State financial regulators responded to the recently released report by the Federal Financial Institutions Examination Council (FFIEC) with additional recommendations to reduce regulatory burdens on banks.
Every 10 years, the FFIEC reviews the regulatory environment under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) and issues a report to Congress.
State regulators participated in the EGRPRA review as a representative body through the State Liaison Committee (SLC), a member of the FFIEC. While state financial regulators support the findings of the report, the SLC identified additional opportunities to further reduce regulatory burden.
“We are pleased to work collaboratively with our federal counterparts to identify specific obstacles that inhibit the ability of smaller institutions to best serve their communities,” Karen Lawson, chair of the SLC and director of banking at Michigan Department of Insurance and Financial Services, said. “State and federal regulators have made a purposeful effort over the last two years to solicit feedback from the industry and other stakeholders and address issues raised during the review process. While there is still more work to do, I believe the findings identified in the FFIEC’s report to Congress, as well as the actionable recommendations in the SLC letter, have potential to make a meaningful impact on community banks while retaining effective regulation.”
Among the additional recommendations, the SLC would like to see capital rules for smaller and less-complex institutions simplified. The SLC found that community banks devote a disproportionate share of costs to comply with these complex federal rules. The SLC supports efforts to tailor capital requirements for smaller and less complex institutions.
The committee would also like to see further efforts to reduce the burden of call reports by expanding the criteria that permit small institutions to file a streamlined call report. The SLC supports moving from a numerical threshold – currently $1 billion in assets – to a multi-factor set of criteria, such as the FDIC’s Community Bank Research definition.
The SLC additionally calls for a re-examination of the regulatory threshold for appraisals. State regulators are concerned that the thresholds may unnecessarily impede credit availability, particularly in rural and underserved markets, due to the associated costs to borrowers and appraiser shortages in numerous markets throughout the country.
At the end of their recommendations, the committee also noted that they would like to see the Herfindahl-Hirschman Index (HHI) re-evaluated. The HHI is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. The SLC found that the current HHI calculation does not provide a realistic representation of market competition, and may place smaller firms at a disadvantage.