Statement by Doreen R. Eberley, Director Division of Risk Management Supervision on Examining The State Of Small Depository Institutions before the…
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Statement by
Chairman Johnson, Ranking Member Crapo and members of the Committee, I appreciate the opportunity to testify on behalf of the
My testimony will highlight some findings from our community bank research efforts and discuss some key performance statistics for community banks. I will describe the
Community Bank Research Agenda
FDIC Community Banking Study
Since late 2011, the
Our initial findings were presented in a comprehensive Community Banking Study (Study) published in December 2012.1 The study covered topics such as structural change, geography, financial performance, lending strategies and capital formation, and highlighted the critical importance of community banks to our economy and our banking system.
While community banks account for about 14 percent of the banking assets in
The Study highlighted some of the challenges facing community banks in the present environment. Beyond the high credit losses that were experienced as a result of the recession, community banks have also experienced a squeeze on net interest income during the protracted period of historically low interest rates that has followed. Also, while the available data do not permit a breakdown of regulatory versus non-regulatory expenses, a number of community bankers interviewed as part of the Study stated that the cumulative effect of regulation over time has led to increases in expenses related to complying with the supervisory and regulatory process. Nonetheless, the Study also showed that the core business model of community banks - defined around well-structured relationship lending, funded by stable core deposits, and focused on the local geographic community that the bank knows well - actually performed comparatively well during the recent banking crisis. Amid the 500 some banks that have failed since 2007, the highest rates of failure were observed among non-community banks and among community banks that departed from the traditional model and tried to grow faster with risky assets often funded by volatile brokered deposits.
Our community bank research agenda remains active. Since the beginning of the year,
Community Bank Performance and the New Community Bank Quarterly Banking Profile
Another important development in our research effort has been the introduction this year of a new section in the FDIC Quarterly Banking Profile, or QBP, that focuses specifically on community banks.3 Although some 93 percent of
Our most recent QBP shows that community bank loan balances grew by 7.6 percent in the year ending in June, outpacing a 4.9 percent rate of growth for the industry as a whole. All major loan categories increased for community banks. One-to-four family mortgages increased by 4.6 percent over the year. Small loans to businesses--loans to commercial borrowers up to
Net interest income--which accounts for almost 80 percent of net operating revenue at community banks--was
As of second quarter 2014, our analysis shows that community banks reported net income of
Supervisory Approach for
Since the 1990s, the
Examination Cycle
With respect to on-site examinations, the Federal Deposit Insurance Act requires regular safety and soundness examinations of state non-member banks at least once during each 12-month period. However, examination intervals can be extended to 18-months for institutions with total assets of less than
The
The Call Report itself is tiered to size and complexity of the filing institution, in that more than one-third of the data items are linked to asset size or activity levels. Based on this tiering alone, community banks never, or rarely, need to fill out a number of pages in the Call Report, not counting the data items and pages that are not applicable to a particular bank based on its business model. For example, a typical
Rulemaking
The
A number of recent
In addition to issuing rules to implement the provisions of the Dodd-Frank Act that benefit community banks, the
Under the Volcker Rule, a bank is exempt from all of the compliance program requirements, and all of the associated costs, if it limits its covered activities to those that are excluded from the definition of proprietary trading. This exemption applies to the vast majority of community banks. For community banks that are less than
The
To assist bankers in understanding and complying with the revised capital rules, the
Subchapter S
The Basel III capital rules introduce a capital conservation buffer for all banks (separate from the supplementary leverage ratio buffer applicable to the largest and most systemically important bank holding companies (BHCs) and their insured banks). If a bank's risk-based capital ratios fall below specified thresholds, dividends and discretionary bonus payments become subject to limits. The buffer is meant to conserve capital in banks whose capital ratios are close to the minimums and encourage banks to remain well-capitalized.
In July, the
As described in the guidance, when an S corporation bank does face this tax issue, the Basel III capital rules allow it (like any other bank) to request an exception from the dividend restriction that the buffer would otherwise impose. The primary regulator can approve such a request if consistent with safety and soundness. Absent significant safety and soundness concerns about the requesting bank, the
Community Banking Initiative and Technical Assistance
In 2009, the
In discussions with community bankers in these venues and through our routine outreach efforts, it became clear that community banks were concerned about keeping up with changing regulations and policy issues and were interested in assistance from us to stay informed. As a result, in 2013, the
We also instituted a number of outreach and technical assistance efforts, including increased direct communication between examinations, increased opportunities to attend training workshops and symposiums, and conference calls and training videos on complex topics of interest to community bankers. In spring 2013, we issued six videos designed to provide new bank directors with information to prepare them for their fiduciary role in overseeing the bank. This was followed by the release of a virtual version of the
These resources can be found on the Directors'
EGRPRA Review
The
The
Consideration of Regulatory Relief Proposals
As indicated above, the
Strong risk management practices and a strong capital base are fundamental to the long-term health of community banks and their ability to serve their local communities. Most community banks know how to manage the risks in their loan portfolios and have strong capital positions. And of course, community banks have a strong interest in retaining customers by treating them fairly. Serving the credit needs of their local communities, while managing the attendant credit risks, truly is the core expertise of many community banks and what they do best. Reports by the General Accounting Office (GAO) and the
Institutions that did not survive, according to these reports, were those with weaker or more aggressive risk management approaches, including imprudent loan underwriting and rapid growth often financed by wholesale funds or brokered deposits. One of our IG reports also found that banks that heeded supervisory directives regarding risk management practices were more likely to survive.
We believe the evidence strongly supports the idea that the best way to preserve the long term health and vibrancy of community banks, and their ability to serve their local communities, is to ensure their core strength is preserved: strong capital, strong risk management and fair and appropriate dealings with their customers. We also believe our own supervision plays an important role in obtaining corrective action to address problems where this is needed, and that this also promotes the long term health of community banks.
This being said, we remain alert to the importance of achieving the fundamental objectives of safety-and-soundness and consumer protection in ways that do not involve needless complexity or expense. As noted elsewhere in this testimony, we have a number of forums for hearing and considering suggestions in this regard, and we stand ready to provide our views and technical assistance to this Committee.
Conclusion
The
1FDIC Community Banking Study, 2012. https://www.fdic.gov/regulations/resources/cbi/study.html
2See: Backup, Benjamin R. and
3FDIC Quarterly Banking Profile, http://www2.fdic.gov/qbp
4http://www.fdic.gov/regulations/laws/rules/5000-400.html
5Technical Assistance Video Program: https://www.fdic.gov/regulations/resources/director/video.html.
6Deposit Insurance Coverage: Free Nationwide Seminars for Bank Officers and Employees (FIL-17-2014), dated
7See https://www.fdic.gov/regulations/resources/director/.
8See http://www.fdic.gov/regulations/resources/cbi/infopackage.html.
9Public Law 104-208 (1996), codified at 12 U.S.C. section 3311
10The
11 http://www.gpo.gov/fdsys/pkg/FR-2014-06-04/pdf/2014-12741.pdf
12http://www.fdic.gov/EGRPRA/
13Causes and Consequences of Recent Bank Failures (
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