The major congressional response to the Financial Crisis was the passage of the Dodd-Frank Act in 2010, putting many restrictions on U.S. financial institutions in hopes of ending “too big to fail.” The problem is that the new regulations often apply to the many low risk, traditional, main street banks which did not cause the financial crisis. The new regulations hamper the ability of these smaller banks to lend money to their regular customers, thereby slowing down the economic growth we need for full recovery from the recession.
Thomas Hoenig, Vice Chair of the Federal Deposit Insurance Corporation, has recently made some common sense recommendations for alleviating this problem.
He proposes to provide relief for financial institutions which meet the following criteria:
- Banks that hold zero trading assets or liabilities.
- Banks that hold no derivative positions other than interest rate swaps and foreign exchange derivatives.
- Banks whose total value of all derivative exposures is less than $3 billion.
- Banks which have a ratio of equity-to-assets of at least 10%. Most community banks meet this criteria and the number is within reach for those which do not.
Of more than 6500 commercial banks, only about 400 do not meet the first three criteria. None of the banks with more than $100 billion in total assets meet these criteria. Banks which qualify could receive relief such as:
- Exemptions from Basel capital standards and risk-weighted asset calculations.
- Allowing for examiner judgment in eliminating requirements to refer “all possible or apparent fair lending violations to Justice” if judged to be de-minimis or inadvertent.
- Exemptions from appraisal and stress test requirements.
- Allowing an 18-month examination cycle as opposed to the current 12-month cycle.
Mr. Hoenig’s conclusion: “For the vast majority of commercial banks that stick to traditional banking activities, and conduct their activities in a safe and sound manner with sufficient capital reserves, the regulatory burden would be eased. For the small handful of firms that have elected to expand their activities beyond commercial banking, the additional regulatory burden is theirs to bear.”