Federal Reserve officials on Tuesday offered their support to the nation's community banks, acknowledging that the complex financial reform effort is saddling small lenders with a heavy supervision load.
Kansas City Fed President Esther George, Fed Board Governor Jerome Powell and St. Louis Fed President James Bullard all addressed the issue at a community banking conference here.
George gave the sharpest remarks, saying that the Fed is too reliant on rules that were meant for large investment banks.
"In spite of legislators' and regulators' best intentions, customers and communities that rely on smaller banks for access to credit are feeling the weight of regulatory burden, and bankers are pleading for relief," George told a St. Louis Federal Reserve Bank conference.
George said simpler capital rules such as leverage ratios are better than risk-weighted ratios for predicting default at small banks.
She acknowledged that community banks don't always get things right, but argued that rules pertaining to the sector were too prescriptive and complex, and not dependent enough on the discretion of local examiners.
"Regulation and supervisory frameworks have evolved with far less reliance on examiner experience and supervisory judgment and more emphasis on data-driven, econometric models and measurement," she said.
Fed Governor Powell said rising competition from larger lenders is hurting the industry, though the supervisory framework is also having an impact.
"The burden of regulatory compliance can be particularly daunting for small banks," he said.
Community banks have longed complained that the reforms put in place after the 2008 financial crisis to rein in excesses in the banking industry have placed undue burdens on smaller lenders.
In congressional testimony last week, Maryann Hunter, of the Fed's banking supervision and regulation division, described steps the central bank had taken to address the concerns of smaller banks, including implementing a new consumer compliance framework, improving training for examiners and establishing a community bank advisory council.
St. Louis Fed President James Bullard, in a question and answer session with reporters on Tuesday, said he supported the idea that individual regulators need to be on the ground in the banking districts that they oversee.
George added in her remarks that despite being better capitalized than they were before the financial crisis, community banks are subjected to more complicated capital rules.
"The risk-weighted asset schedule of the call report has 57 rows and 89 pages of instructions yet no additional capital was required for the majority of community banks," she said, referring to a key quarterly filing required by regulators.
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