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For the past several years, the Federal Reserve System, banking industry, other regulators, and Congress have increased their focus on supporting community banks and right-sizing regulations for smaller institutions. We are now almost 18 months removed from the passing of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), and the impact of the provisions on community banks is becoming clearer. The supervisory agencies are currently implementing the community bank leverage ratio and collaborating with the banking industry to identify additional opportunities to streamline regulatory reporting. However, debate continues about whether EGRRCPA went far enough in providing regulatory relief, especially for community banking organizations. To help address this concern, the Federal Reserve has established a working group solely focused on reviewing small bank supervision and regulation.
Since taking office as a member of the Board of Governors of the Federal Reserve System on November 26, 2018, Governor Michelle Bowman has spoken often about the importance of community banking and appropriately tailoring supervision and regulation. Bowman is the first to fill the Federal Reserve Board position created by statute in 2015 to ensure adequate representation of community banking interests. She is well-positioned for the role, given her post-crisis experience as a fifth-generation community banker from rural Kansas, as well as her recent time serving as the Kansas State bank commissioner. Since taking office, Governor Bowman has conducted extensive outreach to hear firsthand the issues affecting community banks and the communities they serve.
On June 5, 2019, Bowman testified before the U.S. Senate Committee on Banking, Housing, and Urban Affairs regarding her nomination to serve a full term on the board in the community-banking seat. Bowman stated that she “formed a working group of experts from across the Federal Reserve System to launch a comprehensive review of the Fed’s supervisory work with small regional and community banks.” She also stated that the working group is “looking for ways to optimize our supervision and regulation to ensure it adapts to the on-the-ground realities of an evolving industry and changing consumer expectations while maintaining the safety and soundness of our banking system.”
The Federal Reserve Bank of Minneapolis supports additional changes to community bank supervision and regulation and has a unique opportunity to significantly contribute to the working group, named the Small Bank Supervision Working Group (SBSWG), through Senior Vice President Christine Gaffney’s role as co-chair.
At the SBSWG’s kickoff meeting in mid-July, Bowman provided her vision for the group, in which her passion for community banks was evident. SBSWG members shared this same passion and came well-stocked with ideas, sharing about opportunities to reduce burden related to small bank supervision.
The SBSWG reports directly to Bowman and is distinctly focused on the small, low-risk banks throughout the nation that are so vital to their local communities. The primary responsibilities of the SBSWG will be to:
- Identify initiatives and prepare proposals for consideration that have the potential to reduce burden, improve supervisory effectiveness, or generate supervisory efficiencies in small bank supervision while maintaining safety and soundness.
- Consult and advise Bowman on policy and regulation proposals, with a focus on the capacity of smaller banks to comply with such proposals.
The scope of activities is not limited to just safety and soundness–related supervision. The SBSWG has been tasked with assessing the burden associated with all aspects of community bank supervision and regulation, including IT, BSA/AML, Consumer Affairs, Applications, and Enforcement Actions. To further that initiative, Bowman chose group members with varying backgrounds and expertise.
Although the SBSWG will leverage previous Federal Reserve initiatives to reduce burden, the group has been tasked with developing new and innovative approaches to supervision and regulation. These directives align with the Minneapolis Fed’s strategies of achieving excellence in core operations and growing a culture of continuous improvement, as well as the Federal Reserve Board’s Supervision and Regulation strategic plan themes of being innovative, agile, and optimal. The directives also align with the final step of The Minneapolis Plan to End Too Big to Fail, a policy proposal published in December 2017 that recommends allowing “the government to reform its current supervision and regulation of community banks to a simpler and less-burdensome system while maintaining its ability to identify and address bank risk-taking that threatens solvency.” The SBSWG plans to have initial proposals for Bowman’s consideration by the end of September, knowing that implementing changes will require more time, especially if the proposals require interagency or legislative action.
The Federal Reserve System is committed to the community bank model and is keenly focused on its continued success. In an age of innovation, the Fed wants to encourage creativity in bankers to adapt to the changing environment. While the overall goal is to right-size supervision, it is important to keep in mind that supervision is intended to improve bank stability and viability into the future.
The Minneapolis Fed recognizes that regulatory burden has different meanings for different institutions. We would love to hear where you think we can provide further relief, especially those areas that cause the most pain for the least gain. Please send any questions or comments to Chris Riba at christian.riba@mpls.frb.org.
