The$100 million asset mark is a critical one for banks, but those banks faceincreasing and disproportionate pressure from economic forces, said FederalReserve Board Governor Jerome Powell.
Thatthreshold is the domain of the smallest banks and the newest entrants, servingas the starting point for most institutions, and banks of that asset size have"almost exclusively" borne the brunt of the decline in communitybanks numbers, he said during a Sept. 29 appearance. Some of the decline isattributed to banks growing above the threshold into larger asset sizes throughorganic or strategic growth, but some is due to the lack of de novos in thespace, he said.
"Iwant to emphasize that the long-trending decline in the number of very smallcommunity banks does not mean that these banks do not play an important role inour financial system. Almost all newly chartered banks fall into this category,and many of these banks thrive and, ultimately, outgrow the smallest sizecategory," he said. "[B]anks with less than $100 million in assetsshould be viewed as a key source of dynamism and competition within the bankingsector."
Thelack of de novos has had an outsized impact in the accelerating rate of declineof banks with less than $100 million in assets. Powell said the lack of newentrants could be mostly attributed to low interest rates and a post-crisiseconomic expansion that has been slower than usual. Regulatory pressures mayalso have played a part in the decline, Powell acknowledged as he spoke aboutregulatory efforts to foster community bank growth and ease regulatory burdensat the Community Banking in the 21st Century Research and Policy Conference,jointly hosted by the Federal Reserve Bank of St. Louis and the Conference ofState Bank Supervisors.
Hesaid it is now up to policymakers to identify the reasons behind theaccelerating disappearance of the sub-$100 million bank, whether it stems froma "structural change" resulting from "diseconomies of very smallscale" or is a trend that can be reversed by increasing interest rates andrecent efforts by the FDIC to encourage bank charters.
Powellsaid regulators are increasingly tailoring their rules and supervisoryapproaches for institutions of different sizes and complexities in an attemptto achieve supervisory aims without creating unnecessary regulatory burdens.The Fed is "committed" to ensuring new and existing regulations arenot "unduly burdensome" for community banks. He cited the form for bankswith less than $1 billion in assets and increasing the threshold for the SmallBank Holding Company Policy Statement to $1 billion with an expanded scope toinclude savings and loan holding companies as evidence of this support.
Healso said the Fed has several efforts underway to reduce the burden associatedwith real estate appraisal requirements, simplify the regulatory capitalrequirements for community banks, encourage Bank Secrecy Act and anti-moneylaundering resource sharing among community banks to help manage theirobligations, and use data and forward-looking analytics to identify high-riskcommunity banks to focus supervisory responses.
Powellsaid it is too early to speculate what the capital requirement simplificationwould look like, but he is "hopeful" that regulators will be able tocome together to achieve "significant" relief for community banks.Powell added that an Economic Growth and Regulatory Paperwork Reduction Actsubcommittee he chairs is devoted to ensuring that regulations intended for thelargest banks do not flow downward to medium and small institutions. EGRIPA hasforced the Fed to "systematically" go through its rules andregulations to consider their impact on small banks, he added.
Still,he noted that the regulatory agencies are somewhat hamstrung by legislativeamendments, and Powell said the Fed has more flexibility in tailoring safetyand soundness rules compared to consumer or BSA rules.
"Ithas to be a balance. We need to be good, strong regulators but make sure we'renot adding regulatory burden," he said. "It's never a battle you win,it's just something you have to focus on every day."