FDIC's Hoenig Casts Doubt on Reg 'Carve-Out' for Small Banks

WASHINGTON — Community banks should cease pursuing further exemptions from recent rules and should instead embrace broader structural changes to the industry in order to mitigate their challenges, according to the No. 2 official at the Federal Deposit Insurance Corp.

Thomas Hoenig, the FDIC's outspoken vice chairman, said at a recent trade group meeting that it would be difficult for policymakers to put smaller institutions in a different regulatory class — as many of them have sought — than that for larger banks. Part of the challenge, he noted, is that the public — and many bankers themselves — tend to view all commercial banks as one industry.

"Community and regional banks are dying a slow death waiting for regulators to carve them out as special," Hoenig said in prepared remarks to a June 2nd meeting of the North Carolina Bankers Association. "Rather than rely on the hope of a 'carve-out,' they should insist on discipline across the entire commercial banking industry."

Hoenig, who made the remarks at a non-public meeting, reiterated his view that the abuses which led to the stricter regulatory environment were primarily the fault of the biggest banks. (American Banker obtained a copy of the speech upon request to the FDIC. A spokeswoman said Hoenig has made similar remarks at other banker gatherings around the country.)

But those activities — including structured investment vehicles meant to "misrepresent the balance sheet and understate leverage" — resulted in part from a deregulation push in the nineties that affected all commercial banks, he said. In particular, Hoenig has supported curtailing banks' ability — formalized under the 1999 Gramm-Leach-Bliley Act — to mix their banking and broker-dealer activities while still receiving government like FDIC insurance.

"In looking back over the past decade it is an unfortunate fact that the current regulatory burden has been earned," Hoenig said.

Though community banks are not to blame, he said, they do still fit the description of a commercial bank and as a result fall subject to the rules applied across the industry. Those include capital requirements as well as new standards for "qualified" and "qualified residential" mortgages put into law by the Dodd-Frank Act.

"Yes, it may be convincingly argued that these misdeeds were committed by the most complex commercial banking firms, engaged in a host of non-commercial bank activities. However, community banks are commercial banks," Hoenig said. "And as commercial banks they are subject to the new rules and regulations, which for starters include: Basel international capital rules, QM, QRM, escrow requirements, balloon mortgages, compliance exams — and the costs that come with each.

"Many claim that these provisions were not intended to apply to community banks. But in fact they were intended for commercial banks, which you are."

Still, he acknowledged that the cost of complying with the flood of new rules is among the pressures with which community banks now grapple.

"There should be little doubt that regulatory burden contributes to the trend toward consolidation as smaller banks work to control costs and to survive within a highly regulated industry," Hoenig said.

But community banks' desire for a carve out appears inconsistent with some efforts by the overall industry to appear united on several issues, he added.

"It is a common mantra of the industry today to hear 'one industry' in meetings or publications discussing regulatory burden. Therefore, it should surprise no one that the public and the Congress fail to distinguish community banks from other commercial banks that also are universal banks, with their array of investment banking, trading and other financial activities — and with the panoply of abuses highlighted daily in the media," Hoenig said. "It, therefore, is a lot to expect of the public or the Congress to understand which regulations should apply to some and not others when all receive the benefits of government protection."

Community banks would benefit, he said, from policies that curb the activities that led to the higher burden in the first place.

"To have a chance at regulatory balance we — that is the industry and the regulators — must work to change the cause of the burden, which is to ensure we have the courage and ability to stop the missteps, abuses and that sometimes occurs in commercial banking," Hoenig said. "Confidence in the ability of the industry to manage and regulators to supervise effectively would justify efforts to have the Congress and regulators remove aspects of the industry's regulatory burden, and to do so without undermining economic stability or putting the public pocketbook at extended risk."