Hoenig Adds Sweetener to Reg Relief Plan

WASHINGTON — The push to exempt small banks from certain tougher regulatory requirements in return for facing higher overall capital standards continues to gain ground.

Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig on Tuesday reiterated his plan for banks that stick to "traditional" banking models and maintain high capital ratios to receive eased regulatory requirements, but added a sweetener to the mix.

He said regulators should clarify that traditional banks  — ones that do not engage in trading assets or liabilities, hold relatively few derivative positions and have an equity-to-assets ratio at or above 10% —should face a flexible compliance regime when it comes to the Volcker Rule.

Regulators should update "existing guidance to clarify that Volcker Rule compliance requirements can be met by simply having clear policies and procedures that place appropriate controls on the activities — and which are required and currently verified by examiners regardless of the Volcker Rule," Hoenig said in prepared remarks at an outreach meeting on the Economic Growth and Regulatory Paperwork Reduction Act in Kansas City, Mo.

While Hoenig has said that traditional banks should not be explicitly exempted from the Volcker Rule, which bans proprietary trading, most of them would face little compliance burden from it because they don't engage in such activities. Still, bankers have been concerned that they would have to jump through certain regulatory hoops to prove that they don't need to comply. Hoenig's proposal would have regulators essentially say that existing policies and procedures, which are already checked by examiners, would take care of compliance requirements.

"This is a little more specific, this is saying what you have to do to be [in compliance]," said Karen Thomas, senior executive vice president at the Independent Community Bankers of America.

The Hoenig proposal was welcomed by industry representatives.

"What he is doing is he is elaborating on his support of a concept of a tailored approach," said Wayne Abernathy, an executive vice president at the American Bankers Association. "The tone we are continuing to get from regulators is now that these principles have been written, to now apply them in a more flexible way that does not inhibit the banks or their customers."

Karen Shaw Petrou, managing partner of Federal Financial Analytics, noted that in the past Hoenig "has said that the Volcker Rule should remain in place."

"I think he is liberalizing that by saying unlike others who think the Volcker Rule should simply be waived, he is saying he wants it in place, but easier to comply with," Petrou said.

Hoenig first released details of his plan in April, under which "traditional" banks would face a lighter compliance regime, including exemptions from the complex Basel III capital rules.

Since then, Federal Reserve Board Gov. Daniel Tarullo has voiced support for a similar idea under which community banks would face higher capital requirements, but they would be simpler than the Basel III rules.

"One idea I have heard is to allow smaller community banks to opt into a simpler set of risk-weighted capital requirements in exchange for a higher minimum required ratio than under the more risk-sensitive, but more complicated, standardized risk-weighted requirements finalized in 2013," Tarullo said in April. "I believe the concept of a 'simpler' set of requirements is meant to describe something much closer to Basel I in terms of the detail and number of risk categories."

Hoenig reiterated his view Tuesday that an exemption from Basel III requirements is key to helping traditional institutions.

"Such an exemption would address other specific issues related to Basel III for community banks including mortgage service rights, capital buffers for banks registered as S-Corporations, high-volatility commercial real estate, and various securitizations products," he said.