Read Between the Lines

Each month Bank Insights reviews news from regulators and others to give perspective on regulatory challenges.

FDIC Removes Reciprocal Deposit Clause in Proposed Small Bank Assessment Rule

The Federal Deposit Insurance Corp. board has revised its proposed rule for small bank assessments, changing the section that treated reciprocal deposits like brokered deposits. Hundreds of bankers and trade groups had opposed it, saying it would amount to a new tax on small banks. The new proposal also alters the one-year asset growth measure so it increases assessment rates only when one-year asset growth reaches 10 percent.  The proposal does not change the loan mix index, which uses historical charge-off rates to identify loan types with higher risk.   

Regulators Endorse 18-Month Exam Cycles

At least 617 more community banks will be eligible for 18-month exam cycles, under an interim final rule approved by the FDIC board in January. The rule came about after Congress included the provision in a highway bill in December. It will allow “well-capitalized and well-managed” banks with assets of less than $1 billion to benefit from 18-month rather than 12-month exam cycles.  “While the 18-month cycle will reduce the burden on well-managed community banks and thrifts, it will also allow the federal banking agencies to focus our supervisory resources on those institutions that need it most—those that present capital, managerial, or other issues of significant supervisory concern,” Comptroller Thomas J. Curry said in voting for the rule. “We don’t have unlimited supervisory resources, and it’s important that we manage those resources wisely.”

GAO Tries to Determine Dodd-Frank Impact on Community Banks

The Government Accountability Office attempted to quantify how the Dodd-Frank law has affected community banks, but concluded it was too difficult and – too soon – to come up with reliable numbers, according to a December report.   Community bankers and trade groups told the GAO they had an increased compliance burden because of the Dodd-Frank law and a decrease in lending.  The GAO looked at Call Report data and found that since 2010, small banks tended to have more employees per every million dollars in assets than larger banks, higher non-interest expenses by a percentage of assets than larger banks, and fewer mortgages on their balance sheets. But the report concluded it was too early to attribute those findings to regulations. Regulators told the GAO “it may be too early to assess the full impact of the Dodd-Frank Act rulemakings and while they have heard concerns about an increase in compliance burden, they have not been able to quantify compliance costs.”  They also said the compliance activities do not appear to have reduced community bank profitability.

FDIC Study Finds that Closely-Held Community Banks Outperform when Managers and Owners Overlap

An FDIC study that looks at the organizational attributes of about 1,350 community banks in the Kansas City, Dallas and Chicago regions found that closely held banks in which key managers are also owners outperform other closely-held banks that have no owners in management. The study, which surveyed bank examiners, found that the vast majority of closely held banks were controlled by groups with family or community ties, and many of the owners were also serving on the bank boards. In 48 percent of the closely held community banks, the key bank officer was a member of the primary ownership group. The closely held banks were generally smaller than widely held banks, more concentrated in rural areas and twice as likely to specialize in agricultural lending.  Succession planning remained an issue for closely held banks, which led the study authors to conclude that their “recipe for success” may prove difficult going forward.

New York to Impose Criminal Penalties on Bank Officers

The New York State Department of Financial Services is beefing up its money laundering and anti-terrorist rules by mandating that senior bank officials sign an annual certification that attest the bank is compliant with a new transaction monitoring program and watch list. Filing incorrect or false annual certifications will result in criminal penalties. Officials said the rules will be based on each bank’s risk assessment.