Exploring community banking regulatory relief

FED NOTES: Originally published in the Spring 2020 edition of Bank Owner magazine.

By Chris Riba

Following the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), lawmakers, regulators and banking organizations have increased their focus on right-sizing the regulatory landscape for smaller institutions. The supervisory agencies are currently implementing the community bank leverage ratio and collaborating with the banking industry to identify additional opportunities to streamline regulatory reporting. However, debate continues about whether EGRRCPA went far enough in providing regulatory relief, especially for community banking organizations.

Since taking office as a member of the Board of Governors of the Federal Reserve System on Nov. 26, 2018, Gov. Michelle Bowman has spoken often about the importance of community banking and appropriately tailoring supervision and regulation. Bowman is the first to fill the Federal Reserve Board position created by statute in 2015 to ensure adequate representation of community banking interests. She is well-positioned for the role, given her post-crisis experience as a fifth-generation community banker from rural Kansas, as well as her recent time serving as the Kansas State bank commissioner.

Since taking office, Bowman has conducted extensive outreach to hear first-hand the issues affecting community banks and the communities they serve. Bowman also formed a working group of experts from across the Federal Reserve System to conduct a comprehensive review of the Fed’s supervision of small regional and community banks. The workgroup is called the Small Bank Supervision Working Group (SBSWG). In recent testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Bowman stated that the SBSWG is “looking for ways to optimize our supervision and regulation to ensure it adapts to the on-the-ground realities of an evolving industry and changing consumer expectations while maintaining the safety and soundness of our banking system.”

The Federal Reserve Bank of Minneapolis supports additional changes to community bank supervision and regulation, and contributes to the SBSWG through Senior Vice President Christine Gaffney’s role as co-chair. The SBSWG reports directly to Bowman and is distinctly focused on the following responsibilities:

1. Identifying initiatives and preparing proposals for consideration that have the potential to reduce burden, improve supervisory effectiveness, or generate supervisory efficiencies in small bank supervision while maintaining safety and soundness.

2. Consulting and advising Bowman on policy and regulation proposals, with a focus on the capacity of smaller banks to comply with such proposals.

In addition to safety and soundness–related supervision, the SBSWG is assessing the burden of other supervisory activities, including those regarding IT, BSA/AML, Consumer Affairs, Applications, and Enforcement Actions. To further that initiative, Bowman chose group members with varying backgrounds and expertise.

Although the SBSWG will leverage previous Federal Reserve initiatives to reduce burden, the group has been tasked with developing new and innovative approaches to supervision and regulation. These directives align with the Minneapolis Fed’s strategies of achieving excellence in core operations and growing a culture of continuous improvement, as well as the Federal Reserve Board’s Supervision and Regulation strategic plan themes of being innovative, agile and optimal. The directives also align with the final step of The Minneapolis Plan to End Too Big to Fail, a policy proposal published in December 2017 that recommends allowing “the government to reform its current supervision and regulation of community banks to a simpler and less-burdensome system while maintaining its ability to identify and address bank risk-taking that threatens solvency.”

The SBSWG has developed specific recommendations that have followed from initial proposals provided for Bowman’s consideration at the end of September, and has begun presenting the recommendations to a subcommittee of the Federal Reserve Board that focuses on smaller regional and community banks. Knowing that implementing changes can be challenging, especially if the changes require interagency or legislative action, Bowman and SBSWG members are engaging key stakeholders to address concerns early in the process. The SBSWG has also seized opportunities to provide relevant input on third party policy and regulation proposals.

The Federal Reserve System is committed to the community bank model and is keenly focused on its continued success. In an age of innovation, the Fed wants to encourage bankers to creatively adapt to the changing environment. The Minneapolis Fed recognizes that regulatory burden has different meanings for different institutions. We would love to hear where you think we can provide further relief, especially those areas that cause the most pain for the least gain.

Please send any questions or comments to Chris Riba at christian.riba@mpls.frb.org.

Chris Riba is Assistant Vice President in the Supervision, Regulation, and Credit Division of the Federal Reserve Bank of Minneapolis. This piece was adapted from an article published in the Federal Reserve Bank of Minneapolis’ Banking in the Ninth publication. Please visit www.minneapolisfed.org/banking to learn more about banking-related activities at the Federal Reserve Bank of Minneapolis. For additional Banking in the Ninth articles, visit https://www.minneapolisfed.org/publications-archive/banking-in-the-ninth.

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