How Have Small Banks Been Affected by Financial Reform?

How Have Small Banks Been Affected by Financial Reform?

CRS Insights
How Have Small Banks Been Affected by Financial Reform?
Sean M. Hoskins, Analyst in Financial Economics (shoskins@crs.loc.gov, 7-8958)
Marc Labonte, Specialist in Macroeconomic Policy (mlabonte@crs.loc.gov, 7-0640)
May 14, 2015 (IN10276)
Congress is considering providing regulatory relief for small banks. Proponents argue that regulatory relief is
needed, in part, because of the increase in regulatory burden resulting from new rules introduced in response to the
financial crisis. But how have small banks been affected by recent rules? A comprehensive evaluation is hindered
by both the sheer number of new rules and the fact that the effects of rules cannot easily be compared or
aggregated, because some rules have large effects on banks and others have small effects. This Insight summarizes
a CRS analysis of major rules issued since 2010 by banking regulators pursuant to the Dodd-Frank Act (P.L. 111-
203) or Basel III. Of the 14 major rules in Table 1, 13 either contain exemptions or are tailored (e.g., simplified
compliance requirements) for small banks. Some rules base exemptions and tailoring on asset size, whereas others
are based on activity volume; a consistent size threshold is not used across rules.
Table 1. Treatment of Small Banks in Recent "Major Rules" Issued by Banking
Regulators Pursuant to the Dodd-Frank Act or the Basel Accords
Regulation
Identifier
Subject
Number
Differential Treatment of Small Banks
Rules Issued by Federal Deposit Insurance Corporation, Federal Reserve, or Office
of Comptroller of the Currency
(1) Liquidity
1557-AD74 Does not apply to banks with less than $50
Coverage Ratio
billion in total assets.
(2) Supplementary
1557-AD74 Does not apply to banks with less than $250
Leverage Ratio
billion in total consolidated assets or $10
billion in total on-balance sheet foreign
exposure.
(3) "Volcker Rule"
7100-AD82 Applies to all banks, but streamlined
compliance policies and procedures for banks
with less than $10 billion in assets.
(4) Treatment Of
1557-AD79 Applies to all banks that hold collateralized
CDO-TruPs in the
debt obligations backed by trust preferred
"Volcker Rule"
securities (CDO-TruPs), including small
banks.
(5) Regulatory Capital 1557-
This rule has many provisions that apply to
Rules: Basel III
AD46,
small banks (but not bank holding companies
3064-AD95 under $1 billion in assets). However, banks
with less than $250 billion in total assets or
$10 billion in foreign exposure are provided
an additional year to implement the rule and
are exempt from parts of it, including the
"advanced approaches" and the
countercyclical capital buffer. Banks with less
than $15 billion in assets received
grandfathered treatment of TruPs.
(6) Risk-Based
1557-AC99 Does not apply to banks with aggregated
Capital Guidelines:
trading assets and trading liabilities less than

Basel II.5
$1 billion or 10% of total assets.
(7) Debit Card
7100-AD63 Does not apply to banks that do not issue debit
Interchange Fees
cards. Does not apply to issuers that, together
with affiliates, have $10 billion or less in
assets.
(8) Enhanced
7100-AD86 Does not apply to banks with less than $10
Prudential Standards
billion in assets. Most provisions do not apply
to banks with less than $50 billion in assets.
(9) Assessments on
7100-AD95 Does not apply to banks with less than $50
Large Banks and
billion in assets.
Non-Bank SIFIs
Rules Issued by Consumer Financial Protection Bureaua
(10) Ability-To-
3170-AA17 Has additional compliance options and more
Repay And Qualified
lenient thresholds for certain additional legal
Mortgage Standards
protections for some banks that have less than
$2 billion in assets and originating 500 or
fewer mortgages in the previous year.
(11) Electronic Fund
3170-AA15 Banks that send 100 or fewer remittances
Transfers
annually are not covered by the rule.
(12) Loan Originator
3170-AA13 Limited exemption from some requirements
Compensation
for individual loan originators (who may work
Requirements
for a bank) that originate 10 or fewer loans in
a 12-month period.
(13) Mortgage
3170-AA14 Exemptions from some requirements for banks
Servicing Rules
that service 5,000 or fewer mortgages loans
(Regulation Z)
and only service mortgages that it or an
affiliate originates.
(14) Mortgage
3170-AA14 Exemptions from some requirements for banks
Servicing Rules
that service 5,000 or fewer mortgages loans
(Regulation X)
and only service mortgages that it or an
affiliate originates.
Source: CRS analysis.
Notes: For details on the content of the rules, click on the hyperlinks in the table. For
details on sources and methodology, see CRS Report R43999, An Analysis of the
Regulatory Burden on Small Banks.
a. The CFPB's rules, in general, apply to banks and nonbanks that perform the activity
covered by the rule. This table only discusses the treatment of banks.
The five rules issued by the CFPB apply only to those entities involved in certain activities. Small banks would be
exempt from CFPB rules, therefore, if they did not perform the activity covered by the rule. In addition, all five
rules have some form of exemption or tailoring for small banks that perform the covered activity based on activity
volume (and, in one case, asset size), although some of the exemptions and tailoring are limited.
Six of the nine major rules issued by the other banking regulators have size threshold exemptions that prevent those
rules from applying to small banks at all. Two of the nine are tailored to reduce the compliance costs for small
banks. The only rule (#4) that does not have an exemption or tailoring for small banks modified the Volcker Rule
to make it easier for banks to hold "CDO-TruPs"— securities backed by a form of capital frequently issued by
small banks.
The presence of an exemption or tailoring in a rule does not in and of itself mean that the rule is optimally

structured to achieve its regulatory goal while simultaneously minimizing burden. The table does show, however,
that because most major rules treat small and large banks differently, it could be argued that there is not a "one-
size-fits-all" approach to bank regulation.
The table may be useful for understanding which major rules related to financial reform apply to small banks, but it
provides a limited perspective on the effect of recent rulemaking on small banks more broadly. It is subject to
several limitations and caveats that are discussed in CRS Report R43999, An Analysis of the Regulatory Burden on
Small Banks.