WASHINGTON — Setting up a split between the regulators of large and small banking companies, the Federal Deposit Insurance Corp. is expected to make 4,600 community banks eligible for streamlined Community Reinvestment Act exams.
The move would align the FDIC with the Office of Thrift Supervision, which announced Friday that it will unilaterally quadruple the asset limit, to $1 billion, so that 88% of thrifts would be evaluated under an exam focused on an institution’s lending record. Larger institutions must meet a three-part test that covers lending as well as investment and service to the community.
Forced to respond to the OTS’ move, the Federal Reserve Board and the Office of the Comptroller of the Currency said Friday that they would withdraw a February proposal to double the threshold, to $500 million.
The OCC said it would ask Congress to decide what size banks should receive the simplified exams.
Congressional reaction Monday split along party lines.
Sen. Paul Sarbanes of Maryland, the ranking Democrat on the Senate Banking Committee, called quadrupling the threshold an “extreme action.”
The OTS’ acting “independently of the other agencies, with no opportunity for public notice and comment, is bad policy and procedurally irresponsible,” Sen. Sarbanes said Monday.
Key Republicans said that even though they endorse the OTS’ move, they were concerned about the split among the four agencies.
“While I am pleased that the OTS has recognized the importance of providing some meaningful regulatory relief for our nation’s smaller financial institutions, I am concerned about the federal banking regulators’ inability to work together to provide this relief across the board,” said Rep. Jeb Hensarling, R-Tex., who has sponsored a bill that would raise the threshold to $1 billion for banks and thrifts.
FDIC Chairman Donald Powell said he could not reveal his official position until his agency’s board votes on the idea in early September, but he indicated in an interview Monday that he supports simpler exams for small institutions.
“While I can’t take an official position, and would not do so, this is part of the initiative to find ways to relieve the regulatory burdens that face all banks at the same time keeping in mind the needs of consumers,” Mr. Powell said.
There are 4,631 state-chartered banks overseen by the FDIC with less than $1 billion of assets. They hold $640 billion of assets.
The chances for adoption, on at least a 3-to-2 vote, by the five-member board look good, with Mr. Powell joined by OTS Director James E. Gilleran and FDIC Vice Chairman John Reich.
Asked about the prospect of the FDIC and the OTS making their moves while the OCC and the Fed still apply the full CRA exam to all banks of over $250 million, Mr. Powell said, “I think people would be concerned, [asking] ‘Is this a precursor of things to come, or is this a blip?’ ”
He said he does not think the agencies would make a habit of taking separate tacks, but instead would apply just to the CRA issue. “It causes some disruption, but I don’t think the consequences are something that we can’t live with.”
In a separate interview Monday, Comptroller of the Currency John D. Hawke Jr. said that even though he “fully recognizes the regulatory burdens community banks labor under,” the February proposal to double the threshold “was not aimed at just relieving” community banks’ burden.
“It was trying to come up with overall improvement in the Community Reinvestment Act in a reasonable and balanced way, and we simply didn’t find the formula for doing that,” he said. “When we got comments back from both sides, it was clear that there was enormous unhappiness. Community banks thought we didn’t raise the level high enough. Community groups thought it was a disaster to raise it at all.”
The issue came to a head after the chiefs of the four agencies met Thursday evening. They realized that they were split on the issue, and they reportedly agreed that they would not immediately announce their differences. But Mr. Gilleran surprised the other agencies Friday when he went public with his plan, forcing the OCC and the Fed to react.
Mr. Gilleran and other OTS officials refused to comment Monday for this story.
“I cannot recall an instance of a joint rulemaking where the agencies did not issue a joint final rule,” said Karen Thomas, the director of regulatory affairs and the senior regulator counsel at the Independent Community Bankers of America, who has been practicing banking law for more than 20 years.
Many said the OCC backed off the multi-agency proposal to avoid another political fight. It has spent much of the year battling congressional criticism over preemption rules it issued in January and its failure to crack down before this year on Riggs Bank for violations of anti-laundering rules since at least 1997.
The OCC and the Fed “are bowing to political pressures from consumer organizations that don’t reflect how bankers really serve their community,” said Diane Casey-Landry, the president of America’s Community Bankers.
The OCC said the criticism over Riggs and the preemptions rules did not play a role in its decision-making. “We make decisions on their own merits as they come up,” a spokesman said.
A Fed spokeswoman did not comment.
Rep. Spencer Bachus, who chairs the House Financial Services financial institutions subcommittee, said the split among regulators is dangerous.
“I am disappointed that the OCC has chosen to abandon their initiative to exempt more small banks from oppressive CRA requirements,” the Alabama Republican said in a statement. “I am particularly concerned that, coupled with the OTS’ innovative proposals to free small thrifts from these unnecessary burdens, that we are once again creating an uneven playing field that competitively weakens small independent and community banks.”
Rep. Bachus, along with other senior House Financial Services Republicans, including Rep. Richard Baker, R-La., who chairs the capital markets subcommittee, had asked regulators to raise the threshold to $1 billion.
Rep. Hensarling, the sponsor of a bill to make the change, commended the OTS and described its move as a “common-sense” approach to reducing the regulatory burden that small banks and thrifts say puts them at a disadvantage.
“Although the OTS’ decision is very encouraging, it is clear now that the only way to accomplish our objective of a uniform $1 billion threshold for small banks is through federal legislation,” he said. “I hope the recent actions taken by the banking regulators will persuade members of Congress to support” the bill.
Congressional Democrats, including Sen. Sarbanes and the presidential ticket of Sens. John Kerry and John Edwards, asked the regulators in May to withdraw the proposal.
“Unfortunately, the current proposed regulations, if adopted, will likely undo much of the progress that has taken place since 1995 by reducing the obligation of institutions to invest in low- and moderate-income communities and by failing to ensure that CRA remains relevant in the changing financial services arena,” 29 Democrats and one independent wrote in a May 17 letter to the four federal bank and thrift regulators.
