Lael Brainard: Identifying opportunities for reducing regulatory burdens on community banks
Central bank: fed | Type: speech | Date: 2015-10-19

## Lael Brainard: Identifying opportunities for reducing regulatory burdens on community banksSpeech by Ms Lael Brainard,

Member of the

Board

of

Governors

of

the

Federal

Reserve System, at the Economic Growth and Regulatory Paperwork Reduction Act Outreach Meeting, Federal Reserve Bank of Chicago, Chicago, Illinois, 19 October 2015.*

*

*On behalf of the Federal Reserve Board, I want to thank everyone for participating in the fifth outreach meeting held as part of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process.

I also want to thank President Charles Evans for hosting today.Under EGRPRA, the federal banking agencies are required to conduct a joint review of our regulations every 10 years.

At the Federal Reserve, we view the current review as a timely opportunity to step back and look for ways to reduce regulatory burden, particularly for smaller or

less

complex

banks

that

pose

less

risk

to

the

system.

Our

ultimate

goal

is

to

identify outdated, unnecessary, or unduly burdensome regulations and to take action to address those burdens.I

was pleased to participate, along with colleagues from the other banking agencies, in the launch meeting held last November in Los Angeles.

Since that time, staff across the Federal Reserve System, including here in Chicago, have been hard at work evaluating comments and identifying

actions

that

will

meaningfully

reduce

burden.

In

some

cases,

where

we

have authority and the benefit is straightforward, we have taken action.

In other cases, which may require interagency agreement and changes to rules, the process will take longer.

In still other cases, we may need to look to Congress to take action.

I want to spend the rest of my time this morning highlighting those areas that hold the greatest promise to reduce undue regulatory burden, especially for our community banks. 1

## Regulatory reportsWe have heard the request to achieve a meaningful reduction in the burden associated with regulatory

reporting,

and

we

are

taking

action.

In

early

September,

the

Federal

Financial Institutions Examination Council (FFIEC) detailed steps regulators are taking to streamline and simplify

regulatory

reporting

requirements

for

community

banks

and

reduce

their

reporting burden.

As

an

initial

step

to

streamline

some

reporting

requirements,

the

federal

banking agencies, under the auspices of the FFIEC, are seeking comment on proposals to, in part, eliminate or revise several Call Report data items.

Additionally, the federal banking agencies are evaluating the feasibility and merits of creating a streamlined version of the quarterly Call Report for community banking organizations.The Federal Reserve Board is conducting a separate review of the FR series of reports for holding companies to identify unnecessary burden.

Of course, any changes to the bank Call Report forms will likely be reflected with corresponding changes to the Bank Holding Company FR Y-9 reports, but there are additional reports for holding companies that are included in our broader review.

## Small Bank Holding Company Policy ThresholdThe Federal Reserve Board has taken action to address burden concerns from community banks by expanding the universe of small bank holding companies covered by the Small Bank1 These remarks represent my own views, which do not necessarily represent those of the Federal Reserve Board.Holding Company Policy Statement.

In December 2014, following congressional action, the Federal

Reserve

amended

its

regulation

to

raise

the

total

asset

threshold

for

the

policy statement's applicability from $500 million to $1 billion in total consolidated assets.

As a result, more than 700 holding companies (that are not engaged in complex activities) are now exempt from

consolidated

regulatory

capital

requirements,

reducing

both

the

cost

of

capital

and reporting requirements for small depository institutions. 2

## Community Reinvestment ActThe Federal Reserve Board and the other federal banking agencies have received numerous constructive comments on ways to update the implementation of the Community Reinvestment Act (CRA) to better reflect changes in the ways banking services are being provided and banks are interacting with their communities.

A few of the most common issues raised include those related to whether the definition of Assessment Areas should be revised because of changes in technology that allow banks to gather deposits and make loans far from existing branches and

deposit-taking

ATMs,

whether

the

asset

thresholds

that

determine

the

examination methods for banks of different sizes should be raised to lessen regulatory burden on smaller banks,

and

whether

the

performance

tests

should

be

revised

to

give

more

meaningful consideration to community development activities.These are important issues, and we are looking at a wide range of suggestions and options, which

may mean it

will

take

us

time

to

distill

the

comments

and

formulate

effective

policy responses in collaboration with the other banking agencies.

In the meantime, I urge you to continue providing specific suggestions to help inform our interagency deliberations.

## Bank Secrecy Act/Anti-Money LaunderingWe have heard from many community bankers that they would welcome guidance that would assist them in meeting their compliance obligations under the Bank Secrecy Act/Anti-Money Laundering rules in more cost-effective ways.

Accordingly, we are taking a careful look at options that might reduce exam frequency for lower-risk banks and might enable small banking institutions to share expert resources.

There may also be an opportunity to align insider abuse Suspicious Activity Report filing requirements with other filing requirements applicable to all other known or suspected criminal violations.

## Expediting and improving applicationsThe Federal Reserve Board has received comments regarding the amount of time it takes to process applications.

Last year, we started publishing a semiannual report that improves the transparency of the applications process by providing information on the applications that have been approved, denied, and withdrawn and the length of time to review applications. 3 We are currently reviewing our rules to see whether there are ways to expedite the applications review process by delegating additional matters to the Reserve Banks.In addition, we have received suggestions regarding possibly broadening the measure of the degree of competition in a banking market to include the activities of Internet banks. 4

Doing so2 See Board of Governors of the Federal Reserve System, 'Federal Reserve Board Issues Final Rule to Expand Applicability of Small Bank Holding Company Policy Statement and Apply It to Certain Savings and Loan Holding Companies,' news release, April 9, 2015.

Regulatory capital requirements will continue to apply to the depository institution subsidiaries of these companies.3 See Board of Governors, 'Federal Reserve Board releases First Semiannual Report on Banking Applications Activity,' news release, November 24, 2015.4 The Herfindahl-Hirschman Index ('HHI') is used to measure economic concentration in a banking market under the Department of Justice Bank Merger Competitive Review guidelines.BIS central bankers' speecheswould

reduce

the

market

shares

of

other

banks

and

the

measures

of

local

market concentration, which in turn may help community banks in rural areas that are engaged in acquisitions.

## Appraisal thresholdsAt past EGRPRA outreach meetings, participants have raised concerns that the requirement to obtain an appraisal on small dollar real estate loans is a significant burden, particularly in rural areas.

The prudential regulators' rules issued under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) currently do not require the use of a statecertified or state-licensed appraiser for federally related transactions of $250,000 or less, or real estate secured business loans of $1million or less when the primary source of repayment is not sale proceeds or rental income from the property.

The statute allows the agencies to determine the appropriate threshold below which an appraisal by a state-certified or statelicensed appraiser is not required if that threshold would not represent a threat to the safety and soundness of financial institutions.

The agencies adopted these two thresholds in 1994.Given the passage of time and changes in the condition of real estate markets, I believe it is appropriate for the agencies to again review the current thresholds.

In particular, the agencies need to assess whether the thresholds appropriately address collateral and credit risk in small dollar real estate loans and are reasonably balanced against the cost and time to obtain an appraisal, particularly in rural markets where fewer appraisers may be available.

Of course, the agencies would need to consider whether any revision to the $250,000 threshold level would provide reasonable protection for consumers.

Board staff is evaluating the appropriateness of the thresholds in the prudential appraisal regulation.

We will work with other agencies in completing this analysis. 5

## Simplified capital for small institutionsAt previous outreach meetings, community banks have asked whether the Federal Reserve can exempt smaller financial institutions from meeting all of the revised capital requirements.

Based on lessons from the crisis, bank capital requirements were significantly revised to make the requirements more risk-sensitive and raise the quality and quantity of capital.

In some instances, smaller institutions have indicated that the degree of categorization of risks, the attendant recordkeeping and systems changes, and the increased reporting burden on their institutions are generating significantly increased compliance costs that are not commensurate with

the

risk

profile

of

the

institution.

For

smaller

and

less

complex

community

banks,

the benefit

from

this

increased

risk

sensitivity

may

be

outweighed

by

the

burden

of

increased complexity, and a commensurate improvement in safety and soundness of the institution may be

achievable

by

simply

holding

a

larger

cushion

of

capital

measured

against

a

simpler definition

of

assets.

To

be

workable,

such

an

approach

would

need

to

provide

a

robust measure

of

the

financial

institution's

capital

health

and

meet

the

objectives

of

the

Collins amendment.

We are currently exploring possible options. 6

## Stress tests for regional banksOne

additional

item

that

I

would

consider

worthy

of

congressional

consideration

in

the EGRPRA context would be the stress tests currently performed by smaller, regional lenders,5 It is important to note that any change in the appraisal threshold will only affect federally related transactions covered by the prudential regulators' rules.

The majority of residential mortgages would remain subject to the appraisal requirements set by secondary market, particularly by Fannie Mae and Freddie Mac.6 See Daniel K.

Tarullo, 'Tailoring Community Bank Regulation and Supervision' (speech at the Independent Community Bankers of America 2015 Washington Policy Summit, Washington, DC).or those above $10 billion in assets but less than $50 billion in assets.

It might be worthwhile to examine the prudential benefits - the additional insights gained by us as supervisors as well as by the banks' senior managers from the stress tests - against the opportunity costs in terms of

compliance measures and the allocation of management and examination resources for both supervisors and those banks.

And I look forward to discussing this in the coming months.In considering these issues, it is also important to underscore that we are already tailoring our expectations for the stress tests to the lower risk profile of smaller banking institutions, and the stress tests currently performed by these institutions should in no way be designed to mimic the more comprehensive and extensive stress testing program for larger and more complex institutions, particularly the Comprehensive Capital and Analysis Review (CCAR) program.

## Examination cycleWe

are

also

examining

whether

there

may

be

scope

to

extend

examination

cycles

for community banks with lower risk profiles and in some areas have already taken action.

For example,

the

Federal

Reserve

recently

revised

our

consumer

compliance

examination frequency policy to lengthen the time frame between on-site consumer compliance and CRA examinations for lower-risk community banks with less than $1 billion in total consolidated assets.

Another item to evaluate includes potentially increasing the number of healthy, wellmanaged

community

institutions

that

could

qualify

for

an

18-month

examination

cycle

by raising the threshold from its current $500 million level.

In addition to reducing the examination burden on many community banks, this would also allow the federal banking agencies to better allocate resources to those banks that pose more significant supervisory concerns.

## Volcker ruleFinally, EGRPRA may provide a good opportunity to reevaluate whether community banks should be subject to the Volcker rule.

Exempting banks with less than $10 billion in assets from its requirements would significantly help reduce burden on smaller institutions. 7

## ConclusionThe list that I have laid out here is meant to be suggestive, not comprehensive.

I look forward to hearing your views on these issues as well as any additional suggestions you believe to be worthy of consideration.

Each of the agencies will be using the information gathered at this outreach meeting and our other outreach efforts to support the review process, so we can reduce burden where possible, particularly for community banks.

I encourage everybody to speak frankly and to be as specific as possible.Thank you again for coming.7 See Tarullo, 'Tailoring Community Bank Regulation and Supervision'; and Jerome H.

Powell, 'Regulation and Supervision of Community Banks' (speech at the Annual Community Bankers Conference sponsored by the Federal Reserve Bank of New York).BIS central bankers' speeches