State financial regulators highlight their perspectives and offer suggestions to further reduce regulatory burden related to certain issues raised as part of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process.

The EGRPRA review is required by the Federal Financial Institutions Examination Council (FFIEC) and its member agencies every 10 years. As part of this process, federal financial regulators issued this week a joint report to Congress detailing the results of this cycle’s review.  State regulators participated in the EGRPRA review as a representative body through the State Liaison Committee (SLC), a member of the FFIEC. While state financial regulators support the findings of the FFIEC EGRPRA report, the SLC identified additional opportunities to further reduce regulatory burden.  The recommendations are reported in a letter to the federal banking agencies, and adopted as Appendix 1 within the joint report to Congress.

“We are pleased to work collaboratively with our federal counterparts to identify specific obstacles that inhibit the ability of smaller institutions to best serve their communities,” said Karen Lawson, Chair of the State Liaison Committee and Director of Banking at Michigan Department of Insurance and Financial Services. “State and federal regulators have made a purposeful effort over the last two years to solicit feedback from the industry and other stakeholders and address issues raised during the review process. While there is still more work to do, I believe the findings identified in the FFIEC’s report to Congress, as well as the actionable recommendations in the SLC letter, have potential to make a meaningful impact on community banks while retaining effective regulation.”

The key opportunities identified by the SLC, as outlined in its letter – Appendix 1 of the report – include the following:

Simplify capital rules for smaller and less-complex institutions. The SLC found that community banks devote a disproportionate share of costs to comply with these federal rules. The general complexity of the rules and various aspects such as high volatility commercial real estate and the treatment of mortgage servicing assets unnecessarily complicate small bank operations.  The SLC supports efforts to tailor capital requirements for smaller and less complex institutions.

Continue and expand efforts to reduce Call Report burden. State regulators and the federal agencies worked together to streamline the Call Report. But further reduction is necessary, particularly for smaller and less complex banks. Efforts need to accelerate and broaden in scope, including expanding the criteria that permit small institutions to file a streamlined Call Report. The SLC supports moving from a numerical threshold – currently $1 billion in assets – to a multi-factor set of criteria, such as the FDIC’s Community Bank Research definition.

Reexamine the regulatory threshold for appraisals. State regulators are concerned that the thresholds may unnecessarily impede credit availability, particularly in rural and underserved markets, due to the associated costs to borrowers and appraiser shortages in numerous markets throughout the country. The SLC recommends updating the threshold amounts – for both residential as well as commercial real estate loans – to reflect inflation, and that the agencies consider a transaction-based, de minimis test that permits banks to make and retain a limited number of exempt loans.

Reevaluate how the Herfindahl-Hirschman Index (HHI) is employed. The current HHI’s reliance on deposit market share to determine market concentration is problematic. As calculated, the HHI does not offer a representative assessment of market concentration as non-depositories are generally not included and other types of depository institutions are not fully considered. The SLC found that the current HHI calculation does not provide a realistic representation of market competition, and may place smaller firms at a disadvantage.

Appendix 1 of the FFIEC report is available here. The full FFIEC report is available here.

The SLC consists of five representatives of state banking agencies that supervise financial institutions. Members are designated from American Council of State Savings Supervisors, Conference of State Bank Supervisors, National Association of State Credit Union Supervisors, and the FFIEC.