Six Banker Ideas to Help Relieve the Crushing Compliance Burden

WASHINGTON — It is still a question mark how much regulatory easing will ultimately result from a legislatively mandated review of federal banking rules, but relief proposals from the industry keep rolling in.

The regulators have collected the first of four rounds of comment letters — with ideas from bankers and other parties about which rules to cut or revise — as part of the review required by the Economic Growth and Regulatory Paperwork Reduction Act. Some of the ideas for relief, including steps to clarify the de novo chartering process and eliminate certain application requirements, have already been acted upon.

At a roundtable with federal and state regulators in Los Angeles earlier this week, however, bankers offered ideas covering everything from the length of the exam cycle to the threshold for subjecting mortgages to appraisal requirements.

Here is a sample of some of their suggestions:

Reduce the time it takes to process de novo charters and other applications.

Late last month, the Federal Deposit Insurance Corp. issued guidance to address a host of industry questions about the process for chartering new banks. The agency's "Questions and Answers" document — which the FDIC said was in response to EGRPRA comments — sought to clarify typical processing times for applications and how long new banks follow heightened capital requirements.

Though the document has won industry praise, bankers at the hearing said regulators could go even further to attract more new-bank activity.

Adriana Boeka, president and chief executive of the $160 million-asset Americas United Bank in Glendale, Calif., said the FDIC's clarification on processing times was not sufficient. The Q&A document said an application will get a ruling typically four to six months after it is "deemed substantially complete."

Boeka said that is too long for groups that are trying to hold on to sources of capital and arrange a team of executives.

"When the application is done and is delivered to the regulatory agencies,… that's not the beginning," she said. "The group has been around and talking and planning and strategizing for so long that … you can't take another up to six months or more because … it affects lives," she said.

She noted that the typical 90-day-to-four-month span for approval of mergers between well-rated banks is also too long. The parties "should expect approval of that transaction within 60 days, maximum," she said.

Raise the threshold for qualifying for a longer exam cycle.

Like the FDIC's efforts to respond early to EGRPRA requests, the Office of the Comptroller of the Currency has similarly said reforms may be implemented before the regulatory review concludes. In remarks at the hearing, Comptroller Thomas Curry announced support for, among other things, raising the asset threshold for healthy community banks to qualify for an 18-month examination cycle, instead of 12 months. Curry said raising the threshold to $750 million assets from $500 million would qualify 300 more banks.

But Ernest Hwang, president of the $599 million-asset Security California Bancorp in Riverside, Calif., said the threshold should be higher. "I would really like to encourage" regulators "to increase … [the threshold] at a minimum to at least $1 billion," he said.

"In order" to manage "expense, you have to have some scale," Hwang continued. "Our investment banker friends would say a billion dollars in assets is where you start getting meaningful scale to handle current regulatory burdens, not forthcoming regulatory burdens. I would really like to challenge the [regulatory] bodies to consider, while $750 million is a great step, a billion would be a better step."

Trey Maust, co-president and chief executive officer of Lewis & Clark Bank in Oregon City, Ore., said the 18-month cycle may even be too long for some small banks that find the process so daunting. It could be extended "for those institutions that are small and non-complex, supplemented by interim, targeted risk-based visitations," he said.

He noted that his bank, which has the equivalent of 22 full-time employees, was recently visited by nine field examiners. "To put this into perspective, if one were to extrapolate … [that] ratio onto America's largest bank, it would be the equivalent of 96,000 examiners on site at JPMorgan Chase," Maust said.

Streamline the transfer of examination documents.

Anita Robinson, the chief executive at the $129 million-asset Coast National Bank in San Luis Obispo, Calif., called for steps to simplify how banks deliver the documents that are needed for an exam to their regulator. She said her bank currently submits pre-exam documents electronically to the OCC, but then must make the same materials available in physical form to the examiners that arrive on site.

"We are not yet paperless. Some banks are. So we have boxes and boxes and boxes of files and papers that we deliver to the examination team when they're on site," Robinson said. "One of my senior management teams says that if the bank's documentary request list is to be submitted electronically via a download" to the OCC, "then the exam team should have access to that or the [examiner-in-charge] … should disseminate those documents for the exam as opposed to replicating the same documentation in paper format for the exam team to use when they're on site."

Leave decision-making on new applications to the regional offices.

Maust called on the agencies to leave decisions on new charters and other applications to the officials that know an institution's local market, and reduce involvement from regulators in Washington.

"I would … ask that you consider decentralizing the decision-making process away from Washington D.C. unless the specific de novo poses a material risk to the" Deposit Insurance Fund, he said. "We consciously avoided pursuing any business initiatives that would have required approval from Washington D.C. While it prevented us from capitalizing on certain opportunities, it did enable us to avoid the pain brought about by centralized decision-making from supervisory staff that have no connection to our regional or local economy."

Reduce the amount of mortgage originations subject to appraisal requirements.

Currently, a bank appraisal for home purchases is typically required when a transaction is at least $250,000. But Julia Gouw, the president and chief operating officer of the $28 billion-asset East West Bank in Pasadena, Calif., said that that threshold was set in 1994, when the average sales prices of home was $153,000. Prices have since doubled and a higher threshold is now justified, she said. "The cost of an appraisal has gone up tremendously in 20 years."

She also noted that enough information is available online to assess home values without needing to seek an appraisal from a licensed appraiser. "Zillow has become a database provider of all the historical sales prices. You also have Google Maps and Google Earth that you can look at to see what the home looks like," she said. "A consideration should be made whether we need a full appraisal by an appraisal company."

Provide simplified guidance to community banks on capital requirements.

Robert Franko, the chief executive of the $617 million-asset First Choice Bank in Cerritos, Calif., said smaller institutions need more guidance from regulators on how complex regulations, such as the Basel capital reforms, are to be applied simply to a Main Street bank.

"Anything where a board or management can open it up and read 10 pages … and go and start to model it themselves," he said.

In the past, the agencies have provided helpful guidance on how an individual bank can test other areas of the balance sheet. That includes, for example, a 2010 advisory on how a bank should model its ability to weather a sudden rise in interest rates. But it would be equally helpful for the agencies to help banks understand how capital requirements relate to their individual capital structures. Right now, he said, banks just look at the minimum capital ratios required by a rule, without getting any guidance about whether their portfolio may require a ratio above the minimum.

Banks "don't have any modeling other than what we've self-created," Franko said.