Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation, want’s to see the regulatory burden for “traditional” banks eased, regardless of their size.

He shared his thoughts during a speech in Kansas City on Tuesday, at an interagency meeting to discuss the Economic Growth and Regulatory Paperwork Reduction Act. The legislation, enacted in 1996, requires that regulations enacted by the Federal Financial Institutions Examination Council, Office of the Comptroller of the Currency, FDIC, and Board of Governors of the Federal Reserve System be reviewed, at least once every 10 years, “to identify outdated, unnecessary, or unduly burdensome regulations.” The final report from the first EGRPRA review was submitted to Congress in 2007; work on the second is underway.

“I think it is fair to say there is broad agreement that the regulatory burden should be eased for community banks,” Hoenig said. “However, what is proving more difficult is finding agreement on what exactly defines a traditional bank and what specific regulatory changes would give such banks meaningful relief without compromising bank soundness or consumer protections.”

Hoenig wants to establish eligibility criteria for relief that emphasizes the core commercial banking model and importance of strong equity capital. Under his plan, a bank would be eligible for regulatory relief if it: holds no trading assets or liabilities; holds no derivative positions other than interest rate and foreign exchange derivatives; the total notional value of all its derivatives exposures, including cleared and non-cleared derivatives, is less than $3 billion; and maintains an equity-to-assets ratio of at least 10 percent.

Defining eligibility for regulatory relief around these specific criteria, rather than asset size, reflects the longstanding business models of traditional commercial banks, Hoenig explained, adding that “because these criteria are objective, they can be enforced with less of an imposition on the banks, using off-site call report monitoring and within the regular exam process.”

Hoenig surmises that more than 90 percent of the approximately 6,400 commercial banks in the United States meet the first three criteria, and two-thirds meet the fourth criterion regarding capital. The remaining one-third of these banks are within two percentage points of the capital requirement and could be afforded relief as they achieve this objective over a 24-month period.

Size does not limit eligibility for regulatory relief using Hoenig’s metric. “An insured bank of any size would qualify if it does not expand into activities that are associated with commercial and investment banks, insurance companies, or commercial or industrial firms,” he said. “The effect is to keep nonbank activities outside the insured bank, where they are directly subsidized by the taxpayer and create unstable economic distortions.”

Under his framework, regulators can outline meaningful regulatory relief for traditional banks that is consistent with safety and soundness.

Exempting these more traditional banks from all Basel capital standards and associated risk-weighted asset calculations. This 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.

Exempting these banks from several entire schedules on the call report.

Allowing for greater examiner discretion and eliminating requirements to refer "all possible or apparent fair lending violations to Justice" if judged to be minimal or inadvertent.

Establishing further criteria that would exempt eligible banks from appraisal requirements

Exempting banks, if applicable, from stress testing requirements.

Where judged appropriate, allowing for an 18-month examination cycle as opposed to the current required 12-month cycle for traditional banks.

Mortgages made by these traditional banks that remain in the banks' portfolio would be a qualified mortgage loan for purposes of Dodd-Frank Act.

Updating 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.

“U.S. banks engaged in core banking activities and operating with reasonable levels of capital should not incur the same regulatory burden as those that do not,” Hoenig said. “Nor should traditional bankers seeking measurable regulatory relief be held hostage to debate over Dodd-Frank requirements that apply to firms that choose to engage is a much broader set of investment banking and commercial activities.  The public needs commercial banks to provide credit to small businesses and consumers across the country without the burdensome constraints of misdirected regulation.”

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