Proportional Progress

By Camden R. Fine

It’s a concept long but steadily in the making—proportionally tiered regulations for community banks.

Conceived by ICBA more than two decades ago, tiered regulation was developed to provide relief to community banks saddled with woefully impractical Community Reinvestment Act regulations. The whole complex CRA regime was put in place to address local obligations neglected by the country’s largest financial institutions. However, its real-world effect had unfairly imposed the highest costs and burdens on community banks—institutions that were already fulfilling their local obligations as part of their inherent business models.

Tiered regulation has since provided community banks sensible relief while allowing regulators to pursue their true congressional mandate aimed at wayward giant banks.

From our initial successes over CRA reform, ICBA and its members set the precedent and a track record for tiered regulation for community banks. Since then, as red tape has escalated to rein in the megabanks, the concept has been increasingly recognized and supported by both federal regulators and lawmakers. And during those years, ICBA and community bankers continually spurred and led the discussion.

Well, we’ve come a long way. Its necessity spectacularly confirmed by the latest Wall Street financial crisis, tiered regulation is widely accepted as practical and productive public policy. Within Washington’s financial policy circles, it is understood and discussed on par with other bedrock banking principles, from systemic risk and too-big-to-fail to moral hazard. This shared understanding extends from Capitol Hill to the regulatory agencies to the highest reaches of the White House.

More important, our industry’s persistent efforts are paying off with tangible results. The Wall Street Reform Act specifically directed regulators to create rules that accommodate the operational limits and business models of community banks, in the process embedding tiered regulation into statutory permanence. The Consumer Financial Protection Bureau’s exemptions for community banks in its recent mortgage lending standards further show that tiered regulation can and should be implemented. And just last month all the federal banking regulators, while unfortunately not fully exempting community banks from their joint Basel III capital standards, rightly exempted community banks from several of the most troublesome features last proposed in those requirements.

For all of these landmark gains, ICBA stood alone among the national banking trade associations in advocating for these tiered regulatory approaches. These achievements have been uphill battles against powerful opponents. For that reason, we cannot rest on these successes. Tiered regulation must be expanded further—to solidify its place in public policy and to help reestablish a fair and level playing field for community banks after years of misdirected regulations. Nonbanks, tax-exempt financial players and megabanks still don’t bear anything close to the same proportional regulatory burdens that community banks do.

Whether addressing safety and soundness or consumer protections, modern banking regulation must become scaled to an institution’s size, complexity, activities and fundamental business model. Otherwise regulation won’t be effective, or even worse it could prove harmful. That’s becoming a consensus, and even a new starting point for almost any new banking law or regulation in Washington.

Tiered regulation has arrived in Washington. But as a policy practice it’s still just getting started, so we all need to continue to work just as hard as we have been to keep its momentum going.