Game-Changing Provision Added to Reg Relief Bill

WASHINGTON — In the mass of banking-related provisions added to a financial services appropriations bill this week, one significant measure escaped notice — a provision that would allow the three banking regulators to exempt community banks from any regulation under their purview.

Sen. Susan Collins, R-Maine, successfully added her bill, called the Community Bank Sensible Regulation Act of 2015, to the appropriations measure before it was approved by the Senate Appropriations Committee along party lines on Thursday.

The provision would grant the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve Board new powers to exempt banks with less than $10 billion of assets from some regulations that they deem unnecessary or burdensome to smaller institutions.

"At present, many smaller, community banks must shoulder the burden and cost of complying with complex regulations that place them at a severe competitive disadvantage," said Collins in a statement to American Banker. "This legislation would allow regulators to take the specific nature of community banks into account, easing the unnecessary and burdensome regulations that are currently imposed upon them."

If the provision is enacted, it would pave the way for the agencies to exempt small banks from regulations like the Volcker Rule. Some regulators have said the measure, which bans banks from trading for their own profit and was first proposed by former Fed Chairman Paul Volcker, should not apply to community banks.

Regulators would face some limits, however. The provision would allow them to exempt or tailor regulations under their purview, but would not allow them the authority to craft exemptions for laws implemented by other agencies, such as the Consumer Financial Protection Bureau. (The CFPB already has broad power to carve out small institutions under existing statutes.)

Still, it would provide regulators with a potentially powerful new tool, and ease frustrations of community banks that must currently wait on Congress to act if they want any regulatory relief.

"All kinds of regulatory relief is being advanced by Congress but very little is being enacted," said Paul Merski, executive vice president for congressional relations for the Independent Community Bankers of America, which strongly supports the measure. "If you could give the bank regulators the authority to act on some of this regulatory relief, that would be helpful."

For now, the measure would be limited to helping banks with less than $10 billion of assets. But the bill would index that figure, saying it should be increased annually "at a percentage equal to the percentage change in the total aggregate assets of" all banks and thrifts.

The provision's chances are unclear. The overall bill is designed to provide funding to the Treasury and Judiciary departments as well as the Securities and Exchange Commission and Commodity Futures Trading Commission. But Senate Banking Committee Chairman Richard Shelby successfully added his regulatory relief bill to the spending legislation in an effort to force Democrats to negotiate with him. Collins' measure was included along with other regulatory relief changes.

Democrats objected to Shelby's move and opposed the Appropriations Committee's bill, which was approved 16 to 14 on Thursday. Yet Democrats may not object to Collins' measure in part because it is limited to helping small banks and thrifts.

Moreover, the provision's chances are better because Collins is a key player on the Appropriations Committee and in the Senate in general. Collins signaled during the committee vote that she had problems with another part of Shelby's bill, a provision that would raise the systemic threshold for banks to $500 billion. Collins suggested it was too high.

But Shelby will need every Republican vote and then some if he wants to clear regulatory relief through the full Senate.

"Anything that is promoted by Sen. Collins, especially if any of these changes are going to go through the appropriations committee, will be absolutely part of any conversation," said Ed Mills, an analyst with FBR Capital Markets. "Nothing here is terribly controversial. It plays well into the spirit of what Democrats are pushing for."

Sheila Bair, the former FDIC chairman who called for a provision like this one in February, said Collins is a savvy lawmaker.

"Sen. Collins is a very skilled legislator and the community banks are lucky to have her as an advocate," said Bair, now a senior adviser to Pew Charitable Trusts.

The congressional debate comes as regulators have conducted their own review to identify policies they view as unnecessary or burdensome, which they are required to do every 10 years under the 1996 Economic Growth and Regulatory Paperwork Reduction Act. But the regulators are limited in their ability to provide relief since substantive changes in many cases typically require legislation.

James Ballentine, the chief lobbyist for the American Bankers Association, said it's hard to say what the legislative provision's chances are since the regulatory relief package itself is in flux. But "we appreciate anybody that injects this into the conversation about whether certain regulations should apply to community institutions," he said.

Spokespersons for the OCC, FDIC and Fed declined to comment on the bill, but added flexibility is likely to be welcomed. Both Comptroller of the Currency Thomas Curry and Fed Gov. Daniel Tarullo have suggested that community banks should be carved out of the Volcker Rule, and Tarullo has discussed other exemptions for small banks from capital regulations. The Collins provision would make implementing such changes easier.

"It looks like a small provision but it could have a pretty big impact," said Bair. "It could be a game changer."