By Andrew A. Turner, J.D.
Federal Reserve Governor Jerome H. Powell is the latest Fed official to focus on the need to tailor regulation and supervision for community banks. Talking about “Regulation and Supervision of Community Banks,” Powell said that he favors raising the asset threshold for compliance with Volcker rule and incentive compensation requirements, “perhaps to $10 billion.”
Powell noted that community banks rarely engage in activities prohibited by the Volcker rule. He also observed that community banks don’t “face the adverse incentives of compensation agreements that may encourage executives and loan officers to maximize lending volume at the expense of safety and soundness.” In his view, these are areas of risk “almost exclusively” for larger financial institutions
In a November 2014 speech, “A Tiered Approach to Regulation and Supervision of Community Banks,” Federal Reserve Board Governor Daniel K. Tarullo asserted that “tailoring of regulation and supervision for community banks not only seems reasonable, it seems an important and logical next step in financial regulatory reform.” Tarullo was elaborating on earlier remarks, “Rethinking the Aims of Prudential Regulation,” where he discussed a tiered approach to banking regulation and what it would mean for community banks.
Previously, then Federal Reserve Board Chair Janet Yellen, spoke about “Tailored Supervision of Community Banks,” saying that the first step to tailor supervisory expectations, according to Yellen, is determining which supervisory policies should apply to community banking organizations. In other cases, she observed that “it may not make sense to exclude community banking organizations entirely from the scope of a supervisory policy, but we may be able to scale expectations to the size and complexity of the supervisory portfolio, to minimize the burden where possible and appropriate.”
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