Reducing regulatory burden for banks under $10 billion in assets is a worthy goal, but don’t expect regulators to abandon the Volcker Rule anytime soon, FDIC Vice Chairman Thomas Hoenig said this week.
According to remarks delivered before the Hyman P. Minsky conference Wednesday, the vice chairman of the Federal Deposit Insurance Corp. proposed a set of criteria for regulatory relief based on the activity and complexity of financial institutions – and not strictly their size.
Among those criteria, Hoenig included banks that hold effectively zero trading assets or liabilities, banks that hold no derivative positions other than interest rate swaps and foreign exchange derivatives and banks whose total notional value of all their derivatives exposures is less than $3 billion.
“Of the more than 6,500 commercial banks, only about 400 do not meet these three criteria. None of the banks with more than $100 billion in total assets meet these criteria; and only 90 of the more than 4,000 banks with less than $250 million in total assets fail to meet these criteria,” he said.
He also suggested a fourth criterion for regulatory relief: those banks that have a ratio of GAAP equity-to-assets of at least 10 percent, noting, that “the substantial majority of community banks already have equity-to-asset ratios of 10 percent or higher, and the number is in reach for those that do not.”
Once those conditions for regulatory relief have been established, Hoenig said, the dialogue could then turn to other common pain points for community banks, like the new risk-based capital rules, the frequency of the examination cycle or the ever-expanding call report.
As to what that relief might actually look like, he said that could include exempting what he characterized as traditional banks from Basel capital requirements, exempting those banks from several entire schedules on the call report and establishing criteria that would exempt traditional banks from appraisal requirements.
But one item that’s not up for debate is the Volcker Rule, as Hoenig made clear. The way Hoenig sees it, the Volcker Rule is simply not much of a compliance burden for “the vast majority of community banks.”
“On balance, therefore, a blanket exemption for smaller institutions to engage in proprietary trading and yet be exempt from the Volcker Rule is unwise,” he said. “A blanket exemption would provide no meaningful regulatory burden relief for the vast majority of community banks that do not engage at all in the activities that the Volcker Rule restricts. However, a blanket exemption for this subset of banks would invite the group to use taxpayer subsidized funds to engage in proprietary trading and investment activities that should be conducted in the marketplace, outside of the safety net.”
