Regulation and Regulatory Burden

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This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, is expected to appear at least once each month throughout 2017.

Nearly 10 years ago, the U.S. financial system experienced the most significant financial crisis since the Great Depression. Congress responded to the crisis with new financial regulation—the Dodd-Frank Act—intended to strengthen the resiliency of the financial system and, to the extent possible, end “too big to fail.”

The Dodd-Frank Act

Under the Dodd-Frank Act, the nation’s largest financial firms are now subject to substantially more regulation than they were prior to the financial crisis. One of the results has been materially improved levels of capital and liquidity, both of which are regularly stress tested under adverse economic scenarios.

However, these regulations are not applied on a one-size-fits-all basis. As regulators have gained experience, regulatory capital and liquidity requirements have been tailored relative to the systemic importance of the institutions, with greater flexibility for the “smaller” large firms.

Not all regulations can be tailored since only Congress can change the wording of the law. The limited ability to tailor some regulations can pose special challenges to small, community banks, which have the least scale to absorb the cost of compliance.

Reducing Regulatory Burden

Recognizing the impact of regulatory burden on small banks, federal banking agencies have taken several steps over the past few years to reduce burden where consistent with the law.

Raising Asset Thresholds

In 2015, the Federal Reserve adjusted the size threshold for exempting small bank-holding companies from consolidated capital requirements, raising the threshold from $500 million to $1 billion in total assets.

Also, in 2016, the Fed implemented a provision in the FAST (Fixing America’s Surface Transportation) Act that raised the asset threshold for insured depository institutions that are eligible for an 18-month examination cycle from $500 million to $1 billion.

Reducing Report Size

The Fed has worked with other regulatory agencies to reduce the number of line items on the regulatory Call Report—the balance sheet and income statements commercial banks are required to submit every quarter. Small, traditional banks are now able to file call reports with 40 percent fewer reportable items.

Conducting More Examination Work Off-Site

Finally, the Fed has continued to “risk focus” its examination work, conducting more activities off-site to reduce the burden on small banking organizations.

Ongoing Efforts to Reduce Regulatory Burden

Regulatory burden reduction efforts are continuing. In 2015, the Fed led a review under the Economic Growth and Regulatory Paperwork Reduction Act, a law that requires all federal banking agencies to examine their regulations for appropriateness at least once every 10 years.

The agencies issued a joint report to Congress on their findings in March 2017, outlining actions they can take without legislative action. The agencies plan to:

• Simplify capital rules
• Raise the appraisal threshold for commercial real estate loans
• Address appraiser shortages in rural areas
• Jointly review all aspects of the examination process, including the exam report format and preparation process

These proposals hold promise. However, banks are looking for more burden-reducing measures, including legislative changes that permit a simplified capital alternative for small institutions.

On one hand, regulation can be expensive and challenging for bankers and regulators alike. On the other hand, the safety and soundness of our financial system and balanced protection of consumers are important to financial stability. A balanced outcome can be achieved by calibrating regulation through thoughtful change.

Follow the Series

• Why Are Banks Regulated?
• Did the Dodd-Frank Act Make the Financial System Safer?
• Bank Supervision and the Central Bank: An Integrated Mission
• Why Are There So Many Bank Regulators?
• Why Didn’t Bank Regulators Prevent the Financial Crisis?
• Who Funds the Cost of Bank Supervision?
• Why Does the Fed Supervise Small Banks?

Additional Resources

• Federal Financial Institutions Examination Council: Joint Report to Congress: Economic Growth and Regulatory Paperwork Reduction Act
• On the Economy: Keeping a Watchful Eye