Statement of John M. Reich Vice Chairman Federal Deposit Insurance Corporation
on Consideration of Regulatory Reform Proposals before the Committee on
Banking, Housing and Urban Affairs United States Senate
June 22, 2004 - 10:00 AM
538 Dirksen Senate Office Building
Mr. Chairman, Ranking Member Sarbanes, and Members of the Committee, I very much
appreciate this opportunity to testify on our efforts to reduce unnecessary regulatory
burden on the nation's banks and the regulatory review process mandated by the Economic
Growth and Regulatory Paperwork Reduction Act (EGRPRA). As a former community banker
with 23 years of experience in the industry, and as the current leader of the
inter-agency effort to reduce regulatory burden, I have a strong personal commitment
to eliminate all unnecessary burden while maintaining the safety and soundness of the
industry and protecting important consumer rights.
My testimony will discuss the accumulation of regulations over the years and their impact
on the nation's financial institutions. Next, I will outline our efforts to review our
regulations and address, on an inter-agency basis, some of the existing regulatory
burden, as mandated by EGRPRA. I will describe some actions the Federal Deposit
Insurance Corporation (FDIC) is taking internally to reduce burdens imposed by our
own regulations and operating procedures. Finally, I will review the need for
legislative action to reduce burden and outline some legislative proposals
we are discussing with the other agencies.
The Accumulation of Regulations and their Impact on the Nation's Banks
Regulatory burden is clearly an issue for all FDIC-insured institutions. Since
enactment of the Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA) in 1989, the bank and thrift regulatory agencies have promulgated a
total of 801 final rules. There were good and sufficient reasons for many of
these rules and, in fact, some were actually sought by the industry. However,
801 regulatory changes over a 15 year period is certainly a lot for banks to
digest, particularly smaller community banks with very limited staff. Rule
changes can be quite costly since implementation often requires computers to be
reprogrammed, staff retrained, manuals updated and new forms produced. Even if
some of the rules do not apply to a particular institution, someone has to at
least read the rules and make that determination.
While there are no
definitive studies of the total cost of regulation, a survey of the evidence by
a Federal Reserve Board economist in 1998 found that total regulatory costs
account for 12 to 13 percent of banks' noninterest expense, or about $36 billion
in 2003 ("The Cost of Bank Regulation: A Review of the Evidence," Gregory
Elliehausen, Federal Reserve Bulletin, April 1998). For the banking
industry, every change in reporting requirements or modification of business
practices involves new capital expenditures and increased human resources,
computer programming costs and vendor expenses. The same research indicates that
start up costs for new or changing regulations may be very expensive and
insensitive to the size of the changes. In other words, the process of learning
about and adopting regulatory changes is expensive for banks, whatever the
magnitude of the change. Frequent small, incremental changes may be much more
expensive than large, one time changes.
While my strong personal view is
that regulatory burden has a disproportionate impact on community banks, which I
discuss below, we are committed to addressing the problem of regulatory burden
for every insured financial institution. Banks, large and small, labor under the
cumulative impact of regulations that divert resources and capital away from
economic development, credit extension and job creation. Most of the proposals
we are examining would provide significant relief to all financial institutions
and I commend the Committee for its attention to this pressing issue.
The Impact of
Regulatory Burden on Community Banks
New regulations have a
greater impact on some community banks, especially small community banks (under
$100 million in assets), than on larger institutions due to their inability to
spread start up and implementation costs over a large number of transactions.
Economies of scale associated with regulatory compliance have been confirmed in
implementation cost studies of the Truth in Savings Act, the Equal Credit
Opportunity Act and the Electronic Funds Transfer Act, where the incremental
cost of regulation declines as the number of transactions or accounts rise. Jim
Hance, Vice Chairman of Bank of America, summed the situation up at a recent
conference at the Federal Reserve Bank of Chicago: "[A]ll banks are being
mandated to install more and more compliance-related technology—for issues
ranging from anti-money laundering to Basel II. Scale allows us to do so far
more efficiently than smaller competitors."
The magnified impact of
regulatory burden on small banks is a significant concern to me. As a former
community banker, I know the importance of community banks in our economy.
Community banks play a vital role in the economic wellbeing of countless
individuals, neighborhoods, businesses and organizations throughout our country,
often serving as the lifeblood of their communities.
These banks are
found in all communities—urban, suburban, rural and small towns. Whether a
minority-owned urban neighborhood institution or an agricultural bank, community
banks have several things in common. They are a major source of local credit.
Data from the June 2003 Call Reports shows that the overwhelming share of
commercial loans at small community banks were made to small businesses. In
addition, the data indicate that commercial banks with assets between $100
million and $1 billion account for a large share of all small business and small
farm loans.
Community banks are the bankers for municipalities and school districts.
Community bankers generally know personally many small business owners and
establish lending relationships with these individuals and their businesses.
These small businesses, in turn, provide the majority of new jobs in our
economy. Small businesses with fewer than 500 employees account for
approximately three-quarters of all new jobs created every year in this country.
The loss of community institutions can result in losses of civic leadership,
charitable contributions, and local investment in school and other municipal
debt.
My concern is that the volume and complexity of existing banking
regulations, coupled with new laws and regulations, may ultimately threaten the
survival of our community banks. This concern is not new. The conclusion of the
1998 Federal Reserve study states:
Average compliance costs for regulations are substantially greater
for banks at low levels of output than for banks at high levels of output. This
conclusion has important implications. Higher average regulatory costs at low
levels of output may inhibit the entry of new firms into banking or may
stimulate consolidation of the industry into fewer, larger banks.
Over the last 20 years, there has been substantial consolidation in the banking
industry. This can be seen most dramatically in small community banks. At the
beginning of 1985, there were 11,780 small community banks with assets of less
than $100 million in today's dollars. At year end 2003, their number had dropped
by 63 percent to just 4,390 (see Chart 1). Even more dramatically, the total
market share of those institutions decreased from nine percent at the beginning
of 1985 to two percent at yearend 2003 (see Charts 2 and 3). The decline had
three main components: mergers, growth out of the community bank category, and
failures. The decrease was offset somewhat by the creation of more than 2,400
new banks. In the above calculations, bank asset size was adjusted for
inflation. Thus, a bank with $100 million in assets today is compared with one
having about $64 million in assets in 1985.
A number of other market
forces, such as interstate banking and changes to state branching laws have
affected the consolidation of the banking industry. The bank and thrift crisis
of the 1980s and the resulting large number of failures and mergers among small
institutions serving neighboring communities also contributed to the decline in
the smallest financial institutions. It is probable that together those factors
were the greatest factors in reducing small bank numbers. However, I believe
that in looking to the future, regulatory burden will play an increasingly
significant role in shaping the industry and the number and viability of
community banks. While many new banks have been created in the past two decades,
I fear that, left unchecked, regulatory burden may eventually pose a barrier to
the creation of new banks. Keeping barriers to the entry of new banks low is
critical to ensuring that small business and consumer wants and needs are met,
especially as bank mergers continue to reduce options in some local
markets.
It may seem a paradox to discuss profitability concerns at a
time when the banking industry is reporting record earnings. Last year the
industry as a whole earned a record $120.6 billion, surpassing the previous
annual record of $105 billion set in 2002. When you look behind the numbers,
however, you see a considerable disparity in the earnings picture between the
largest and smallest banks in the country. The 110 largest banks in the country
(those with assets over $10 billion), which represent 1.2 percent of the total
number of insured institutions, earned $87.7 billion or about 73 percent of
total industry earnings, while the 4,390 banks with assets under $100 million,
which represent 48 percent of the total number of insured institutions, earned
about $2.1 billion, which represents only 1.7 percent of total industry earnings
(see Chart 4). Moreover, when you further examine the data, you find that banks
with assets over $100 million had an average return on assets (ROA) of 1.39
percent, while those with assets under $100 million had an average ROA of 0.95
percent (see Chart 5).
While the banks under $100 million had the
highest yield on earning assets (5.86 percent) they also had the lowest
non-interest income (1.43 percent), and the highest noninterest expense to asset
ratio (3.71 percent). This combination resulted in about one in ten banks under
$100 million in assets being unprofitable in 2003. This is almost five times the
ratio for banks between $100 million and $10 billion and almost ten times
greater than the largest banks. These numbers make it clear that community
banks, while healthy in terms of their supervisory ratings, are operating at a
lower level of profitability than the largest banks in the country. At least
part of this disparity in earnings stems from the disproportionate impact that
regulations and other fixed noninterest costs have on community banks (see Chart
6).
Bankers are becoming increasingly worried that their
institutions—and all that they mean to their communities—may not be able to
operate at an acceptable level of profitability for their investors for too many
more years under what they describe as a "never-ending avalanche" of
regulations. In some cases, the cost of complying with that burden is pushing
some smaller banks out of the market. As reported in the American Banker
(May 25, 2004), regulatory burden was an important factor in the decision by two
community banks to sell their institutions. One bank CEO of a consistently high
performing community bank confided that at a recent meeting of his bank's board,
the institution's directors remarked that the bank's return on assets had been
slipping in recent years, in part attributable to the increasing costs of
compliance, and asked how much longer the bank can afford to remain independent
without giving consideration to maximizing current shareholder value through a
merger or sale. These conversations are likely occurring in community bank
boardrooms all over the United States today.
An additional challenge
bankers face is maintaining the capacity to respond to the steady stream of new
regulations while continuing to comply with existing regulations. Some of the
new regulations and reporting requirements facing the industry include those
required by the FACT Act legislation enacted by Congress last year, USA PATRIOT
Act, the Sarbanes-Oxley Act, and the Check 21 Act. These laws reflect important
public policy choices concerning, for example, the quality of the credit
reporting system, identity theft, national security and changes in technology.
However, it is incumbent upon the regulators who write implementing regulations,
as well as the Congress, to be mindful of the need to avoid unnecessarily
increasing regulatory burdens on the industry as we implement new reporting
requirements and regulations required by legislation.
It is not just the
total volume of regulatory requirements that pose problems for banks, but also
the relative distribution of regulatory burden across various industries that
could hit community banks hard in the future. For example, community bankers are
increasingly subject to more intense competition from credit unions, which have,
in many cases, evolved from small niche players to full-service retail
depository institutions. In the past ten years, the number of credit unions with
assets exceeding $1 billion has increased four-fold, from 20 institutions in
1994 to 87 institutions today and the credit union industry continues to grow
nationwide. With ever-expanding fields of membership and banking products,
credit unions are now competing head-to-head with banks and thrifts in many
communities, yet the conditions under which this competition exists enable
credit unions to operate with a number of advantages over banks and thrifts.
These advantages include exemption from taxation, not being subject to the
Community Reinvestment Act, and operation under a regulatory framework that has
supported and encouraged the growth of the credit union movement, including
broadening the "field of membership." These advantages make for an uneven
playing field, a condition that Congress should reexamine and seek to resolve.
I am a strong proponent of market forces determining economic outcomes.
If community banks lose out in a fair and square competition with competing
institutions, so be it - let the market speak and the chips fall where they may.
But if smaller banks are weakened in the market not by competition or
technology, but inadvertently or unintentionally by the disproportionate effect
of regulatory burden, that outcome seems to be inequitable and unfortunate. We
need to be vigilant and careful to assure the appropriate public policy response
to prevent this outcome.
As you can tell, I have some serious concerns
about the future of community banking, and I see regulatory burden as an
important factor in the equation for their future success. I personally believe
the stakes are high for community bankers in this fight to reduce regulatory
burden, and the very future of community banking may well depend on the success
of our efforts.
Inter-Agency
Effort to Reduce Regulatory Burden
In 1996, Congress passed the
Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). Section 2222 of
EGRPRA requires the Federal Financial Institutions Examination Council (FFIEC)
and each of its member agencies to review their regulations at least once every
ten years, in an effort to eliminate any regulatory requirements that are
outdated, unnecessary or unduly burdensome. Last year, FDIC Chairman Don Powell,
as Chairman of the FFIEC, asked me to oversee this inter-agency effort. I
accepted with enthusiasm.
From the beginning of this process, each of
the agency principals- Chairman Powell, Comptroller Hawke, Director Gilleran,
Governor Bies and former Chairman Dollar-have given their full support. We also
have received enthusiastic cooperation and support from the Conference of State
Bank Supervisors (CSBS) and the national and state trade associations in working
towards regulatory burden relief. We established an inter-agency EGRPRA task
force consisting of senior level staff from the Federal Reserve Board (FRB),
Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision
(OTS), National Credit Union Administration (NCUA), and the FDIC. Under the
EGRPRA statute, the agencies are required to categorize their regulations by
type (such as "safety and soundness" or "consumer protection" rules) and then
publish each category for public comment. The inter-agency task force divided
the agencies' regulations into the following 12 categories (listed
alphabetically):
- Applications and Reporting
- Banking Operations
- Capital
- Community Reinvestment Act
- Consumer Protection
- Directors, Officers and Employees
- International Operations
- Money Laundering
- Powers and Activities
- Rules of Procedure
- Safety and Soundness and
- Securities
The agencies agreed to put one or more categories out for public comment every
six months, with 90-day comment periods, for the remainder of the review period
(which ends in September, 2006). Spreading out comments over three years will
provide sufficient time for the industry, consumer groups, the public and other
interested parties to provide meaningful comments on our regulations, and for
the agencies to carefully consider all recommendations.
The agencies
published their first joint EGRPRA Federal Register notice on June 16,
2003, for a 90-day comment period, seeking comment on our overall regulatory
review plan, including the way in which we categorized the regulations. The
first notice also requested burden reduction recommendations on the initial
three categories of regulations: Applications and Reporting; Powers and
Activities; and International Operations. These three categories of regulations
contained 48 separate regulations for comment. In response, the agencies
received 19 written comments that included more than 150 recommendations for
changes to our regulations. Each of the recommendations has been carefully
reviewed and analyzed by the agency staffs. Based on the recommendations, staff
will bring forward proposals to change specific regulations, as appropriate,
which will be put out for public comment.
On January 20, 2004, the agencies issued their second joint request for comment
under the EGRPRA program. This notice sought public comment on the
lending-related consumer protection regulations, which include Truth-in-Lending
(Regulation Z), Equal Credit Opportunity Act (ECOA), Home Mortgage Disclosure
Act (HMDA), Fair Housing, Consumer Leasing, Flood Insurance and Unfair and
Deceptive Acts and Practices. The comment period for that notice closed on April
20, 2004 and staff is currently analyzing the comment letters received to
determine which recommendations to pursue. Even though the second Federal
Register notice contained far fewer regulations for comment than the initial
notice, the agencies received over 570 comment letters.
Banker, consumer
and public insight into these issues is critical to the success of our effort.
The regulatory agencies have tried to make it as easy as possible for all
interested parties to get information about the EGRPRA project and to let us
know what they think are the most critical regulatory burden issues. The EGRPRA
website, which can be found at www.egrpra.gov, provides an overview of the
EGRPRA review process, a description of the agencies' action plan, information
about our banker and consumer outreach sessions and a summary of the top
regulatory burden issues cited by bankers and consumer groups. There also are
direct links to the actual text of each regulation and comments can be sent to
the EGRPRA website. Comments submitted through the website are automatically
transmitted to all of the financial institution regulatory agencies. Comments
are then posted on the EGRPRA website for everyone to see. The website has
proven to be a popular source for information about the project, with thousands
of hits being reported every month.
While written comments are important to the agencies' efforts to reduce
regulatory burden, we believe it is also important to have face-to-face meetings
with bankers and consumer group representatives so that they have an opportunity
to directly communicate their views on the issues of most concern to them.
Last year, the agencies sponsored five banker outreach meetings in
different cities to heighten industry awareness of the EGRPRA project. The
meetings provided an opportunity for the agencies to listen to bankers'
regulatory burden concerns, hear comments and suggestions, and identify possible
solutions. The outreach meetings were held over a six-month period in Orlando,
St. Louis, Denver, San Francisco and New York. More than 250 bankers (mostly
CEOs) as well as representatives from the national trade groups and a variety of
state trade associations participated in the meetings with representatives from
FDIC, FRB, OCC, OTS, CSBS and state regulatory agencies.
The banker
outreach meetings were extremely useful and productive. Following panel
discussions and a question and answer period, the meeting participants were
broken into small discussion groups. Senior-level regulators served as
moderators of the discussion groups and regulatory staff recorded bankers'
concerns and their recommendations to reduce regulatory burden. Summaries of the
issues raised were then posted on the EGRPRA website. Since the banker outreach
meetings were so successful last year, we decided to hold at least three more
meetings this year. The first one was on April 22 in Nashville, Tennessee and
the second on June 9 in Seattle, Washington. Our third will be held on September
23 in Chicago, Illinois.
We held an outreach meeting for consumer and
community groups on February 20, 2004, in Arlington, Virginia. About 24
representatives from various consumer and community groups participated in the
meeting along with representatives from the FDIC, FRB, OCC, OTS, NCUA and CSBS.
The meeting provided a useful perspective on the effectiveness of many existing
regulations. We plan to hold at least two more consumer and community group
outreach meetings later this year, with one scheduled for June 24 in San
Francisco and another tentatively planned for September 23 in Chicago.
The "Top 10"
List of Banker Concerns
Based on the concerns expressed at our
banker outreach meetings, we have identified a "Top 10" list of regulations
bankers cite as being the most costly, burdensome or otherwise competitively
detrimental. The FDIC and most bankers believe that the objectives of these laws
are worthy. However, bankers have told us that these important goals can be
achieved in a less burdensome manner. While this is not a scientifically
selected survey of all bankers or issues, the most frequently mentioned
regulations and the nature of their concerns are as follows:
Bank Secrecy Act (Currency Transaction Reports (CTRs), Suspicious Activity
Reports (SARs)): Bankers are more than willing to do their part in the war
on terrorism and recognize the importance of CTRs and SARs in the process.
However, they would like the reporting process to be more effective and
efficient. In addition, bankers say they receive no feedback on their
efforts.
USA Patriot Act and Customer Identification Systems:
Similarly, bankers recognize the importance of verifying the identities of
their customers. However, bankers would like the CIP requirement of the USA
PATRIOT Act to be more effective and efficient. Again, bankers have commented
regarding lack of feedback on their efforts.
Limitations on Transfers
and Withdrawals from Money Market Deposit Accounts (Regulation D): Bankers
believe the statutory and regulatory limits on transfers and withdrawals from
money market accounts are outdated and suggest easing or repealing the limits.
They also suggest eliminating existing restrictions which prohibit the payment
of interest on demand deposits.
Home Mortgage Disclosure Act (HMDA) and Regulation C: Some bankers assert
that the costs of complying with data collection and reporting requirements is
too high in relationship to the usefulness of the data. It also was suggested
that the reporting thresholds for banks be raised so that banks with less than
$50 or $100 million in assets would be exempt from the reporting
requirements.
Community Reinvestment Act (CRA) Regulations: Some
bankers would like to see the asset size threshold (currently $250 million) for
the small bank CRA test raised to as much as $1 or $2 billion.
Privacy
Act Notices: Bankers, particularly those that do not share customer
information with third parties, stated that sending annual privacy notices to
all customers is costly and often confusing to the consumer.
Truth in
Lending (Regulation Z) and Real Estate Settlement Procedures Act (RESPA): A
number of bankers complained about the volume and complexity of documents
required for closing loans and asked the agencies to reconsider the required
disclosures. They also suggested simplifying Annual Percentage Rate
calculations.
Truth-in Lending and the Right of Rescission:
Bankers reported that few, if any customers had ever exercised their right
of rescission and thus customers should be permitted to waive their right.
Alternatively, some suggested creating additional exemptions to this
requirement.
Extensions of Credit to Insiders and Regulation O: Bankers reported that
these lending restrictions often make it difficult to find directors willing to
serve on bank boards.
Flood Insurance and the Flood Disaster
Protection Act: Bankers strongly suggested that flood maps be kept up to
date. Others felt that much of the cost of enforcing flood insurance
requirements has shifted from the federal government to banks.
The list above includes some of the most frequently mentioned regulatory burden
concerns expressed by bankers to us over the last year. The regulators are
examining these concerns to determine whether suggested changes to our
regulations and/or current laws may be appropriate at this time. This process
will continue until the end of the EGRPRA review process in 2006.
Response by
Regulatory Agencies
The EGRPRA regulatory review project is still
in its early stages, with approximately two years until completion. However, I
am pleased to report that the banking and thrift regulatory agencies have been
working together closely and harmoniously on a number of projects to address
unnecessary burdens. In addition to eliminating outdated and unnecessary
regulations, the agencies have begun to identify more efficient ways of
achieving important public policy goals of existing statutes. I think it is fair
to say that although we have much work ahead of us, there has been significant
progress to date. Here are some notable examples:
Privacy
Notices
On December 30, 2003, the Federal bank, thrift and credit
union regulatory agencies, in conjunction with the Federal Trade Commission,
Securities and Exchange Commission, and the Commodity Futures Trading
Commission, issued an Advanced Notice of Proposed Rulemaking (ANPR), seeking
public comment on ways to improve the privacy notices required by the
Gramm-Leach-Bliley Act. Although there are many issues raised in the ANPR, the
heart of the document solicits comments on how the privacy notices could be
improved to be more readable and useful to consumers, while reducing the burden
on banks and other service providers required to distribute the notices. In
response to the comments received, the agencies are planning consumer research
and testing that will be used to develop privacy notices that meet these goals.
As they do so, the agencies will continue to be mindful of the burden
implications of changing the privacy notices and the requirements for their
distribution.
Community
Reinvestment Act Regulations
On February 6, 2004, the Federal bank
and thrift regulatory agencies jointly issued a proposal to amend the Community
Reinvestment Act (CRA) regulations. The joint proposal would, among other
things, reduce regulatory burden by changing the definition of "small
institution" to mean an institution with total assets of less than $500 million,
without regard to holding company assets. This represents a significant increase
in the small bank threshold from the current level of $250 million which was
established in the 1995. Under the proposal, just over 1,100 additional banks
(those with assets between $250 and $500 million) would be subject to the
streamlined CRA examination process for small banks. This streamlined
examination focuses primarily on local lending, which is the mainstay of
community banks.
This proposal would not exempt these institutions from
complying with CRA-all banks, regardless of size, will be required to be
thoroughly evaluated within the business context in which they operate. As I
indicated at the FDIC Board meeting when this proposal was approved for
publication, I think this is a good first step for the agencies. Personally, I
would have liked to see the agencies propose a higher threshold, perhaps $1
billion, since I do not think any bank under $1 billion in assets should be
judged by the same standards as a bank with $100 billion or $1 trillion in
assets. I recognize that there are many competing interests and that community
groups, in particular, as well as many members of Congress generally oppose any
increase at all in the threshold level. However, I think that this change to the
regulation, if adopted as proposed, would result in significant regulatory
burden reduction for a number of institutions without weakening the objectives
of the Community Reinvestment Act. The comment period for this proposal closed
on April 6, and the agencies received approximately 1,000 comment letters that
currently are being analyzed by staff. It is my hope the agencies will consider
carefully all comments and agree on a final rule before the end of this
year.
RESPA
In July, 2002, the Department of Housing and Urban
Development (HUD) proposed a rule intended to improve the process for obtaining
mortgages. Given the high level of concern expressed by the banking industry
about the closing process, and the tremendous volume of paperwork that consumers
have to deal with at real estate closings, I think it is incumbent upon the
regulators to continue to play a role in the mortgage reform efforts. I agree
with the basic goals of HUD's initiative, which are to: (1) enable people to
know their options so they can shop intelligently; (2) clarify and simplify the
required disclosures; and (3) provide some certainty that costs won't change
before closing. The FDIC has provided some input into HUD's rulemaking process
and will continue to provide whatever additional input may be necessary. I think
it is important to assist in this effort to simplify and improve the closing
process for consumers, while reducing unnecessary burden on the banking
industry.
Bank Secrecy Act
There is no question that financial
institutions and their regulators must be extremely vigilant in their efforts to
implement the Bank Secrecy Act in order to thwart terrorist financing efforts
and money-laundering. Last year, bankers filed over 12 million CTRs and SARs
with the Financial Crimes Enforcement Network (FinCEN). Bankers reported that
they believe they are filing millions of reports that are not utilized for any
law enforcement purpose and consequently a costly burden is being carried which
is providing little benefit to anyone. In an effort to address this concern and
enhance the effectiveness of these programs, the financial institution
regulatory agencies are working together with FinCEN and various law enforcement
agencies, through task forces of the Bank Secrecy Act Advisory Group, to find
ways to streamline reporting requirements for CTRs and SARs and make the reports
that are filed more useful for law enforcement
I am convinced that we can find ways to make this system more effective for law
enforcement, while at the same time making it more cost efficient and less
burdensome for bankers. I recently met with FinCEN's new Director, William Fox,
and pledged to work with him to make bank reporting under the Bank Secrecy Act
more effective and efficient while still meeting the important crime-fighting
objectives of anti-terrorism and anti-money-laundering laws.
USA PATRIOT
Act and Customer Identification Requirements
Most bankers
understand the vital importance of knowing their customers and thus generally do
not object to taking the additional steps necessary to verify the identity of
their customers. However, bankers wanted guidance from the regulators on how
they could comply with this important law. In response, the federal financial
institution regulators, the Treasury Department and FinCEN issued interpretive
guidance to all financial institutions to assist them in developing a Customer
Identification Program (CIP), which was mandated by the USA PATRIOT Act. The
inter-agency guidance answered the most frequently asked questions about the
requirements of the CIP rule.
FDIC Efforts
to Relieve Regulatory Burden
In addition to the above-noted
inter-agency efforts to reduce regulatory burden, the FDIC, under the leadership
of Chairman Powell, is constantly looking for ways to improve our operations and
reduce regulatory burden, without compromising safety and soundness or
undermining important consumer protections. Over the last several years, we
streamlined our examination processes and procedures with an eye toward better
allocating FDIC resources to areas that could ultimately pose greater risks to
the insurance funds - such as problem banks, large financial institutions,
high-risk lending, internal controls and fraud. Some of our recent initiatives
to reduce regulatory burden can be summarized as follows:
1) Raised the threshold for well-rated, well-capitalized banks to qualify
for streamlined safety and soundness examinations from $250 million to $1
billion so that the FDIC's resources are better focused on managing risk to the
insurance funds;
2) Implemented more risk-focused compliance and trust
examinations, placing greater emphasis on an institution's administration of its
compliance and fiduciary responsibilities and less on transaction
testing;
3) Increased the efficiency of the Information Technology (IT)
examination procedures and streamlined IT examinations for institutions that
pose the least technology risk;
4) Worked with CSBS and the Federal
Reserve to develop, through a Nationwide State/Federal Supervisory Agreement, a
closely coordinated supervisory system for banks that operate across state
lines;
5) Initiated electronic filing of branch applications and began
exploring alternatives for further streamlining the deposit insurance
application process in connection with new charters and mergers;
6)
Simplified the deposit insurance coverage rules for living trust accounts so
that the rules are easier to understand and administer;
7) Reviewed
existing Financial Institution Letters and other directives to eliminate
outdated or unnecessary documents (also developing a more user-friendly,
web-based system for finding communications from the Corporation);
8)
Provided greater resources to bank directors, including the establishment of a
"Director's Corner" on the FDIC website, as a one-stop site for Directors to
obtain useful and practical information to in fulfilling their responsibilities,
and the sponsorship of many "Director's Colleges" around the country;
9)
Made it easier for banks to assist low and moderate income individuals, and
obtain CRA credit for doing so, by developing Money Smart, a financial
literacy curriculum and providing the Money SmartProgram free-of-charge
to all insured institutions;
10) Implemented an interagency charter and
federal deposit insurance application that eliminates duplicative information
requests by consolidating into one uniform document, the different reporting
requirements of the three regulatory agencies (FDIC, OCC and OTS);
11)
Revised our internal delegations of authority to push more decision making out
to the field level to expedite decision making and provide institutions with
their final Reports of Examination on an expedited basis; and
12)
Provided bankers with a customized version of the FDIC Electronic Deposit
Insurance Estimator (EDIE), a CD-Rom and downloadable version of the web-based
EDIE, which allows bankers easier access to information to help determine the
extent to which a customer's funds are insured by the FDIC.
The FDIC is
aware that regulatory burden does not emanate only from statutes and
regulations, but often comes from internal processes and procedures. Therefore,
we continually strive to improve the way we conduct our affairs, always looking
for more efficient and effective ways to meet our responsibilities
Legislation to
Reduce Regulatory Burden
Mr. Chairman, I wish to commend you and
your colleagues on your efforts to develop legislation removing unnecessary
regulatory burden on the banking industry. Since most of our regulations are, in
fact, mandated by statute, I believe that it is critical that the agencies work
hard not only on the regulatory front, but also on the legislative front, to
alert Congress to unnecessary regulatory burden. For that reason, I was
gratified to see the House address some of the burden issues and pass H.R. 1375,
the Financial Services Regulatory Relief Act. H.R. 1375 contains a number of
significant regulatory relief provisions that could reduce regulatory burden.
The bill also includes several provisions requested by the regulators, including
the FDIC, to help us do our job better. As my testimony indicates, the FDIC
staff has been working closely with their colleagues at the FRB, OCC and the OTS
over the last several months, in an effort to identify additional legislative
proposals to reduce regulatory burden on the industry. As you know, EGRPRA
requires the agencies to collect comments from the public on ways to reduce
regulatory burden and report their suggestions to the Congress. While we will
submit a more formal report as required by EGRPRA, I would like to report to you
some of the suggestions we have heard so far. I personally believe these
proposals deserve careful review and ultimately consideration by Congress. Some
of the bankers' key suggestions are discussed in detail below.
Eliminating
Unnecessary Reports From Directors and Officers with Respect to Extensions of
Credit (Regulation O)
The Federal bank and thrift regulatory
agencies believe that it is no longer necessary for directors and officers to
file the following three reports that are currently required to be filed under
section 22(g) of the Federal Reserve Act (12 USC 375a) and section 106(b)(2) of
the Bank Holding Company Amendments of 1970 (12 USC 1972(2)):
1) a report filed by a bank executive officer with the bank's board of
directors whenever the executive officer obtains a loan from another bank in an
amount that exceeds the amount the executive officer could obtain from his or
her own bank;
2) a report required from banks regarding any loans the bank
has made to its executive officers since its previous call report; and
3) an
annual report from a bank's executive officers and principal shareholders to the
board of directors of any outstanding loans from a correspondent bank.
The information contained in these reports is already collected through the
normal examination and supervision programs of the regulatory agencies and
through quarterly Call Reports. Therefore, the regulatory agencies believe that
the preparation and submission of these reports is not necessary and imposes
costs and unnecessary burden on the banks and the individuals required to
prepare and file the reports.
Streamlining
the Application Process
The Federal bank and thrift regulatory
agencies believe that the application process and procedures for certain types
of bank mergers can be significantly streamlined, without jeopardizing safety
and soundness or weakening important consumer rights, by making the following
legislative changes:
1. Amend section 18(c) of the Federal Deposit Insurance Act (FDIA) (12
U.S.C. § 1828(c)), also known as the Bank Merger Act (BMA), to exempt
applications for merger transactions between depository institutions and their
wholly owned subsidiaries, or with wholly owned subsidiaries of the depository
institution's holding company, from a competitive factors review by the
Department of Justice and other agency review processes as well as from
post-approval waiting periods.
Presently, the BMA requires, among
other things, the prior written approval of the appropriate federal banking
agency whenever an insured depository institution proposes a merger transaction
with any other insured depository institution, or with any noninsured
institution, whether or not the institutions are affiliated. Before acting on
any merger transaction application (other than one involving a probable failure
or an emergency case), the agency must request a competitive factors report from
the Attorney General and from each of the other three federal banking agencies
and allow 30 days for them to respond. In the case of an emergency, the time
period for response is 10 days. In the case of a probable failure, no such
request is necessary.
Finally, the BMA provides that the merger
transaction (other than a probable failure or emergency case), may not be
consummated before the 30th day after approval or, if the Attorney General
concurs, the 15th day after approval. In the case of a probable failure, the
merger transaction may be consummated upon approval. In the case of an
emergency, the merger transaction may be consummated on the 5th day after
approval. The post-approval waiting period is generally designed to give the
Attorney General an opportunity to file suit to block the merger transaction, if
the Attorney General determines that the merger transaction is anticompetitive.
The proposed change would only apply to mergers between an insured
depository institution and one or more of its affiliates. It is generally
accepted that such mergers do not present any competitive issues. This
legislative proposal would shorten the timeframe for the approval and
consummation of corporate reorganizations and by doing so create savings for the
applicant without raising safety and soundness issues.
2. Shorten the
post-approval waiting time on mergers where there are no adverse effects on
competition - This proposal would amend section 11(b) of the BHCA (12 U.S.C.
§ 1849(b)) and section 18(c)(6) of the FDIA (12 U.S.C. § 1828(c)(6)) to shorten
the current 15-day minimum post-approval waiting period for certain bank
acquisitions and mergers when the appropriate federal banking agency and the
U.S. Attorney General agree that merging with or acquiring another bank or bank
holding company would not result in significantly adverse effects on competition
to a 5-day period.
Under current law, the post-approval waiting period
is generally 30 days. This 30-day period may be shortened to 15 days upon
agreement of the appropriate banking agency and the Attorney General. This
proposal would give the banking agency and the Attorney General the flexibility
to further shorten the post-approval waiting period. The Attorney General would
continue to be required to consider the competitive factors involved in each
merger transaction. The institutions involved in mergers or acquisitions would
benefit from the streamlining of the application review process that reduces
bank waiting time and associated costs by allowing faster consummation of a
merger where there are no adverse affects on competition or consumers.
3.
Eliminate competitive factors report from the other three federal banking
agencies - This proposal would amend paragraph (4) of section 18(c) of the
FDIA (12 U.S.C. § 1828(c)) to streamline application requirements by eliminating
the requirement that each federal banking agency must request a competitive
factors report from the other three federal banking agencies as well as from the
Attorney General.
The Attorney General would continue to be required to
consider the competitive factors involved in each merger transaction. The FDIC,
as insurer, would receive a copy of the responsible agency's request to the
Attorney General when the FDIC is not the responsible agency for the particular
merger, thereby giving the FDIC notice of the transaction. The proposal shortens
the timeframe for approval and consummation of transactions and so would
decrease regulatory burden associated with the application process.
4.
Eliminate the requirement for prior written consent to establish branches by
well-managed, well-capitalized, highly-rated institutions - While the
regulators have not reached agreement, one additional proposal that we are
looking at would amend section 18(d)(1) of the FDIA (12 U.S.C. § 1828(d)(1)) to
eliminate the requirement for prior written consent to establish branches by
well-managed, well-capitalized, highly-rated institutions. The institutions
would need to have at least a satisfactory CRA rating and the agencies are
exploring ways to preserve consumers' ability to raise any CRA concerns in
connection with these transactions.
Instead of the requirement for prior
written consent, this proposal would require after-the-fact notice. Such a
notice procedure should permit well-run banks to establish branches more
efficiently without the delay and substantial paperwork associated with an
application. This amendment would not affect the requirement for prior approval
for the establishment of interstate de novo branches under section 18(d)(4) of
the FDIA (12 U.S.C. § 1824(d)(4).
I should note also that the Office of
Thrift Supervision has recommended adding a new section 5(d)(3)(B) to the Home
Owners' Loan Act (12 U.S.C. 1464(d)(3)) (HOLA) to give federal thrifts authority
to merge with one or more of their nondepository institution affiliates. This
authority would be equivalent to the authority national banks have pursuant to
section 6 of the National Bank Consolidation and Merger Act (12 U.S.C. §
215a-3), which was added by section 1206 of the Financial Regulatory Relief and
Economic Efficiency Act of 2000 (Pub. L. No. 106-569, 114 Stat. 2944, 3034).
Section 18(c) of the Federal Deposit Insurance Act (FDIA) (12 U.S.C. § 1828(c)),
also known as the Bank Merger Act, will continue to apply and the new authority
does not give thrifts the power to engage in new activities.
Under
current law, a federal thrift may only merge with another depository
institution. This proposal reduces regulatory burdens on thrifts by permitting
mergers with nondepository affiliates, where appropriate for sound business
reasons and if otherwise permitted by law. This amendment reduces regulatory
burden by permitting a thrift that wishes to acquire the business of an
affiliate to do so without undertaking a costly series of transactions, such as
merging the affiliate into a subsidiary and liquidating the subsidiary into the
thrift.
Elimination of Annual Privacy Notice Requirement for Institutions That Do
Not Share Personal Information
As noted above, an ANPR was issued
at the end of last year seeking public comment on ways to improve the privacy
notices required by the Gramm-Leach-Bliley Act (GLBA). In addition to our
efforts to improve the content of the notice, the banks have urged that the law
be changed to relax the requirement for banks to send annual privacy notices to
all of their customers if, in fact, they do not share information with third
parties or their affiliates subject to the "opt-out" right under either the GLBA
or the Fair Credit Reporting Act. For example, after providing the initial
privacy notice, an institution would only provide subsequent notices when its
privacy policy actually changes in some material way, rather than requiring that
notices be provided on an annual basis.
Waiver of the Three-Day
Right of Rescission
The Truth in Lending Act provides consumers
with a significant right that gives them three days to re-think the consequences
of pledging their home as collateral on certain loans. There is no question that
this is a valuable right that must be preserved.
However, bankers note
that consumers are often perplexed and sometimes disturbed by the fact that the
Federal government limits their access to borrowed funds for three days
following loan closing. Bankers have described that consumer dissatisfaction is
particularly acute when they are paying interest on their new loan without
access to the funds. Although banks can allow consumers to waive their right of
rescission, bankers believe the waiver criteria are very restrictive and
narrow.
This is a sensitive area. There is no question about that. There
need to be ways to address the issues we have heard about while still protecting
consumer rights. There are several possibilities to explore and we are open to
exploring them with consumers and the industry. For example, perhaps we should
look at expanding the waiver criteria to allow a consumer to voluntarily choose
not to be protected by the right of rescission. Another possibility is to
provide the closing documents three days prior to closing and incorporate the
right of rescission into this three-day period, much like the Federal Reserve
Board and Department of Housing and Urban Development proposed to Congress in
1998.
Increased Flexibility of the Flood Insurance Law
Bankers
have suggested several changes in the law to increase the flexibility of
regulators and lenders to implement flood insurance program requirements and
provide the federal financial regulatory agencies with discretion to impose
civil money penalties in findings of patterns or practices of violations of
flood insurance requirements. Specifically, the suggestions would address the
situation where the official flood maps are more than ten years old; increase
the "small loan" exception (currently $5,000) and allow adjustments for
inflation on a regular basis; and amend the forced-placement rules to allow
lenders to force-place flood insurance within 30 days (instead of the current 45
days) of notifying the borrower.
Other banker suggestions include
removing the requirement of mandatory Civil Monetary Penalties (CMPs) when
federal regulators discover a pattern and practice of certain violations of the
National Flood Insurance Program (NFIP). In accordance with each agency's
authority to impose CMPs pursuant to its own implementing act, the regulators
can tailor their actions more closely to individual cases. The bankers' argue
these proposals would reduce burden by increasing the speed with which flood map
information may be obtained when maps are out of date, lowering risk when forced
placement of insurance is necessary, adjusting for inflation periodically the
threshold for loans covered by the NFIP, and replacing mandatory penalties with
penalties crafted to match the violation.
Repeal of the CRA
Sunshine Law
The agencies have heard from both bankers and
consumer groups that paperwork requirements of the CRA Sunshine law are
burdensome. The sunshine provisions are found in section 48 of the FDIA (12
U.S.C. § 1831y), enacted by section 711 of the Gramm-Leach-Bliley Act. One way
to address these burdens would be to recommend repealing the law. However, the
ramifications would need to be carefully studied before advocating repeal. Under
current law, depository institutions, nongovernmental entities, and other
parties to agreements providing for cash payments, grants, or other
consideration with a value in excess of $10,000 or for loans exceeding $50,000
annually made pursuant to or in connection with, the fulfillment of the
Community Reinvestment Act of 1977 must make a report of all such covered
agreements annually to the appropriate Federal banking agency. Removing the
annual reporting requirement would reduce regulatory burden on depository
institutions, nongovernmental entities (i.e., consumer groups) and other parties
to covered agreements, as well as the Federal banking agencies. There are no
safety and soundness concerns about the repeal of this law.
The
above-noted legislative proposals are just some of the ideas I am pursuing on an
inter-agency basis to reduce unnecessary burdens on the banking industry without
diluting important consumer protections and I hope to pursue many others over
the course of the EGRPRA regulatory review process. I very much look forward to
working with the Committee on developing a comprehensive legislative package
that provides real regulatory relief for the industry. I am certain that this
hearing will provide valuable input for the comprehensive package. Conclusion
Mr. Chairman, as I mentioned at the outset, the
EGRPRA effort is committed to addressing the problem of regulatory burden for
every insured financial institution. Bankers, large and small, labor under the
cumulative impact of regulations. However, I believe that if we do not do
something to stem the tide of ever increasing regulation, a vital part of the
banking system will disappear from many of the communities that need them the
most. That is why I think it is incumbent upon all of us - Congress, regulators,
industry and consumer groups - to work together to eliminate any outdated,
unnecessary or unduly burdensome regulations. I am personally committed to
accomplishing that objective.
I am confident that, if we all work
together, we can find ways to regulate that are both more effective and less
burdensome, without jeopardizing the safety and soundness of the industry or
weakening important consumer protections.
Thank you for providing me
with this opportunity to testify.
|
