ST. LOUIS Giving bank supervisors more discretion during exams would provide greater benefits compared with complex regulation, according to Esther George, president of the Federal Reserve Bank of Kansas City.
George, who spoke at the Fed's second annual conference on community banking, questioned why regulatory burdens still exist for smaller institutions despite efforts by the Dodd-Frank Act to draw distinctions based on bank size. While many small bank advocates have pushed for a tiered regulatory system with one set of rules for big banks and another for smaller institutions George suggested a better solution would involve giving examiners greater leeway to use their own judgment when enforcing rules at community banks.
"Regulation and supervisory frameworks have evolved with far less reliance on examiner experience and more emphasis on data-driven" models, she said. While considered highly successful for big banks, substituting rigid rules for examiner judgment at small banks "has altered the supervisory process without adding value and has instead created higher costs of compliance."
George was one of three Fed officials to address an audience consisting of state regulators, bankers and academics. The conference, held in conjunction with the Conference of State Bank Supervisors, focuses on research about community banks.
Speakers emphasized that the Fed is paying close attention to the competitive climate surrounding small banks. The key message early in the conference was that community banks matter, and the regulators are monitoring issues that threaten them.
"Community banks are important to the economy but we all know that their business model is under pressure," James Bullard, president and chief executive of the Federal Reserve Bank of St. Louis, told attendees.
Bullard addressed George's support for examiner flexibility in a media briefing, stating that he "would be generally sympathetic to the idea that the individual regulator is on the ground and should have an opportunity to make certain decisions." Bullard also said he agreed with the notion of an "internal struggle to get the right amount of data and applying some judgment and sense" during exams.
George also asserted that "the pendulum has swung too far" in terms of consumer compliance. While regulation has "an important role to play in consumer protection," she said a regulatory focus on "identifying specific undesirable products" seems to run counter to "the requisite subjectivity that underlies the strengths of community bank lending."
Laws tied to mortgage lending, the Community Reinvestment Act and fair lending should "allow consumers to be served where subjectivity is required," George said, while also expressing a belief that the ability-to-repay rule "seems unnecessary" for banks that use so-called soft information to assess borrowers' creditworthiness.
The two-day conference began Tuesday. Its research topics will include how Washington's policies on commercial real estate lending influenced lending before the 2008 financial crisis and a look at the Small Business Lending Fund. Another important paper will look at the factors that are restricting de novo activity.
"Those of us at the Fed pay a great deal of attention to [new bank charters] because it is the primary source of new competition in the markets in which community banks compete," Fed Gov. Jerome Powell said.
Powell also referenced the challenges community banks face, despite an improving economy, including regulatory compliance burdens that "can be particularly daunting" and competition from larger banks, credit unions and nonbanks.
The Fed unveiled a pair of initiatives designed to strengthen its rapport with community banks and their leaders. Bullard said the Fed is preparing a pilot program intended to revitalize training for bank directors; it will be based on an existing program offered by the Kansas City Fed.
Powell, who chairs the Fed's subcommittee on smaller regional and community banking, plans to conduct a national webinar with community bankers on Oct. 20. Powell noted that he also made time during last year's community banking conference to meet with St. Louis bankers to better understand the challenges they are facing.
"I find these types of conversations with people who live and work in the world outside Washington and Wall Street to be enormously enlightening," Powell said.
The early remarks were largely intended to show that key Fed officials recognize the value of community banking and the uniqueness of small banks' operating model.
"Community banks differ from their larger cousins, not just in size, but in the fundamental focus of their business," Bullard said.
"Close ties give community bankers a clear advantage in understanding local needs and tailoring their products and services to meet those needs," Bullard said. "I have never worked at a community bank; however, I have been a community bank customer, and in that role I have had personal experience interacting with bankers whose mission is to provide high-quality service to every customer who walks in the door."