Lael Brainard: Identifying opportunities for reducing regulatory burdens
on community banks
Speech 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outdated, unnecessary, or unduly burdensome regulations and to take action to address those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 reports
We 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 Threshold
The 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 Bank
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 Act
The 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 Laundering
We 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 applications
The 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 so
would 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 thresholds
At 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 institutions
At 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 banks
One 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,
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 cycle
We 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 rule
Finally, 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
Conclusion
The 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.