Category Archives: Crapo Act

Small business loan approval rises —
community banks lead the way

MORE GOOD NEWS from the Biz2Credit Small Business Lending Index:

Small business loans were approved at an overall rate of about 38 percent (from banks of all size). This was the post-recession high for loan approval by banks as a whole.

Community banks continue to lead the way — approving more than 50 percent of loans. Larger banks approved loans at a higher rate in January than they did a month before, but the approval rate of 28.3 percent pales against that of smaller lenders:

“If you have an idea for a new small business or if you want to buy an existing business, you will probably think of talking to your commercial bank about a small business loan first,” writes rosemary Carlson for The Balance Small Business.

But “the approval rates for small business loans are low from [large] commercial banks. In 2004, before the Great Recession, loan approval rates for small business loans from commercial banks were twice what they were in 2017.”

As we noted in “Happy Days are Here Again,” however, there may be a robust small-bank alternative close to home.

Banks and the Volcker Rule — a “small” victory

One year after the Federal Reserve and its sister regulators deep-sixed the Volcker Rule, the banking barons who benefited from federal bailouts and a decade of Dodd-Frank regulations that crushed their smaller competitors are wondering how they missed out on the gravy train.

“Wall Street spent years” fighting the rule, writes Francine McKenna in MarketWatch, “but small banks win the most relief in Trump regulatory rewrite.”

The irony is rich. The purpose of the rule was to protect against system risk — not allocate burdens. But in fact, the Volcker Rule, like almost any regulation, imposed a greater burden — as a share of total costs — on small community banks than it did on the too-big-to-fail brigades.

This was truly perverse, especially in light of the fact that the best scholarship on the subject indicates that it’s larger institutions that pose greater system risk in the event of failure. The primary result of Dodd-Frank, a measure designed to punish banks “too big to fail,” was to drive nearly half the small community banks out of business, while profits, stock shares, and capitalization of the big banks soared.

Then again, the term “Volcker Rule” itself, and its substance, has a smokey, bitterly nostalgic aroma. The Volcker Rule was a response by Volcker and other regulators to the financial crisis that reflected monetary chaos they helped bring about in the early 2000s. In this, it resembles the Smithsonian Accords that blew up the Bretton-Woods monetary order; the G-7 monetary coordination effort that was a response to exchange rate chaos; and other start-a-fire-and-then-try-to-put-it-out solutions of the last 50 years.

The Volcker Rule was a second-best part of a first-worse solution to monetary chaos in the early 2000s. It won’t be missed, especially if policy-makers replace rule-writing fiat with a national and global monetary rule.

In the words of George Shultz — one of Volcker’s collaborators in the wanton monetary destruction of the 1970s and beyond — “If they’re too big to fail… make them smaller.”

A hand for Quarles:
Improved thinking, regulation at the Fed

   LAST FALL, WE URGED the Federal Reserve’s Vice Chair for Supervision, Randal K. Quarles, to “call your office” in impelementing the provisions of 2018’s regulatory-reform-minded Crapo bill, especially as applied to small and community banks.

   In particular, we encouraged hmi to take note of the growing mountain of evidence — much of it at the Fed, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency — that large financial institutions should be the primary focus of regulation… whereas, the health of smaller banks, if relieved of some of the regulatory burden, would actually contribute not only to competive diversity, but financial stability.

Judging from his May 15 testimony before the Senate Committe on Banking, Housing, and Urban development, Quarles made that call.

The Fed, Quarles explained, approached the Crapo Act (a.k.a. “ERRCPA”) as a call on regulators to “to focus our energy and attention on both the institutions that pose the greatest risks to financial stability and the activities that are most likely to challenge safety and soundness.”

In addition to noting the Fed’s effort to relieve small institutions from most of the burdens of the Volcker rule — which happend last summer — Quarles reviewed the main tiers of Crapo Act implementation:

“We also have been providing targeted regulatory relief, especially for community banks and other less complex organizations.

• “We proposed a new interagency Community Bank Leverage Ratio to give community banking organizations a more straightforward approach to satisfying their capital requirements. State bank supervisors and others have provided thoughtful comments on our work, which we are taking into account.

• “We expanded community banking organizations’ eligibility for both longer examination cycles and exemptions from holding company capital requirements, and we have proposed more limited regulatory reporting requirements for community banks.

• “We provided smaller regional bank holding companies immediate relief from annual holding company assessments and fees, stress testing requirements, and other prudential measures designed for larger institutions.”

The shift in conceptual approach that appears to be in progress is heartening — even if better regulation, compared to monetary reform, as a second-best solution. The breadth of paradigm shift is event in the detailed Federal Reserve Supervision and Regulation Report of May 14.

More on that report to come. In the meantime, we’re offering polite applause for the prudent “regulatory hand” to Mr. Quarles.

Smaller banks, smaller stress. Bigger banks….
(Randal K. Quarles, call your office)

THREE CHEERS for the U.S. Federal Reserve for its recent study, “The Differential Impact of Bank Size on Systemic Risk, by Amy G. Lorenc and Jeffery Y. Zhang.

The study couldn’t come at a more critical time, as the Fed, Federal Deposit Insurance Corporation, and others immerse themselves in implementing the new requirements of the Crapo bank-regulation reform act.

   “Our empirical results,” the authors write, “show that stress experienced by banks in the top 1 percent of the size distribution leads to a statistically significant and negative impact on the real economy. This impact increases with the size of the bank. The negative impact on quarterly real GDP growth caused by stress at banks in the top 0.15 percent of the size distribution is more than twice as large as the impact caused by stress at banks in the top 0.75 percent, and more than three times as large as the impact caused by stress at banks in the top 1 percent.

These results,” they conclude, “support the idea that the largest banks should be subject to the most stringent requirements while smaller banks should be subject to successively less stringent requirements.”

Banking systems systems dominated by large banks are like a majestic ship — they can do many things; they move fast; they have big guns. But if one or two of these great vessels is hit, and sinks…

Community banks, by contrast, function like a network of rafts. They can’t move as swiftly. They don’t have huge guns. Water comes over the side and people get wet… but like a raft, the system doesn’t sink as readily.

Though the passage of the Crapo act in May was a valuable step, the fact remains, as we wrote at the time in “Fed, you’re up next, “it will take well beyond that for the Federal Reserve, FDIC, and other institutions to implement many of the new law’s provisions via regulation — and longer still for their impact to be felt in the real world.”

Note: the Fed acted in late August to implement an important increase in the threshhold level for small bank holding company policy statements to $3 billion — another step forward.

Here’s hoping the rule-writers at the Fed (att: Randal K. Quarles, pictured nearby) take the time to familiarize themselves with the Fed’s own important research contribution.

Rebalancing the Financial Regulatory Landscape (we hope)

   WHILE LOBBYISTS and lawyers and legislators alike scramble to figure out the intricacies of the new “Economic Growth Regulatory Relief and Consumer Protection Act” — a.k.a. the Crapo Act, *whew* …

   … the keen barristers and analysts at DavisPolk have put together an exhaustive study of the new law’s hopeful impact: “Bipartisan Banking Act Will Rebalance the Financial Regulatory Landscape.”

   We’re a little more reticent. It’s true: federal regulators acted in July to indicate that some of the act’s changes would take immediate effect. But the wheels of government turn slowly, if at all, and there are “miles to go… before we sleep.”

Meantime, we’re headed off to the shore — with hope in our hearts, and a printout of the DavisPolk analysis in our beach bag.

Fed: one step forward, two steps… well, yet to come

Late Friday (July 6), the Federal Reserve issued a joint statment on implementation of “the Crapo Act,” or, as its principal authors christened it, the “Economic Growth, Regulatory Relief, and Consumer Protection Act.”

The statement itself was written in regulationese — though perhaps this befits any comment on a piece of legislation that infelicitously acronyms out to “EGRRCPA.” The Fed was joined in the statement by the Federal Deposit Insurance Corporation and the Comptroller of the Currency. The regulators outlined which provisions of the Crapo At will take immediate effect, and which will require further regulatory action.

After reassuring the public (read: themselves) that their agencies “will continue” to enjoy vast discretion in oversight of the financial system, the

Good news: modification of the Volcker Rule will take effect immediately, freeing most institutions with total assets of less than $10 billion from the constraints of the Volcker Rule. The regulators way of expressing this was to say that their institutions “will not enforce the final rule implementing section 13 of the BHC Act in a manner inconsistent with the amendments made by EGRRCPA to section 13 of the BHC Act.”

Less good news: two of the more significant areas of regulatory relief for community banks — the respective increases in thresholds for the small bank holding company policy statement, and the off-ramp regarding mortgages and mortgage-backed securities — will await regulation re-writes.

That said, the statement doesn’t constitute a proverbial “two steps back.” Just, “two steps yet to come.”

Trump signs Crapo Act.
Fed: you’re up next.

On May 24, President Donald Trump signed the Crapo Bill — longer disignation, S-2155, Economic Growth, Regulatory Relief, and Consumer Protection Act — into law…

Bringing at least some relief to the beleaguered small and community bank sector.

We’ll know a bit more when the FDIC releases its quarterly banking profile in June.

But it will take well beyond that for the Federal Reserve, FDIC, and other regulatory institutions to implement many of the new law’s provisions — and longer still for their impact to be felt in the real world.

Here are three sign-posts to watch for:

1. One of the stated purposes of Crapo is to reduce the economic burden of compliance on community banks — which because of their size, must spend disproportionate resources on meeting its fixed costs. Will Crapo’s changes reach the bottom line as we head into 2019 and 2020?

2. Will community banks continue to go out of business, and banking industry concentration continue apace — or will these trends, finally, be reversed?

3. It has been nearly a decade since a new community bank was started. Will we see some new market entrants in 2019? 2020?

Senate takes up regulatory relief: the Crapo bill

Highlights from an analysis of the proposed “Crapo bill” — S. 2155, “Economic Growth, Regulatory Relief, and Consumer Protection Act” — as analyzed by Norbert Michel for Forbes magazine.

If enacted, the Carpo bill (principally authored by Sen. Mike Crapo, an Idaho Republican) would provide “targeted relief” as follows:

Volcker Rule reform in the form of an exemption for banks with assets less than $10 billion.

— an “off-ramp for some banks,” exempting community institutions below the $10 billion threshold from risk-weighted capital requirements.

— safe harbor provisions for repayment rules for small banks that hold mortgages on their books rather than sell them into the mortgage-backed security market.

Michel clearly isn’t pleased that the proposal, in his words, “provides almost no relief” for the big banks. But the fact is, as we’ve ooutlined previously, it’s not the big banks (also beneficiaries of the previous bailout) but small banks that need to have the cross of Dodd-Frank lifted.

More background here on the squeeze on U.S. community banks.