Tiered Regulation for Community Banks

Position

• The current regulatory framework imposes burden on community banks that diverts resources from their ability to support the financial needs of their customers, serve their communities, and contribute to their local economies. Regulatory relief is needed to account for relationship banking.
• ICBA urges Congress and the regulatory agencies to continue to expand and refine a tiered regulatory and supervisory system that recognizes the significant differences between community banks and large, complex institutions in terms of the risks they pose to consumers and to the financial system.
• To preserve their original purpose and remain aligned with an evolving financial services landscape thresholds for regulatory accommodations and exemptions based on asset size, risk profile, and transaction volume should be continually reviewed and adjusted upward as community banks consolidate and the average asset size of banks increases.

Background

Regulatory requirements and onerous supervisory expectations increase compliance costs and disproportionately burden community banks. These burdens diminish community banks’ ability to attract capital, support the financial needs of their customers, serve their communities, and contribute to their local economies.

Large banks have massive, dedicated legal and compliance staff and can more easily absorb regulatory costs. Credit unions and other nonbank institutions, such as industrial loan companies (ILCs) and fintech companies are not subject to the same taxation, laws, and regulations as community banks. In addition, unreasonable regulatory requirements serve as a barrier to entry for investors who might otherwise contemplate the formation of de novo banks.

Without the entry of a sufficient number of de novo banks to offset consolidation, the industry has become progressively more concentrated. Both investment and risk are flowing outside the regulated banking system where non-bank entities are not subject to comparable constraints.

ICBA’s community bank agenda for the 118th Congress encompasses regulatory relief priorities such as: (1) the removal of barriers to entry for de novo community banks; (2) reforms relating to minority depository institutions; (3) modernization of Bank Secrecy Act reporting thresholds; (4) a community bank exemption from Section 1071 of the Dodd-Frank Act which would impose HMDA-like reporting requirements for small business loan applications; and (5) community bank exemptions from proposed climate-related financial risk guidance and regulations.

ICBA’s agenda also includes a range of proposals that would create a more competitive landscape, strengthen cyber and data security, mitigate risks posed by digital assets, protect SBA bank lending, preserve and strengthen community bank mortgage lending, and provide tax relief, among other priorities.