments on these rules at our remaining
outreach meetings.
As this EGRPRA process continues, we will review comments
received to date to determine whether there are changes to our
rules that we can propose prior to the end of the EGRPRA review
process. We also will review these comments for additional
legislative changes that we can provide to Congress prior to
the statutorily mandated EGRPRA report, so that Congress can
incorporate these proposals sooner rather than later. (We note
that we already have indicated support for legislative
proposals authorizing a small bank exception to the Volcker
rule, raising the asset-size threshold for institutions to
qualify for the 18-month small bank examination cycle, and
simplifying the legal requirements for Federal savings
associations to alter their business models.) Lastly, we
continue to seek ways to calibrate our rulemakings (outside of
the EGRPRA process) to account for differences in the size and
complexity of institutions in order to minimize unnecessary
regulatory burden on community banks.
Additional Material Supplied for the Record
LEGISLATIVE PROPOSALS RECOMMENDED BY THE OFFICE OF THE COMPTROLLER OF
THE CURRENCY SUBMITTED BY SENATOR TOOMEY
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE FROM TONEY BLAND SUBMITTED BY CHAIRMAN SHELBY
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]