The Winds of Change for Community Banking: Headwinds, Tailwinds, and Regulation

By Bonilla, Romel; Cooper, Jenna et al. | Chicago Fed Letter, January 1, 2018 | Go to article overview

The Winds of Change for Community Banking: Headwinds, Tailwinds, and Regulation


Bonilla, Romel, Cooper, Jenna, Emmerich, Adam, Hembd, Theresa, Kennedy, Pamela, Marquart, Blake, Nashar, Joseph, Chicago Fed Letter


The conference's speakers focused on the current state of the economy, updates on key accounting and regulatory changes, common examination findings, and views on regulatory requirements and supervisory initiatives. Additionally, panels of agency ombudsmen2 and consumer regulatory compliance professionals discussed current material risks to financial institutions, as well as related evolving supervisory expectations for mitigating those threats.

Patrick Wilder, vice president, Federal Reserve Bank of Chicago, welcomed attendees by addressing the symposium's theme, which focused on the shifting headwinds, tailwinds, and regulatory requirements for community banks.3 He noted that adverse headwinds facing small-scale banking organizations include the perceived heavy cost of complying with rules and regulations, difficulty attracting the next generation of employees, and stiff competition from other banks and nonbank financial firms. According to Wilder, favorable tailwinds for community banking organizations include healthy earnings that are comparable with pre-recessionary levels, several years of strong loan demand, high capital levels, and considerable enhancements in risk-management practices that will be helpful to these firms in meeting the challenges ahead. In addition, Wilder noted that federal banking agencies are working on ways to reduce the regulatory burden for community banks.

A Chicago Fed perspective on the economy and monetary policy

Charles Evans, president and CEO, Federal Reserve Bank of Chicago, began his remarks by stressing the prominent role that community banks play within their local economies, as well as ways they help shape the Fed's ongoing assessment of local and regional markets. He noted that the longterm success of community banking organizations is typically closely tied to the strength of their local relationships. Evans continued with an assessment of the U.S. economy, which included an expectation for positive momentum to continue into 2018. In describing the economic environment, he highlighted solid gains in consumer spending, a healthy labor market, improved balance sheets among both consumers and businesses, and growth in business capital spending.

Evans also noted some concerns about the economy, including an inflation rate that has remained below the Federal Open Market Committee's (FOMC) 2% longer-run target4 throughout most of the post-crisis recovery. Evans said this underperformance could be attributable to the public's view that 2% is effectively an inflation ceiling; he stressed that the 2% inflation target is symmetric, meaning that inflation could be allowed to rise above this threshold for a period of time in order to meet the long-term aim. In closing, Evans called for a broad commitment by policymakers to inflation target symmetry, which supports current Fed policy and shores up Fed credibility.5

A view from the Federal Reserve Board on supervisory matters

Cathy Lemieux, executive vice president, Federal Reserve Bank of Chicago, held a discussion with Maryann Hunter, deputy director, Board of Governors of the Federal Reserve System, about the Board's views on some important supervisory matters. The conversation started with the Fed's ongoing efforts to reduce regulatory burden for community banks, which Wilder touched on earlier. Hunter noted that federal banking agencies have already taken steps to reduce this burden through their authority under current banking laws and have plans to do more. She described a recent public proposal to simplify capital standards,6 as well as a newly proposed rule to raise the appraisal threshold for commercial real estate (CRE) loans.7 Hunter encouraged industry practitioners to provide input on key matters through the public comment process; she noted that Federal Reserve policymakers review all comments submitted for each proposal. She described other notable efforts by the Federal Reserve and other banking agencies to reduce regulatory burden, such as

* revisiting existing policy statements to ensure they remain relevant;8

* increasing to $1 billion, from $500 million, the threshold at which noncomplex small bank holding companies are exempt from consolidated capital requirements;9 and

* reminding financial institutions about two existing options-temporary practice permits and temporary waivers-for addressing CRE appraiser shortages (a trend that has been pronounced in rural markets). …

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