Asset Thresholds Complicate Bank Regulation, State Supervisors Argue

Enough already with one-size-fits-all exemptions.

That's the message the Conference of State Bank Supervisors has for Congress as lawmakers begin debating regulatory relief for small banks. The supervisor group is urging legislators to refrain from exclusively using exemptions based on asset size.

Sorting through the complex web of bank regulations and exemption requirements is one of the primary burdens for community banks, said Candace Franks, chairman of the Conference of State Bank Supervisors. Adding more asset thresholds will only compound the problem.

"There are a lot of asset thresholds that have been applied to various regulations," Franks, the banking commissioner for Arkansas, said in a recent interview. "It helps the matter, but it also complicates the matter because whether or not you fall within these various thresholds is another issue that community banks have to deal with."

Franks' group is urging Congress to adopt a formal community bank definition that has its own regulatory framework. Such an approach would push lawmakers to consider more qualitative factors — such as a bank's local governance structure and business model — in addition to the size of their balance sheets.

"If the bank meets the definition of a community bank, that would be less complex and easier for our institutions to know exactly what rules apply to them and what rules do not apply," Franks said.

Franks recently discussed the issue in testimony before the Senate Banking Committee, where she urged legislators to "right-size" bank regulations. It's a catch phrase that the Conference of State Bank Supervisors is using to push for a more nuanced approach to regulatory relief.

Think of it as a scalpel, rather than an ax, approach for reducing compliance burdens. "It's not about more or less regulation, it's about the right type of regulation," said Margaret Liu, the group's deputy general counsel.

For instance, the Consumer Financial Protection Bureau could tailor its qualified-mortgage regulations to grant a safe harbor for mortgages that community banks keep on their books.

Another example would involve directing the General Accountability Office to study whether risk-based capital standards designed by the Basel Committee on Banking Supervision are appropriate for smaller banks.

"One of our big concerns is that a one-size-fits-all approach to regulation is really going to harm the viability of community banks," Liu said.

The comments come as asset thresholds for small banks take center stage in Washington. Lawmakers have been gearing up in the past few months for a debate over modifying the Dodd-Frank Act, which could include exempting banks with less than $10 billion in assets from the Volcker Rule.

Additionally, Sheila Bair, former chairman of the Federal Deposit Insurance Corp., recently endorsed a legislative proposal to give federal regulators the authority to exempt banks with less than $10 billion in assets from new and existing regulations. It could be an easy fix for protecting smaller banks from regulatory requirements — such as Basel III or the Volcker Rule — that were designed for larger institutions.

"From a CSBS standpoint, it's a constructive suggestion, for sure," Liu said of the Bair-backed proposal.