BankThink

Community banks need reg relief that is more than skin deep

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Main Street community banks have achieved regulatory relief from Washington's expansive response to the Wall Street financial crisis. But it should not stop there.

These hard-fought carve-outs address the disproportionate impact of regulatory burdens on community banks and recognize the need for a tiered regulatory system based on institutional size and complexity.

In order to allow continued access to financial services in local communities and to promote equitable economic growth in every corner of the country, policymakers should keep advancing reforms that support community banks, and the communities they serve.

The 2008 market crash wrought by too-big-to-fail financial institutions not only flattened the economy — and many community banks along with it — but also unleashed a flood of new regulations for banks that bore no responsibility for a calamity caused by lax underwriting and complex financial instruments.

Community banks found themselves dealing with both a crisis they did not cause and new regulations designed for practices in which they don't engage, such as risky mortgage lending and proprietary trading.

As a result, community banks were forced to spend more time and resources meeting regulatory demands, with many leaving the mortgage market entirely, undermining access to credit in local communities.

In response, community bankers worked diligently for years to advance reforms targeting excessive and unnecessary regulatory burdens that inhibit access to local credit for U.S. consumers, small businesses and farmers.

Those efforts culminated in the enactment of the bipartisan Economic Growth, Regulatory Relief and Consumer Protection Act of 2018, which refined regulations for qualifying community banks.

Since then, community banks have posted strong results. For instance, they outperformed the rest of the banking industry during the third quarter of 2019, while continuing to demonstrate their safety and soundness with higher capital ratios and better loan quality than larger institutions.

Meanwhile, the community bank presence in both urban and rural markets continues to outpace that of larger banks. And these institutions focus a relatively large share of their resources in low- and moderate-income tracts, helping serve the credit needs of those who need it most.

Nevertheless, there is plenty more that Washington can do to support a more safe, efficient and equitable regulatory regime for community banks.

Pending updates to the Bank Secrecy Act requiring companies to disclose their own "beneficial" owners when they are formed would modernize the compliance regime while providing more useful data to law enforcement.

Closing the industrial loan company (ILC) loophole would ensure the dangerous mixing of banking and commerce doesn’t fuel the next financial crisis. Congress enacted a three-year ban on ILC charters after the last financial crisis but needs to close the loophole once and for all.

Finalizing legislation recently passed in the House that creates a cannabis-banking safe harbor in states where cannabis is legal would address regulatory compliance concerns, and improve public safety by reducing cash-motivated crimes.

Continuing to make the new Current Expected Credit Losses accounting standard more flexible and workable for community banks would help them better align their financial forecasting with these complex standards.

Also, leveling the tax and regulatory playing field with the Farm Credit System and tax-exempt credit unions would offset these financial firms' government-provided competitive advantages.

Community banks remain the banking sector’s gold standard, with robust capital ratios and the lowest levels of risk and complexity due to their locally focused, relationship-based business model.

Rather than finding new ways to apply Wall Street regulations to Main Street community banks, policymakers should continue building and maintaining a tiered regulatory system. This should be a system that recognizes and rewards banking that is accountable and accessible to local communities.

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