As Congress begins final consideration of a number of appropriations bills, Thomas M. Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation has written to Sen. Richard Shelby (R-Ala), Chairman of the Senate Banking Committee, and the committee’s Ranking Member Sen. Sherrod Brown (D-Ohio) providing his views on regulatory relief for smaller banks.
A bill introduced by Shelby and approved by the Banking Committee—the Financial Regulatory Improvement Act of 2015—would ease restrictions on mortgage credit, reduce the examination and supervision burdens on smaller institutions, tighten up the Financial Stability Oversight Council’s process for designating systemically important financial institutions, and make technical corrections to the Dodd-Frank Act. It also would initiate an inquiry into reorganizing the Federal Reserve System. A much narrower proposal offered by the Banking Committee Democrats would have focused regulatory relief on small banks, thrifts, and credit unions; and would not provide for any changes to the Financial Stability Oversight Council, systemically important financial institutions, or changes to the Federal Reserve System.
Although the prospects of Shelby’s bill moving forward in the Senate in the conventional manner seemed challenging, the Banking Committee Chairman was able to add the bill as a rider to an appropriations bill that funds the Treasury Department, the Judiciary, Small Business Administration, Securities and Exchange Commission, Commodity Futures Trading Commission, and several other agencies for Fiscal Year 2016. The FY2016 Financial Services and General Government Appropriations bill was passed by the Senate Appropriations Committee along party lines in a 16-14 vote.
In his letter, Hoenig addressed a blanket exemption from the Volcker Rule for all small banks and provided recommendations on how to provide regulatory relief for traditional banks.
Strongly cautions. At the outset, Hoenig noted, “no question that some classes of banks face significant compliance burdens that are disproportionate to their risk and business model. However, in the effort to cull incommensurate regulations, I strongly caution against easing or repealing rules that are appropriately calibrated to the risk that specific bank practices pose to the financial system and broader economy.”
Volcker Rule. Addressing the compliance burdens experienced by community banks regarding the Volcker Rule, Hoenig pointed out that the “the vast majority of community banks have virtually no compliance burden associated with implementing the Volcker Rule.” He added these banks do not have proprietary trading operations or trading positions of any kind; and they generally do not invest in any private-label securitizations, let alone more complicated hedge funds or private equity funds.
Hoenig further observed that existing bank regulatory agency guidance provides that community banks with less than $10 billion in total assets are already exempt from all of the Volcker Rule compliance requirements if they do not engage in any of the covered activities other than trading in certain government, agency, state, and municipal obligations.
For those banks under $10 billion that do engage in traditional hedging activities, Hoenig noted that “Volcker Rule compliance requirements can be met by simply having clear policies and procedures that place appropriate controls on the activities—and which are required regardless of the Volcker Rule.”
As for the 400 or so, out of approximately 6,400 community banks that engage in less-traditional activities that maybe restricted by the Volcker Rule, Hoenig conceded that there “would be some initial compliance requirements to determine their status,” but added that of these banks “most will find that their trading-like activities are already exempt from the Volcker Rule.
Hoenig concluded, “On balance, therefore, exempting smaller banks from the Volcker Rule should not be considered as regulatory relief or a technical adjustment. Exempting smaller banks from the rule would allow them to engage in risky trading and investment activities financed by taxpayer subsidized funds. And an exemption would not serve any practical or public value, nor would it provide meaningful regulatory relief for the vast majority of traditional community banks because they do not engage in the activities that the Volcker Rule restricts.
Regulatory relief. On the issue of providing regulatory relief for community banks, Hoenig suggested that the focus of that relief should “be directed at bank activity and complexity, and less on bank size.”
Specifically, Hoenig called for statutory relief based on objective set of specific criteria that stresses the importance of strong equity capital and the core commercial banking model.
Under his plan, a bank would be eligible for regulatory relief if:
- it holds no trading assets or liabilities;
- it holds no derivative positions other than interest rate and foreign exchange derivatives;
- the total notional value of all its derivatives exposures—including cleared and noncleared derivatives—is less than $3 billion; and
- it maintains a ratio of Generally Accepted Accounting Principles equity-to-assets of at least 10 percent.
Hoenig noted these criteria reflect the longstanding business models of traditional commercial banks; and since these are objective, they can be enforced with less of an imposition on the banks through off-site call report monitoring and the regular exam process.
Once well-capitalized banks meet the criteria, regulatory relief can be provided to them, which includes:
- exemption from all Basel capital standards and associated capital amount calculations and risk-weighted asset calculations;
- exemption from several entire schedules on the Call Report, including schedules related to trading assets and liabilities, regulatory capital requirement calculations, and derivatives;
- allowing for greater examiner discretion and eliminating requirements to refer “all possible or apparent fair lending violations to Justice” if judged to be minimal or inadvertent;
- establishing further criteria that would exempt eligible banks from appraisal requirements;
- exempting eligible banks, if applicable, from stress testing requirements;
- allowing for an 18-month examination cycle as opposed to the current required 12-month cycle for traditional banks; and
- allowing mortgages that remain in the banks’ portfolio to be considered qualified mortgage loan for purposes of the Dodd-Frank Act.
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