FDIC Releases Plan to Bolster Community Banks

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WASHINGTON — Better communication, technical assistance and more efficient information flow between bankers and examiners are not earth-shattering changes, but the Federal Deposit Insurance Corp. believes they can have a significant impact in how community banks view their regulator.

The FDIC is set to release its first-year progress report on Tuesday on a broad initiative focusing on the community bank sector. While the report does not recommend changes to rules or guidance, it touts the steps the FDIC is taking around the edges to respond to specific banker concerns aired through roundtables held earlier this year.

The report, a copy of which was given to American Banker, also includes a thick stack of data about the evolution of community banks over the last three decades. FDIC officials said the data suggest the sector's future is much brighter than some fear.

"The bottom-line finding is that even with all the of the consolidation that's taken place and the market challenges that exist for community banks, the core community bank model of reliance on relationship banking funded by core deposits remains quite viable," FDIC Chairman Martin Gruenberg said in an interview on Monday.

The report said the agency will begin piloting an automated tool next year to streamline materials used in consumer-protection exams — similar to a tool that is farther along for safety and soundness exams — and also described efforts to help guide community bankers through compliance with new rules and understand what regulations are around the bend.

"There was recognition [among bankers] that we can't really change rules required by Congress, but we can help them understand what our expectations are," said Sylvia Plunkett, senior deputy director in the FDIC's division of depositor and consumer protection. "The technical assistance is a big piece of that."

More than a year after Gruenberg announced the agency's new community bank focus — in the shadow of multi-decade consolidation and fears about the effect of the Dodd-Frank Act — the now-confirmed head of the agency described the report as a good first step, but said the FDIC will continue to seek ways to refine the supervisory process.

"We've undertaken some useful initiatives both related to examinations and rulemaking, but I think there is more for us to do," he said. "This is in some sense a valuable work product and in some sense a valuable progress report on the work we've done over the past year. But I think there is more for us to continue to do."

The agency's steps — many of which have already been announced less formally throughout the year — stem from a series of six regional meetings Gruenberg held with bankers around the country.

Bankers aired complaints both on the economic and personnel-related challenges facing smaller institutions and also the regulatory process. Those included a glut of new regulations that banks say hurt lending, unpredictability around the release of more regulations, obligations to gather pre-exam material not relevant to a bank or used during the exam, the lengths of exam times, inconsistency between what teams focused on between exams and the perception of "zero tolerance" related to fair-lending violations or other consumer-protection issues.

"Community bankers also generally expressed a desire to move toward a multi-tiered regulatory system," the report's summary said. "One panelist noted that future regulations should consider asset size and volume of the covered activity."

The changes the FDIC has executed so far in response largely revolve around improving the communication flow between the agency and the institutions it regulates.

The agency unveiled last month an online vehicle meant to ensure examiners only seek pre-exam materials relevant to the institution they are about to enter, a program that will be launched on a national basis early next year. The agency's consumer compliance division will also begin testing a similar tool "to direct the [consumer compliance] examiner through a series of questions about the institution to ensure only necessary information and documents will be requested."

The FDIC is also in the process of developing new "information packets" to give bankers at the outset of both safety and soundness and consumer-protection exams. "This information is intended to further open lines of communication, set expectations and provide resources to assist bankers with the examination process," the report said.

The agency has revised the process for making regional supervisors and examination field staff available to discuss with bankers during the interim period between exams, and has undergone steps to ensure its collection of Home Mortgage Disclosure Act data is more consistent with that of other regulators.

"We are going to try to make changes where changes make sense and where it's practical to do so," said John Weier, a special advisor to Gruenberg. "We will continue to look at the exam and the rulemaking process to make sure that we continue to make it as effective as possible."

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Comments (7)
5 years after the financial crisis that resulted in the US government showering benefits on the mega-banks that caused disaster and the FDIC is finally recognizing the need to provide help to smaller banks. Can this really be called "responsive"?
Posted by jim_wells | Tuesday, December 18 2012 at 8:16AM ET
Amen, jim_wells.

Moreover, "a thick stack of data about the evolution of community banks over the last three decades. FDIC officials said the data suggest the sector's future is much brighter than some fear." Exactly what planet are they living on? And what does 25 year old data have to do in relevance to a post crisis post Dodd-Frank world we now have. The spin makes me want to throw up in my mouth.
Posted by TxTim | Tuesday, December 18 2012 at 9:50AM ET
Agree. This article gave me the impression that the effort is more about opening long-overdue lines of communications and justifying the examination process than it is about providing any help to the banks.
Posted by jim_wells | Tuesday, December 18 2012 at 10:11AM ET
Most smaller banks have given up on consumer lending. When clients ask me about what they would need to do to start making mortgage loans, I tell them they will need at least 3 FTE devoted to nothing but mortgage lending, a large investment in a documentation system in order to produce all of the required disclosures, a large investment in training, and to forget about making a profit for at least the first two years. And that doesn't even go into all of the issues of maintaining a pipeline and dealing with sales to the secondary market.

Most small banks simply cannot AFFORD to make consumer loans. The result is the consumers wind up going with mortgage brokers who may or may not (possibly not) have their best interest at heart.
Posted by PRLynn | Wednesday, December 19 2012 at 3:58PM ET
@PRLynn - apparently the FDIC and other federal financial regulators aren't listening to very practical issues like this. They are too busy taking credit for saving the Too Big To Behave Banks that destroyed what was once a healthy credit market in the US, whilst closing as many community banks as they can.
Posted by jim_wells | Wednesday, December 19 2012 at 4:11PM ET
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