What the Treasury Report Means for Community Banks

…and how ICBA helped make it happen.

By Kathryn Jackson Fallon

Community banks have long been hampered by regulations on par with large-cap institutions. However, some of these regulations could now be scaled back.

In June, the US Treasury Department, led by Treasury Secretary Steven Mnuchin, released a report outlining recommendations for regulatory relief in the banking industry. Chris Cole, ICBA’s executive vice president and senior regulatory counsel, says, “I think it’s the first time in a decade that Treasury has issued a report about banks and has not recommended additional regulation on banks.”

Primary source

Read the inspiration behind the Treasury report, ICBA’s “Community Bank Regulatory Relief” white paper, at icba.org/beheard

As the Treasury prepared the report, ICBA had the opportunity to weigh in. Many ICBA recommendations were heeded. Here are a few that, if implemented, would prove especially beneficial to community banks.

Simplify the capital regime for community banks

“Treasury recommends that bank regulators explore exempting community banks from the risk-based capital regime implementing the Basel III standards.”

Exempting community banks from Basel III capital requirements is exactly what ICBA recommended. This would allow for a much simpler method of assessing the capital adequacy of community banks.

An exemption from Basel III for community banks would mean capital requirements would become simpler, maybe going back to a more simplified risk-based system, Basel I, or scrapping a risk-based system altogether and using a simple leverage ratio. ICBA’s position has been all along that Basel III should never have applied to smaller banks and that it was a complicated system set up only for internationally active banks.

Higher thresholds

“Treasury recommends raising the small bank holding company policy statement asset thresholds to $2 billion from the current $1 billion.”

While ICBA would have liked to see the limit for the small-bank holding company policy statement increased to $5 billion or $10 billion, raising the limit to $2 billion is a move in the right direction. It allows banks to have their capital adequacy measured at the bank-only level and not have to compute consolidated capital at the holding company level. This would allow community banks to raise debt at the holding company level and inject it down into the bank, which is also a good way to bolster the capital levels of the bank itself.

That rise to $2 billion would capture quite a few banks. “As asset size goes up, the number of banks goes down,” says Cole. More bank holding companies, those with assets up to $2 billion, would be able to leverage their assets more easily—in other words, borrow more.

Small-business lending

“Simplifying, adjusting or changing certain financial regulations for financial institutions serving small businesses…”

Lending to small business is a vital way community banks serve the needs of their communities. It would be tremendously burdensome for community banks to collect, compile and report the voluminous data required by section 1071 of Dodd-Frank. Treasury recommends, as does ICBA, a repeal of that provision.

Treasury also recommends reconsidering guidance regarding real estate collateral for small-business loans. Karen Thomas, ICBA senior executive vice president, government relations and public policy, would include commercial real estate lending, which is so important to small businesses and local economic growth.

Mortgage lending and CFPB reform

“Increase the threshold for making small creditor QM [qualified mortgage] loans.”

Treasury has proposed to increase the size of the definition of a small creditor under the Consumer Financial Protection Bureau’s ability-to-pay rule to a higher asset threshold of between $5 billion and $10 billion from the current $2 billion.

Residential mortgage rules are highly detailed, and increasing the threshold would help alleviate some of the burden of compliance. It would also make it easier for community banks to stay in the mortgage business. Community banks serve many customers who may not qualify for a secondary market mortgage. “Their only opportunity to get a mortgage loan is to find a lender willing to hold that mortgage in portfolio,” Thomas says. “We think it’s important to give community banks that ability so that they can serve those borrowers that don’t necessarily fit the cookie-cutter mold.” Since so many community banks are mortgage lenders, raising that QM asset threshold would be a big improvement.

Examination and supervisory process

The Treasury report calls for agencies to continue to streamline the Call Report, which is more than 80 pages, not including instructions.

Thomas says they should also consider raising the asset limit for the extended 18-month examination cycle. “The general rule is that a bank should be examined every 12 months. But banks under $1 billion that are well rated have an 18-month examination cycle.” ICBA recommended, as does the Treasury report, looking at raising that asset limit.

Enough of the Call Report deals with Basel III that streamlining Basel III, simplifying capital and actual disclosures, would mean less of a headache for community banks, because filling out these complicated forms requires so much time.

Encourage de novo activity

The report recommends significantly streamlining the de novo application process. Making it easier for new entities to form is a sign of a healthy industry.

Simplifying the rules will make it easier for new banks to get the insurance approvals from the FDIC.

“The regulators have been pretty tough on how much money you need to start a bank, insisting on at least 8 percent leveraged capital based on year-three asset size,” Cole says. “And that translates, quite often, to around $25 million to $35 million for a de novo bank.”

These recommendations are encouraging, but there is no guarantee that they will actually materialize. Those requiring regulation might be easier to implement than those that require congressional action. ICBA is working all fronts to achieve some of these goals.

Kathryn Jackson Fallon is a business and financial writer in New York.