WASHINGTON — Sen. Elizabeth Warren voiced concerns Thursday about the regulatory burden facing community banks, asking whether the industry needs a two-tiered system of rules to keep the smallest institutions from being wiped out.

The Massachusetts Democrat raised the issue at a Senate Banking hearing on the struggles facing community banks, saying she feared that the Dodd-Frank Act was being misapplied to hurt smaller institutions.

"One of the concerns that I have is that in Dodd-Frank we now have a regulatory system, that while Dodd-Frank made some distinctions between large and small banks, that small banks are still subject to many regulations that were written for the larger financial institutions," she said.

As a result, Warren suggested that perhaps the industry would be better served with a tiered regulatory structure, in which large and small banks are regulated separately.

"[W]hat I'm concerned about is that we now have a regulatory system for which many parts are neutral on its face, but the impact on smaller financial institutions that can't afford to hire an army of lawyers to go out and interpret these rules turns out to be crushing," she said. "So the question I want to ask is … whether or not we are reaching a point where we should really be thinking about a two-tiered system?"

The idea of a two-tiered system has long been championed by small bank advocates, who say the current setup subjects community banks to many rules that shouldn't apply to them. If Warren were to take up the cause, it could significantly boost momentum for the idea.

Other lawmakers on the banking panel did not go quite as far as Warren, but did raise similar concerns about the regulatory burden facing small banks, warning that new rules are hastening consolidation and making it difficult for banks to stay in business.

Sen. Heidi Heitkamp spoke in particular about the challenges facing banks in her home state to comply with a number of new mortgage rules. The North Dakota Democrat noted that small banks had long been an important source of funding for borrowers buying homes, but that now many institutions were concerned they couldn't stay in the market.

"We're seeing a huge contraction from that responsibility to the community, not as a matter of choice, but as a matter of 'we don't know that we can comply, we don't know that we have the capacity to comply with what's coming at us,'" said Heitkamp.

She went on to describe her concern about the difference between the failure to enforce existing rules and the need for new regulation, warning that perhaps the industry had moved too far towards the latter, particularly with respect to community banks.

"In North Dakota no bank failed, but yet my banks are suffering the consequences of what happened," said Heitkamp. "And I would suggest to you that the lack of enforcement of existing regulations before Dodd-Frank is a critical component to bank failures, and the reaction has been to regulate, and some would argue excessively, in response to that — which is, 'one-size-fits-all, we're going to punish you all equally regardless of your appropriate conservative management of your financial institution.' So be very careful, because I'm going to judge things very carefully on regulation versus enforcement."

The comments come as lawmakers from both sides of the aisle take issue with a host of new rules facing the industry, including Basel III capital and liquidity standards, which many small banks said will cripple them.

Republican senators at the hearing also raised concern about the new rules and their impact on smaller institutions.

"There's a pretty standard response [from regulators] about … 'how we understand the value of community banks, we treat them differently, we have an advisory committee that we get input from,' and yet the statistics and trends continue with additional consolidation," said Sen. Jerry Moran, R-Kan. "I see it in the numbers in Kansas — the number of banks is less than it was a year ago — and I hear it anecdotally, the continual conversation that makes to me that the continuing cost of regulation means that a bank has to be larger in order to cover the costs of those regulations."

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