May 10, 2024
The propensity of federal banking regulators to enact new regulatory burdens on community banks in response to the risky behavior of the largest institutions—a decades-long problem for local lenders—has only accelerated in recent months.
From risky financial instruments to fraudulent account openings, problematic practices by transaction-focused megabanks have long led to new rules for the entire banking sector—even the locally based community banks that operate a relationship-based business model. But the recent rash of new rulemakings—totaling 7,000 pages of new rules since July—is one for the history books.
With the regulatory agencies kicking off their latest comprehensive regulatory review under the Economic Growth and Regulatory Paperwork Reduction Act, ICBA is calling on them to take meaningful action to address these excessive regulatory burdens—for the sake of local communities nationwide.
At the root of the problem is a frequent failure of bank supervisors to take a common-sense approach to implementing existing banking industry rules. In the world of bank supervision, the standard always appears to be that more is better—more examiners, more examinations, more prescriptive rules, more pages of regulations.
I have seen this play out firsthand. As Maryland’s deputy commissioner of financial regulation, I was a key negotiator for the state banking agencies during a 2012 settlement between 49 states and five of the nation’s largest mortgage lenders over “robosigning” foreclosure instruments.
During the negotiations, I repeatedly asked myself how something of this magnitude was never flagged by the federal examiners that were onsite at these banks year-round. A year later, when I began my tenure as general counsel for a community bank, the answer became obvious.
A week or two into my tenure, more than two dozen examiners from the Federal Reserve came onsite to our bank, which had less than $300 million in assets and four local branches—hardly the profile of a complex institution requiring such a large presence from the Fed.
It was clear that the federal regulators never detected the alleged instances of foreclosure-related fraud at the five megabanks because no one connected the dots that it was physically impossible for a single signer to execute thousands of documents per day across multiple jurisdictions. Instead of looking critically at the bank records, the examiners likely reviewed the policy, documented it in board minutes, and checked a box on the exam checklist.
All too often, examiners spend hours and hours of time and request thousands of pages of documents diving into minutia that does nothing to reflect the ultimate purpose of bank exams—confirming that the institution is operating pursuant to safe and sound standards so that depositor funds are not at risk.
More than a decade and thousands of pages of proposed regulations since the robosigning scandal, the prudential regulators continue to lose sight of the proverbial forest for the trees.
On May 6, the FDIC board of directors approved a 200-page proposal on incentive-based compensation without a public meeting and without the support of the Federal Reserve—one of the agencies that is required by federal law to join any such guidance.
In support of its approach, the FDIC cited compensation practices at banks such as Well Fargo. In other words, the FDIC used a bank with more than $1.7 trillion in assets to justify a rule that applies to institutions that are less than 0.1% its size, risk, and complexity.
Since July, regulators have put out nearly 7,000 pages of new and proposed regulations, including a 1,500-page final rule revising the Community Reinvestment Act. Again, regulators appear to think that 1,500 pages of text and complex formulas are somehow needed to advance the CRA, which is designed to ensure banks make credit available in their local communities without discriminating.
On top of all these pages of complex regulations are regulators’ guidance, blog posts, enforcement trends, and public statements that affect day-to-day operations of community banks.
The result will not be safer and sounder institutions, but more check-the-box exercises for examiners, under which community banks are collateral damage in the agencies’ continued inability to properly oversee the too-big-to-fail banks that pose the greatest risk to the financial system.
With the latest EGRPRA review underway, regulators must take bold action to eliminate one-size-fits all mandates that fail to consider the community banking business model.
Given the little substantive relief provided by previous reviews, regulators should hire an independent outside consultant to quantify the regulatory burden on community banks and designate an overall director of the current EGRPRA review process who can cut through the objections of individual agencies.
It is long past time for the federal banking agencies to conduct a meaningful review of the regulations affecting community banks, which have led to long-term damage for the communities that depend on these vitally important local resources. In other words, enough is enough.
Anne Balcer is ICBA senior executive vice president and chief of government relations and public policy.
