Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation

Before the Subcommittee on Financial Institutions and Consumer Credit, Committee on Financial Services, U.S. House of Representatives, Washington, D.C. April 23, 20151

Introduction

This speech should be of interest to approximately 860 state-chartered community banks2 that have elected to be members of the Federal Reserve System, and approximately 4,400 top-tier bank holding companies and approximately 300 top-tier savings and loan holding companies with small community thrifts supervised by the Federal Reserve.

According to Deputy Director Maryann F. Hunter, the overall condition of community banks has improved significantly in the time since the recent financial crisis. The number of banks on the Federal Deposit Insurance Corporation’s (FDIC) “Problem List” fell from a peak of 888 at the end of the first quarter of 2011, to 291 at year-end 2014.3 Nevertheless, the number is still high in relationship to the less than 100 problem banks historically reported prior to the crisis.

Community bank earnings continue to experience considerable pressure from historically low net interest margins, and many community banks report concerns about their prospects for continued growth and profitability.

The Federal Reserve’s Approach to Supervising and Regulating Community Banks

The Federal Reserve uses a risk-focused approach to supervision with activities directed toward identifying the areas of greatest risk to banking organizations and consumers and assessing the ability of the organizations’ management processes to identify, measure, monitor, and control those risks. Under the risk-focused supervision framework, bank examination and holding company inspection procedures are tailored to each banking organization’s asset size, complexity, risk profile, and condition. The supervisory program for all institutions, regardless of size and complexity, entails both off-site and on-site supervisory work, including development of supervisory plans, review of financial data, transaction testing, documentation of examination results, assignment of supervisory ratings, and communication of examination findings to the banks and their boards of directors.5

The Federal Reserve scales supervisory rules and guidance in a way that applies the most stringent requirements to the largest, most complex banking organizations that pose the greatest potential risk to the financial system. The Federal Reserve recognizes that the cost of compliance can be disproportionally greater on smaller institutions versus larger institutions, as community banks have fewer staff available to help comply with additional and complex regulations. To assist community banks in understanding how new rules could affect their business operations, the federal banking agencies have issued supplemental guides that focus on rule requirements that are most applicable to community banks.

Federal Reserve Efforts to Provide Regulatory Relief to Community Banks

In order to provide relief, the Federal Reserve adopted a new consumer compliance examination framework for community banks in January 2014.6 The new program more explicitly bases examination intensity on an individual community bank’s risk profile, weighed against the effectiveness of the bank’s compliance controls. This approach is intended to increase the efficiency of supervision and reduce regulatory burden on many community banks.

The Federal Reserve has invested significant resources in developing various technological tools for examiners to improve the efficiency of both off-site and on-site supervisory activities, while ensuring the quality of supervision is not compromised. For instance, the Federal Reserve has automated various parts of the community bank examination process, including a set of tools used among all Reserve Banks to assist in the pre-examination planning and scoping.

As the Federal Reserve develops supervisory policies and examination practices, it has stated its intention to be mindful of community bankers’ concerns that new requirements for large banking organizations could become viewed as “best practices” that trickle down to community banks in a way that is inappropriate. To address this concern, the Federal Reserve is enhancing communications with, and training for, examinations staff about expectations for community banks versus large banking organizations to ensure that the expectations are calibrated appropriately.7

Conclusion

The Federal Reserve uses multiple channels to gather the views of community bankers on economic and banking topics, including regulatory burden. For instance, when a proposed rule or policy is issued to the public for comment, the Federal Reserve gathers information from banking organizations to use in assessing implementation complexity and cost, especially for the smallest institutions. The feedback received has been instrumental in helping to scale rules and policies to appropriately reflect the risks at community banks.

The Federal Reserve appears to be committed to achieving a balanced supervisory approach that fosters safe and sound community banks and fair treatment of consumers while encouraging the flow of credit to consumers and businesses. To achieve that goal, the Federal Reserve has committed to continue to make sure that regulations, policies, and supervisory activities are appropriately tailored to the level of risks at community banks.

References

1.     Testimony, Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Community Bank Regulations, Before the Subcommittee of Financial Institutions and Consumer Credit, Committee on Financial Services, US House of Representatives, Washington DC. Board of Governors of the Federal Reserve System, April 23, 2015. Access at: http://www.federalreserve.gov/newsevents/testimony/hunter20150423a.htm#f2

2.     For supervisory purposes, the Federal Reserve uses the term “community banking organization” to describe a state member bank and/or holding company with $10 billion or less in total consolidated assets.

3.     “Quarterly Banking profile – Fourth Quarter 2014,” FDIC Quarterly, Volume 9, No. 1, 2015.Access at: https://www2.fdic.gov/qbp/2014dec/qbp.pdf

4.     Testimony, Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Community Bank Regulations, Before the Subcommittee of Financial Institutions and Consumer Credit, Committee on Financial Services, US House of Representatives, Washington DC. Board of Governors of the Federal Reserve System, April 23, 2015. Access at: http://www.federalreserve.gov/newsevents/testimony/hunter20150423a.htm#f2

5.     Ibid

6.     “Federal Reserve Community Bank Risk-Focused Consumer Compliance Supervision Program – Executive Summary,” Federal Reserve January 1, 2014.http://www.federalreserve.gov/bankinforeg/caletters/Attachment__CA_13-19_RFS_Exec_Summary.pdf

Testimony, Maryann F. Hunter, Deputy Director, Division of Banking Supervision and Regulation, Community Bank Regulations, Before the Subcommittee of Financial Institutions and Consumer Credit, Committee on Financial Services, US House of Representatives, Washington DC. Board of Governors of the Federal Reserve System, April 23, 2015. Access at: http://www.federalreserve.gov/newsevents/testimony/hunter20150423a.htm#f11

Newsletter Author: Craig Unterseher

Newsletter Contact Person: Craig Unterseher

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