Bernanke Says Balance Needed in Small Bank Oversight

WASHINGTON — Two key regulators Thursday pledged a renewed focus in Washington on ensuring that examination policies facing community banks do not injure an already-uncertain sector.

"Community banks make a critical contribution to the prosperity of both their localities and the nation as a whole, which is why we at the Federal Reserve and the other banking agencies are acutely interested in their long-term strength and viability," said Federal Reserve Board Chairman Ben Bernanke at a Federal Deposit Insurance Corp. conference on the future of community banking.

In morning speeches, Bernanke and acting FDIC Chairman Martin Gruenberg called for more robust research to understand the scope and condition of community banks, and said the agencies would make a significant effort to prevent new rules from unduly hurting smaller banks.

"Bank supervision requires a delicate balance — particularly now," Bernanke said. "The weak economy, together with loose standards in the past, has put pressure on the entire banking industry, including community banks. To protect banks from a possible race to the bottom and new problems down the road, and to safeguard the Deposit Insurance Fund, supervisors must insist on high standards for lending, risk management and governance.

"At the same time, it is important for banks, and for their communities, and for the national economy that banks make loans to creditworthy borrowers. Lending to creditworthy borrowers, after all, is how banks earn profits. Getting that balance right is not always easy, but is of utmost importance."

The conference was scheduled amid a highly tense atmosphere between regulators and community bankers in the wake of the financial crisis and the Dodd-Frank Act. Banks have complained of overly aggressive examinations, and although Bernanke said most of the new law applies "only, or principally" to the largest firms, smaller institutions are fearful they are getting caught in Dodd-Frank's reach. Bankers are now pushing legislation — opposed by the banking regulators — that would enable institutions to appeal their exam finding to a neutral third party.

In his welcoming remarks, Gruenberg cited numerous initiatives the FDIC has undertaken to ensure the level of regulatory policy is rightly matched to community banks. They include the conference itself, a research effort to understand the true scope of the sector, and a review of FDIC regulatory policies to find ways to make the supervisory process more efficient for community banks. He said he expects a report by the end of the year "on all of these initiatives."

"In my view there is a clear public interest in maintaining a strong community bank sector in the United States," Gruenberg said.