FDIC Vice Chair Hoenig Discusses Regulatory Relief for Community Banks and Volcker Rule Exemptions

Federal Deposit Insurance Corporation Vice Chair Thomas Hoenig delivered remarks recommending criteria for regulatory relief for community banks. He argued that such regulatory relief should not be a reason to abandon the Volcker Rule.

Mr. Hoenig explained that while he is not a critic of systemically important banks engaging in non-bank activities, he is concerned with the “distortions to the financial system that follow when these activities are conducted by commercial banks.”

According to Mr. Hoenig, the Global Capital Index, which was constructed by him and another colleague at the FDIC, revealed that at the more than 6,500 commercial banks in the United States, capital levels “far exceed those of the largest firms.” He stated that from a capital perspective, there is a case to be made for regulatory relief for the vast majority of commercial banks.

Mr. Hoenig suggested focusing regulatory relief on activity and complexity, rather than size. He recommended defining eligibility for regulatory relief based on criteria such as (i) banks that hold zero trading assets or liabilities, (ii) banks that hold no derivative positions other than interest rate swaps and foreign exchange derivatives, and (iii) banks whose total notional value of all their derivative exposures is less than $3 billion. He stated that of the over 6,500 commercial banks, only 400 do not meet these three criteria.

Mr. Hoenig then turned to areas community banks consistently highlight as sources of regulatory burden, such as the new risk-based capital rules, elements of consumer compliance regulation, and an “ever-expanding Call Report.” Mr. Hoenig also suggested “meaningful regulatory relief for traditional banks,” such as exempting traditional banks from all Basel capital standards and associated capital amount calculations, or exempting such banks from several entire schedules on the Call Report.

Mr. Hoenig pointed out that he did not recommend exempting either traditional banks or community banks from the Volcker Rule. According to Mr. Hoenig, weakening the Volcker Rule would be “contrary to moving the largest financial firms toward self-sufficiency.” Additionally, he stated, the “vast majority of community banks have virtually no compliance burden associated with implementing the Volcker Rule.”

Mr. Hoenig suggested existing guidance be updated for banks under $10 billion in total assets that engage in traditional hedging activities to clarify that Volcker Rule compliance requirements can be met by having clear policies and procedures that place appropriate controls on the activities. He also pointed out that there are “less than 400” of the 6,500 banks under $10 billion engaging in less traditional activities that may be restricted. Mr. Hoenig explained that there would be some initial compliance requirements to determine their status, and most will find that their trading-like activities are already exempt from the Volcker Rule.

Lofchie Comment: Banks turning away cash deposits, a pattern now widespread in the market because holding cash adversely affects capital ratios, suggests that the ratios are encouraging counterintuitive behaviors.