Academic journal article ABA Banking Journal

Caught between Two Worlds: Small Banks Owned by Large Holding Companies Must Straddle the Gap between Two Philosophies of What the Community Reinvestment Act Is About

Academic journal article ABA Banking Journal

Caught between Two Worlds: Small Banks Owned by Large Holding Companies Must Straddle the Gap between Two Philosophies of What the Community Reinvestment Act Is About

Article excerpt

Small banks owned by large holding companies must straddle the gap between two philosophies of what the Community Reinvestment Act is about

Envision two banks on opposite street corners in the same town. They are the same size--say, $200 million in assets. They have the same full-service strategy, serve the same market, offer essentially the same products, and deliver their services through comparable networks of branches and automated teller machines.

But these banks are only similar, not the same. What sets them apart is the way they are regulated under the Community Reinvestment Act (CRA). One bank is independent, and thus subject to CRA rules for small institutions. The other is affiliated with a holding company that has more than $1 billion in assets, and is therefore covered by the large-bank CRA standards.

This is no trifling difference. The large-bank CRA standards are far more difficult and burdensome than are the small-bank rules.

The new CRA set up a streamlined set of criteria for small banks. They make it fairly easy for a good community bank that is an active, full-service lender with no discrimination problems to get a "Satisfactory" rating. Since most community banks fit that profile, the small-bank criteria have made sense for these banks, freeing up resources that used to go into CRA paperwork. The criteria have also reduced exam time in these institutions.

In short, the small-bank procedures are one area where the new CRA is clearly better than the old one. However, the differentiated approach to CRA can make things difficult for independent banks that are just above the $250 million threshold that makes them "large" for CRA purposes, as well as for small banks in "large" holding companies, as in the example given above. The regulators reasoned that larger institutions are better able to cope with more extensive CRA requirements, whether at the bank or holding company level. They also saw that large institutions tend to have more variability in their situations, which calls for more complex review. Accordingly, it made sense to have different, higher standards for these banks.

For the small banks within the large-bank category, however, this is the worst of both worlds--too large to enjoy the streamlined review, but, typically, too small to have the resources to support the more demanding standards. This column looks at challenges faced by these institutions, especially those in small to mid-sized holding companies.

Bottom of the chain

Small "large banks" must meet the same three CRA tests as NationsBank and Citicorp--that is, to perform in lending, investments, and services. They are subject to the new CRA's data recordkeeping requirements on small-business lending. And they must delineate their CRA assessment areas like other banks and be able to show that they are serving these markets. If they are covered by the Home Mortgage Disclosure Act (HMDA), their performance will be scrutinized using their HMDA data, as well as their small business credits.

How well small banks in large holding companies cope with the compliance burdens of CRA depends on one factor above all--how much support they receive from the parent firm. This in turn depends partly on the size of the holding company--really large ones usually do a great job of supporting even their smallest affiliates, while small holding companies struggle.

How well the banks cope also depends tremendously on how the holding company manages its affiliates--with what degree of centralized systems and overall support. Companies that have a single computer system, common products, strong central compliance programs (including training, common marketing themes, and campaigns), uniform services at branches, ongoing consolidated performance reporting, and corporate-level committees that set policy and handle oversight of key issues tend to manage CRA with reasonable efficiency and effectiveness. …

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