Yellen reassures community bankers on regulation
May 01, 2014 | 06:19 PM
Federal Reserve Chair Janet Yellen told community bankers today that she is determined the Fed will not place “undue burdens on your institutions” as it tries to protect the country from a repeat of the 2008 financial crisis.
Janet Yellen
In what an Independent Community Bankers Association official said was her first speech to an industry group since she became chair of the Fed’s board of governors, Yellen noted that during her six year tenure (2004-2010) as president and CEO of the Federal Reserve Bank of San Francisco, community bankers in nine western states “helped me take the pulse of the local economy and also to understand how regulatory and policy decisions in Washington affect financial institutions of different sizes and types, sometimes in very different ways.”
Yellen added, “During the financial crisis, I saw firsthand the challenges that community banks faced in a crisis they did little to cause, and I have felt strongly ever since that the Fed must do what it can to ensure that the actions taken following the crisis do not place undue burdens on your institutions.”
Yellen noted that the condition of community banks is improving.
“Although there is still considerable revenue pressure from low margins, earnings for most community banks have rebounded since the financial crisis,” she said.
“Asset quality and capital ratios continue to improve, and the number of problem banks continues to decline. Notably, after several years of reduced lending following the recession, we are starting to see slow but steady loan growth at community banks. While this expansion in lending must be prudent, on balance I consider this growth an encouraging sign of an improving economy.”
Yellen said the Fed has not made community banks subject to the stress tests for the largest 19 U.S. bank holding companies under the annual Comprehensive Capital Analysis and Review, known as CCAR, which requires all bank holding companies with total assets of $50 billion or more to submit annual capital plans for review.
“To be clear, as the federal banking agencies have stated previously, these stress testing and capital planning requirements do not, and should not, apply to community banks,” she said.
In designing the revised capital rules, she added, the agencies considered financial stability risks and adjusted the final rules to make the requirements substantially more rigorous for the largest, most systemically important banking organizations than for community banks.
The Federal Reserve has been monitoring closely the reliance of some firms on potentially volatile short-term wholesale funding and is weighing potential policy responses but “few, if any, community banks are reliant on levels of short-term wholesale funding that could raise concerns about systemic risk, and regulators would carefully consider the ramifications of any action, including the effect on community banks,” she said.
Noting that community bankers have said they are concerned about “regulatory burden,” Yellen said, “We know that a one-size-fits-all approach to supervision is often not appropriate.”
“In recent years, we have taken a number of actions to tailor supervisory expectations to the size and complexity of the banking organizations we supervise.”
The Fed “is taking a disciplined approach to judging which supervisory policies should apply to community banking organizations,” Yellen said. “This involves not only weighing the costs and benefits of proposed rules and their implementation, but in some cases also asking whether it makes sense for a specific policy to apply to community banks.”
“In other cases,” she continued, “it may not make sense to exclude community banking organizations entirely from the scope of a supervisory policy, but we may be able to scale expectations to the size and complexity of the supervisory portfolio, to minimize the burden where possible and appropriate. The final capital rules for community banks that I mentioned earlier illustrate this kind of tailoring.”
In making changes in the accounting standard for credit losses on loans and securities, the Fed has told the Financial Accounting Standards Board to help ensure that the new standard “can be implemented in a reasonable and practical way for community banks” and should not involve “complex modeling processes,” Yellen said.
“We will work with community banks to help implement the new standard when it is final. In addition, our supervisory guidance will emphasize that regulatory expectations for implementation of the standard will differ based on bank size and complexity,” she added.
Yellen did not take questions.
ICBA presented her with the certificate from the Senate officially recognizing her confirmation as Fed chair.
▪ Janet L. Yellen speech — Tailored Supervision of Community Banks ▪ Federal Reserve System Conference of State Bank Supervisors — Community Banking in the 21st Century
Janet Yellen
In what an Independent Community Bankers Association official said was her first speech to an industry group since she became chair of the Fed’s board of governors, Yellen noted that during her six year tenure (2004-2010) as president and CEO of the Federal Reserve Bank of San Francisco, community bankers in nine western states “helped me take the pulse of the local economy and also to understand how regulatory and policy decisions in Washington affect financial institutions of different sizes and types, sometimes in very different ways.”
Yellen added, “During the financial crisis, I saw firsthand the challenges that community banks faced in a crisis they did little to cause, and I have felt strongly ever since that the Fed must do what it can to ensure that the actions taken following the crisis do not place undue burdens on your institutions.”
Yellen noted that the condition of community banks is improving.
“Although there is still considerable revenue pressure from low margins, earnings for most community banks have rebounded since the financial crisis,” she said.
“Asset quality and capital ratios continue to improve, and the number of problem banks continues to decline. Notably, after several years of reduced lending following the recession, we are starting to see slow but steady loan growth at community banks. While this expansion in lending must be prudent, on balance I consider this growth an encouraging sign of an improving economy.”
Yellen said the Fed has not made community banks subject to the stress tests for the largest 19 U.S. bank holding companies under the annual Comprehensive Capital Analysis and Review, known as CCAR, which requires all bank holding companies with total assets of $50 billion or more to submit annual capital plans for review.
“To be clear, as the federal banking agencies have stated previously, these stress testing and capital planning requirements do not, and should not, apply to community banks,” she said.
In designing the revised capital rules, she added, the agencies considered financial stability risks and adjusted the final rules to make the requirements substantially more rigorous for the largest, most systemically important banking organizations than for community banks.
The Federal Reserve has been monitoring closely the reliance of some firms on potentially volatile short-term wholesale funding and is weighing potential policy responses but “few, if any, community banks are reliant on levels of short-term wholesale funding that could raise concerns about systemic risk, and regulators would carefully consider the ramifications of any action, including the effect on community banks,” she said.
Noting that community bankers have said they are concerned about “regulatory burden,” Yellen said, “We know that a one-size-fits-all approach to supervision is often not appropriate.”
“In recent years, we have taken a number of actions to tailor supervisory expectations to the size and complexity of the banking organizations we supervise.”
The Fed “is taking a disciplined approach to judging which supervisory policies should apply to community banking organizations,” Yellen said. “This involves not only weighing the costs and benefits of proposed rules and their implementation, but in some cases also asking whether it makes sense for a specific policy to apply to community banks.”
“In other cases,” she continued, “it may not make sense to exclude community banking organizations entirely from the scope of a supervisory policy, but we may be able to scale expectations to the size and complexity of the supervisory portfolio, to minimize the burden where possible and appropriate. The final capital rules for community banks that I mentioned earlier illustrate this kind of tailoring.”
In making changes in the accounting standard for credit losses on loans and securities, the Fed has told the Financial Accounting Standards Board to help ensure that the new standard “can be implemented in a reasonable and practical way for community banks” and should not involve “complex modeling processes,” Yellen said.
“We will work with community banks to help implement the new standard when it is final. In addition, our supervisory guidance will emphasize that regulatory expectations for implementation of the standard will differ based on bank size and complexity,” she added.
Yellen did not take questions.
ICBA presented her with the certificate from the Senate officially recognizing her confirmation as Fed chair.
▪ Janet L. Yellen speech — Tailored Supervision of Community Banks ▪ Federal Reserve System Conference of State Bank Supervisors — Community Banking in the 21st Century
