Will FDIC Soften Touch on Community Banks?

WASHINGTON — Community bankers and industry representatives are praising a recent pledge by acting Federal Deposit Insurance Corp. Chairman Martin Gruenberg to consider relief for small banks, saying it needs to be a top priority for the agency.

Many small banks say they are overwhelmed with the changes made by the Dodd-Frank Act, and are hopeful Gruenberg can help alleviate some of the burden.

"It's all about where you are on the agenda," said Margaret Tahyar, a partner at Davis Polk & Wardwell. "All the regulators are facing a full regulatory plate. What I thought was interesting and new about what he said was that lightening the load for community banks was one of the top three items on the FDIC's agenda."

In his first speech as acting chairman, Gruenberg laid out three priorities for the agency: implementing the agency's resolution authority for giant firms, the "future of community banks" and expanding consumer access to retail banking.

Speaking to American Banker's Regulatory Symposium, he called the agency's overall effort to address community banking a "major priority" in the near future. The FDIC is planning a conference early next year on the future of community banking, and Gruenberg said he will hold "regional roundtables" with community bankers around the country. In addition, FDIC researchers will "trace the evolution of community banks" in the past two decades for any "lessons" that can be gleaned.

"Some of his awareness and understanding of the community banks and the fact that he wanted to have … regional roundtables and get out and talk to some of these community banks and understand the burden they're going through, I thought, was very, very positive," said Bill Perotti, chief risk officer and chief credit officer for the $18 billion-asset Frost National Bank in San Antonio, who attended the symposium.

But Gruenberg also indicated willingness to examine certain FDIC policies to see if they need to be changed to ease the burden.

"The FDIC is also reviewing key challenges facing community banks such as raising capital, keeping up with technology, attracting qualified personnel and meeting regulatory obligations," he said in the Sept. 19 speech. "Additionally, we are looking at our own risk management and compliance supervision practices to see if there are ways to make the process more efficient."

Observers said bankers liked the tenor of Gruenberg's remarks.

"They all felt like there was a friend of community banks that was speaking," said Chris Cole, senior vice president for the Independent Community Bankers of America.

William Loving Jr., the ICBA's vice chairman and the chief executive of the $254 million-asset Pendleton Community Bank in Franklin, W.Va., agreed that "anytime there is an opportunity to review risk management and compliance practices to alleviate the regulatory burden on community banks, that is welcome."

Still, bank executives say they want action, not words.

"It was encouraging, but let's see what happens with it," said Robert A. Catanzaro, president of the $68 million-asset Independence Bank in East Greenwich, R.I. "A lot of community bankers are cautiously optimistic, but we would like to see real reform.

"Overall, he seemed to be well balanced and attentive to the needs of community bankers. On the other hand, the examiners in the field, in our view at least, are very overzealous and it's had a negative impact on small-business lending."

Former FDIC Chairman Sheila Bair, who stepped down in July, had similarly been viewed as sympathetic to community bank concerns. With FDIC support, the Dodd-Frank Act included several deposit insurance-related provisions beneficial to the sector. The standard insurance limit was raised permanently to $250,000 per customer, unlimited coverage for non-interest-bearing accounts was extended through next year and the law also shifted greater cost for financing the Deposit Insurance Fund to the biggest banks.

But with community banks still protesting the aggressiveness of recent examinations, and fearful of the compliance from Dodd-Frank, industry representatives are hoping Gruenberg will go even further.

Wayne Abernathy, the head of regulatory affairs and financial institution policy at the American Bankers Association, said that the FDIC chief appears to understand where institutions are coming from and to consider supporting community banks as a key part of the agency's role.

Among community banks' worries is a fear that supervisors will not differentiate from the larger institutions in carrying out the tougher regulatory regime outlined by the new law.

"There is a difference between his approach and where I think at least Sheila Bair ended up. Marty is reaching back to the purpose for which the FDIC was created. The FDIC was created to strengthen the community banking system — to stabilize it and basically to give it greater strength," Abernathy said.

"What he's talking about is an issue that we have raised with him as well, which is: we have to get away from this mind-set of one-size-fits-all regulation. Is there a way that you can make the regulatory regime fit the banks better, so that they're not disadvantaged by the regulatory program itself?"

It remains unclear what specifically Gruenberg meant about the agency's looking at how to make the regulatory process "more efficient" for community banks.

An FDIC spokesman gave no further details about the agency's plans. He reiterated that addressing community bank challenges is a priority.

"Among the acting chairman's priorities is a series of initiatives focused on identifying and understanding the challenges facing community banks," the spokesman said. "We expect these to touch on a variety of areas when they are launched in earnest, beginning with a conference early next year."

Many observers said one area for improvement at the agency is ensuring that policy laid out by senior FDIC officials is implemented at the field level. Institutions have complained of an overaggressive approach by FDIC examiners, which they say does not correspond with the message from Washington.

"There is a good bit of variation between different regions and districts as to how the FDIC focuses on certain issues, whether it's compliance, troubled assets or exam reviews," said Randy Dennis, the president of DD&F Consulting Group in Little Rock, Ark.

"From Atlanta to Kansas City to Dallas, there is variation between those regions as to how they deal with things," Dennis continued. "They need to be more consistent."

Timothy Koch, a finance professor at the University of South Carolina, said Gruenberg's mention of capital-raising and technology innovation as challenges was "tracking the list of concerns that are top of mind for most community bankers."

"If you talk to most community bankers they'll say, 'Given the uncertainties in the marketplace we have an extremely difficult time raising capital because the only capital U.S. regulators now allow is common equity,' " said Koch, who is also president of the Graduate School of Banking at Colorado. "In terms of keeping up with technology, the largest institutions have the resources to make the investments. Community bankers say they're struggling to do the same within their allowable cost structures."

Some are skeptical that the FDIC is becoming more sympathetic.

Douglas Faucette, a partner at Locke Lord Bissell & Liddell LLP, says it remains to be seen if the FDIC will, for example, warm to approving more new banks. And while regulators may ease some requirements, new rules under Dodd-Frank that affect some community banks — such as restrictions on incentive-based compensation — still increase the burden for certain institutions, Faucette said.

"I am a cynic. I'll believe it when I see it," he said. "It should be applauded that [Gruenberg] has surfaced this as an issue, but the question is exactly what has the FDIC done or what will it do to address this problem? Will they raise the moratorium on de novo banks? … They may discard some outdated regulations for community banks. But they have added new ones, like on incentive compensation."

He added that even if the FDIC changes course, that does not guarantee that a bank's state regulator will, or that other federal agencies will follow suit.

"There is something that has to happen across the board," Faucette said. "It has to come from Congress, and it hasn't come from Congress."