Regulatory relief for community banks preserved in final housing bill

Several regulatory relief measures for US community banks survived monthslong negotiations over Congress' long-awaited housing bill.

Regulatory relief provisions sought by banking groups — including measures related to de novo bank formation, brokered deposits and examination tailoring — were preserved in the 21st Century ROAD to Housing Act passed by the Senate on June 22. Now the bill is going back to the House, which previously passed its own version, to get a final sign-off with the Senate's changes before heading to the president. Overall, the changes are meant to reduce capital and regulatory burdens so banks have more flexibility to use capital for lending in their communities, lawmakers have said.

The changes will help "ensure community banks can operate under a more balanced regulatory framework," American Bankers Association President and CEO Rob Nichols said in a statement after Senate passage June 22.

Examinations and brokered deposit changes

One provision will reduce examination burdens for community banks by moving the threshold for the 18-month exam cycle to $6 billion from $3 billion in assets. However, an earlier provision allowing good-standing banks under $6 billion in assets to alternate their limited-scope exams and combine their safety and soundness, IT, cybersecurity and consumer compliance exams did not make it into the latest housing bill.

Provisions giving banks more deposit flexibility by changing how they calculate custodial and reciprocal deposits in brokered deposits made it into the latest version.

For banks under $10 billion in assets in good regulatory standing, custodial deposits will not have to be considered brokered deposits as long as they do not exceed 20% of the bank's total liabilities. A provision related to reciprocal deposits would establish a graduated scale for calculating how much of a bank's reciprocal deposits are considered brokered based on the institution's total liabilities.

Reciprocal deposits are a way for banks to place customers' money with other banks to provide insurance coverage beyond the $250,000 FDIC maximum. Brokered reciprocal deposit totals rose sharply after the regional bank failures in early 2023 brought attention to uninsured deposits.

De novo banks

The bill also includes several provisions aimed at encouraging de novo bank formation. It instructs the federal banking agencies to streamline the application process and improve their communication with applicants by appointing a caseworker to be a primary point of contact for organizers. It also instructs the agencies to set up a mentorship program and provide applicants with a list of recently approved de novos who can provide advice to organizers.

In what might be the most impactful change for de novo bank hopefuls, the bill allows federal regulators to adopt a two-year phase-in program for de novos to gradually comply with federal capital requirements. Capital hurdles are often cited as the main reason for the dearth of new banks.

It would also allow new banks to request to deviate from their initial approved business plan during that two-year period.

These changes would "expedite the chartering process and allow start-ups to change business models without pre-approval from the regulators," Stifel Chief Washington Policy Strategist Brian Gardner wrote in a June 17 note.

Bank failure provisions

A provision requiring regulators to issue reports when they invoke the "systemic risk exception" made it into the final housing bill. That exception was used twice in 2023.

However, two earlier provisions that would alter the Federal Deposit Insurance Corp.'s process for selecting a buyer for a failed bank were excluded. Those provisions would have given the FDIC discretion to approve bids other than the one providing the least cost to the Deposit Insurance Fund and restrict the instances in which it can waive the 10% deposit concentration limit for failed bank buyers.

When First Republic Bank failed in 2023, regulators waived the 10% deposit concentration restriction for JPMorgan Chase & Co. to acquire the failed bank's assets.