We’re From the Government and We’re Here to Ease Your Regulatory Burden

Manatt, Phelps & Phillips, LLP

Why it matters

The Office of the Comptroller of the Currency (OCC) is trying to make life easier for community banks, Comptroller Thomas J. Curry recently explained in a speech, working on legislation that would lighten both regulatory and supervisory burdens. Curry said the OCC’s efforts are focused on three areas: creating a Volcker Rule exemption, reducing the frequency of exams for “healthy, well-managed community banks,” and making charters more flexible in a fashion similar to Massachusetts state law. He also encouraged community banks to take part in the information sharing of cyber threats and vulnerabilities through organizations like the Financial Services Information Sharing and Analysis Center. “[C]ommunity banks face many common challenges,” Curry said, emphasizing his agency’s “commitment to ensuring that regulatory compliance is no more burdensome than it must be to keep financial institutions, and the financial system generally, safe and sound. We recognize that regulatory burden is a pressing concern for resource-constrained community banks, which means practically all community banks.”

While the Comptroller has good intentions, these compliance tweaks do not address the real goal of community banks—to have immunity from almost all things Washington.

Detailed discussion

Addressing the Depositors Insurance Fund in Framingham, Massachusetts, the Comptroller of the Currency Thomas J. Curry shared three different areas in which the Office of the Comptroller of the Currency (OCC) is working to ease the regulatory burden on community banks.

First up: The flexibility of banking charters. During the 1980s, the Massachusetts State Legislature tweaked the code “to make powers and investment authorities, as well as supervisory requirements, the same or comparable regardless of the type of banking charter,” Curry explained, allowing all Massachusetts-chartered banks to exercise those powers while retaining their own corporate structure.

“This flexibility enables Massachusetts banks to adapt their business strategies to changing business conditions and markets without having to go through the costly and time-consuming process of a charter conversion,” Curry told attendees. “It has given Massachusetts bankers the freedom to build a business on the traditional foundation of mortgage lending or to engage primarily in commercial lending, or some combination of the two. It has been your choice to make, based on the business strategy you see fit to adopt.”

To make the same system available to federal thrifts, the OCC has been working with congressional lawmakers to draft legislation “that would modify the provision of existing law that requires every savings association to devote a fixed percentage of its balance sheet to home mortgages,” Curry said. The change would enable federal thrifts to “diversify their loan portfolio, maintain their federal charter, and retain the OCC as their regulator.”

This change is limited to those now-OCC leftover charters from the old savings and loan industry where S&Ls received more favorable regulatory treatment if they met Congress’s homeownership goals by hitting the minimum “qualified thrift lender” percentages. Meanwhile, national and most state banks already have the flexibility to change their products and services to meet their business strategies—unless, of course, they stray into new loan or fee income products that their regulators (including the CFPB) don’t take kindly to, such as auto lending.

In addition to the initiative modeled on Massachusetts, Curry said the OCC has also been advocating for two additional items that would ease the regulatory pressure on community banks.

The agency supports a recently introduced bill that would raise the asset threshold from $500 million to $750 million, a move that would qualify more than 100 OCC-supervised banks and thrifts—and several hundred other institutions—for the extended 18-month examination cycle.

“We have long believed that healthy, well-managed community banks ought to qualify for the 18-month examination cycle,” the Comptroller noted, and the proposed legislation “would not only reduce the burden on those well managed institutions, it would also allow the federal banking agencies to focus our supervisory resources on those banks and thrifts that may present capital, managerial, or other issues of supervisory concern.”

This proposal is less of a regulatory relaxation than a recognition of the facts that growth happens and size changes. The old barometers for what was a community bank have moved over the decades from under $100 million in assets to $250 million, $500 million and more often now $1 billion and even $10 billion. Many community banks that were under $500 million in assets have grown in size precisely because they are well managed.

The third area “ripe for congressional action”: a community bank exemption from the Volcker Rule. “We do not believe it is necessary to include smaller institutions under the Volcker Rule in order to realize congressional intent, and we have recommended exempting banks and thrifts with less than $10 billion in assets,” Curry said. While there are no doubt a few aggressive outlier community banks dabbling in things Volcker, this exemption finally saves community banks the “prove the negative” compliance costs of confirming that Volcker rarely ever applied in any way to the operations of the typical community bank.

Curry also emphasized the importance of collaboration for community banks, whether working together with other community banks to obtain cost efficiencies in areas like marketing and employee benefits, or in sharing information about cyber threats and vulnerabilities.

As chairman of the Federal Financial Institutions Examination Council (FFIEC), Curry helped guide a 2014 pilot assessment of cyber security readiness at community institutions. This year, the FFIEC has developed an agenda based on the findings, he explained, including a formal position of encouraging financial institutions to join the Financial Services Information Sharing and Analysis Center (FS-ISAC) and share information about cyber threats.

Taking a page from the circumstances of the FFIEC’s founding, Curry said regulators “have learned that the challenges confronting the financial system require that all of us—state and federal supervisors alike—to work together, and that is what we are doing today. I would encourage financial institutions to embrace that lesson as well.”

Directing, not just encouraging the sharing of data breach information with other banks and law enforcement agencies, is long overdue and was hung up on privacy and sometimes national security concerns. Banks should also be able to share expertise and costs in other compliance areas where competition should not be an issue—such as the extremely costly enforcement world of BSA/AML compliance.

To read Comptroller Curry’s prepared remarks, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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