Tiered Regulation for Community Banks
Tiered regulation tailors supervisory requirements based on a bank’s size and risk profile, helping community banks operate efficiently without unnecessary burdens. Discover how this approach balances safety with flexibility in today’s regulatory environment.
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Position & Background
The current regulatory framework imposes burdens on community banks that divert resources from their ability to support the financial needs of their customers, serve their communities, and contribute to their local economies. Regulatory relief is needed to account for relationship banking.
ICBA urges Congress and the regulatory agencies to continue to expand and refine a tiered regulatory and supervisory system that recognizes the significant differences between community banks and large, complex institutions in terms of the risks they pose to consumers and to the financial system.
An evolving financial services landscape necessitates continuous review of and upward revisions to regulatory thresholds based on asset size, risk profile, and transaction volume especially as community banks consolidate and the average asset size of banks increases.
ICBA advocates for regulators to modernize static, outdated thresholds. Federal Reserve Regulation O, for example, which limits loans to bank officers, has not been updated since the 1970s Raising and indexing overly restrictive thresholds gives institutions more flexibility and room to grow, reduces unnecessary compliance costs, and strengthens their ability to attract and build capital.
Regulatory requirements and onerous supervisory expectations increase compliance costs and disproportionately burden community banks. These burdens diminish community banks’ ability to attract capital, support the financial needs of their customers, serve their communities, and contribute to their local economies. Large banks have massive, dedicated legal and compliance staff and can more easily absorb regulatory costs.
Credit unions and other nonbank institutions, such as industrial loan companies (ILCs) and fintech companies are not subject to the same taxation, laws, and regulations as community banks. In addition, unreasonable regulatory requirements serve as a barrier to entry for investors who might otherwise contemplate the formation of de novo banks. Both investment and risk are flowing outside the regulated banking system where non-bank entities are not subject to comparable constraints.
Federal Reserve Regulation O thresholds were designed to accommodate the reasonable borrowing needs of a bank officer, $100,000, in the 1970s. Today, this threshold no longer accommodates reasonable borrowing needs. Adjusted for inflation, that threshold today would stand at $620,000.
Letters & Testimonies
ICBA Expert Contacts
Jenna Burke
