FDIC Releases Plan to Bolster Community Banks

WASHINGTON — Better communication, technical assistance and more efficient information flow between bankers and examiners are not earth-shattering changes, but the Federal Deposit Insurance Corp. believes they can have a significant impact in how community banks view their regulator.

The FDIC is set to release its first-year progress report on Tuesday on a broad initiative focusing on the community bank sector. While the report does not recommend changes to rules or guidance, it touts the steps the FDIC is taking around the edges to respond to specific banker concerns aired through roundtables held earlier this year.

The report, a copy of which was given to American Banker, also includes a thick stack of data about the evolution of community banks over the last three decades. FDIC officials said the data suggest the sector's future is much brighter than some fear.

"The bottom-line finding is that even with all the of the consolidation that's taken place and the market challenges that exist for community banks, the core community bank model of reliance on relationship banking funded by core deposits remains quite viable," FDIC Chairman Martin Gruenberg said in an interview on Monday.

The report said the agency will begin piloting an automated tool next year to streamline materials used in consumer-protection exams — similar to a tool that is farther along for safety and soundness exams — and also described efforts to help guide community bankers through compliance with new rules and understand what regulations are around the bend.

"There was recognition [among bankers] that we can't really change rules required by Congress, but we can help them understand what our expectations are," said Sylvia Plunkett, senior deputy director in the FDIC's division of depositor and consumer protection. "The technical assistance is a big piece of that."

More than a year after Gruenberg announced the agency's new community bank focus — in the shadow of multi-decade consolidation and fears about the effect of the Dodd-Frank Act — the now-confirmed head of the agency described the report as a good first step, but said the FDIC will continue to seek ways to refine the supervisory process.

"We've undertaken some useful initiatives both related to examinations and rulemaking, but I think there is more for us to do," he said. "This is in some sense a valuable work product and in some sense a valuable progress report on the work we've done over the past year. But I think there is more for us to continue to do."

The agency's steps — many of which have already been announced less formally throughout the year — stem from a series of six regional meetings Gruenberg held with bankers around the country.

Bankers aired complaints both on the economic and personnel-related challenges facing smaller institutions and also the regulatory process. Those included a glut of new regulations that banks say hurt lending, unpredictability around the release of more regulations, obligations to gather pre-exam material not relevant to a bank or used during the exam, the lengths of exam times, inconsistency between what teams focused on between exams and the perception of "zero tolerance" related to fair-lending violations or other consumer-protection issues.

"Community bankers also generally expressed a desire to move toward a multi-tiered regulatory system," the report's summary said. "One panelist noted that future regulations should consider asset size and volume of the covered activity."

The changes the FDIC has executed so far in response largely revolve around improving the communication flow between the agency and the institutions it regulates.

The agency unveiled last month an online vehicle meant to ensure examiners only seek pre-exam materials relevant to the institution they are about to enter, a program that will be launched on a national basis early next year. The agency's consumer compliance division will also begin testing a similar tool "to direct the [consumer compliance] examiner through a series of questions about the institution to ensure only necessary information and documents will be requested."

The FDIC is also in the process of developing new "information packets" to give bankers at the outset of both safety and soundness and consumer-protection exams. "This information is intended to further open lines of communication, set expectations and provide resources to assist bankers with the examination process," the report said.

The agency has revised the process for making regional supervisors and examination field staff available to discuss with bankers during the interim period between exams, and has undergone steps to ensure its collection of Home Mortgage Disclosure Act data is more consistent with that of other regulators.

"We are going to try to make changes where changes make sense and where it's practical to do so," said John Weier, a special advisor to Gruenberg. "We will continue to look at the exam and the rulemaking process to make sure that we continue to make it as effective as possible."

Outside of the exam process, the FDIC has also stepped up outreach sessions to provide technical training for complying with complex regulations, including Director and Banker Colleges held in each region, a symposium on fair lending rules and an expanded section of the FDIC website devoted to regulatory issues of interest to community bank directors.

Meanwhile, a new regulatory calendar on the agency's website is intended to sharpen bankers' attention on what rules and compliance dates are coming in the future.

Yet the changes in total still pale in comparison to what several bankers had hoped for when the FDIC's initiative was first announced, envisioning specific rule changes to allow different obligations for banks of different sizes.

Gruenberg said the effort will continue to focus on improving the process for community banks while still ensuring that regulations stay robust.

"We can make our examination and rulemaking process better from the standpoint of effectiveness and impact on community banks while maintaining our supervisory standards," he said. "I see those two as complementary. That's really going to be our objective going forward."

Citing the regulatory calendar specifically, Gruenberg said, "one of the things we heard regularly from the bankers was some greater sense of predictability and ability to plan is something that's important to them in terms of managing their own resources.

"To the extent that we as the regulator can give them a heads up on what's coming and some ability to anticipate it and maybe prioritize their own response to it, I think that's a plus."

But he added that the first set of initiatives will not be the end of the process.

Institutions want "recognition by the examiners of the particular issues and challenges facing community banks, and for that to be taken into account in the examination and supervision process. … We're making an effort through this initial package of initiatives to respond to them," Gruenberg said. "There is more we can do."