Statement of John M. Reich Vice Chairman Federal Deposit Insurance
Corporation on the Impact of Regulatory Burden on America's Community-Based
Banks Before the Subcommittee on Financial Institutions and Consumer Credit of
the Committee on Financial Services U.S. House of Representatives
May 12, 2004 - 10:00 AM
2128 Rayburn House Office Building
Mr. Chairman, Ranking Member Sanders, and Members of the Subcommittee, I very
much appreciate this opportunity to testify on the impact of regulatory burden on
community banks. As a former community banker with 23 years of experience in the
industry, and as the current leader of an inter-agency effort to reduce regulatory burden,
I have a strong commitment to eliminate unnecessary burden while maintaining the
safety and soundness of the industry and protecting important consumer rights.
After describing the vital importance of community banks, my testimony will highlight the
burden imposed by banking regulations and the impact those regulations have on
community banks. Next, I will outline our efforts to review our regulations and address,
on an inter-agency basis, some of the existing regulatory burden, as well as the actions
the Federal Deposit Insurance Corporation is taking unilaterally to reduce burdens
imposed by our own regulations and operating procedures. Finally, I will discuss the
need for legislative action to reduce burden.
The Role of Community Banks
As Chairman Bachus noted in a recently-introduced House Resolution, community
banks play a vital role in the economic wellbeing of countless individuals,
neighborhoods, businesses and organizations throughout our country, often serving as
the lifeblood of their communities. The definition of a community bank is somewhat fluid,
but generally it is viewed as a financial institution with assets up to $1 billion that is
associated closely with the community where it is located. I will use that as a working
definition for community banks overall today, while paying special attention to small
community banks (those with less than $100 million in assets).
These banks are found in all communities—urban, suburban, rural and small towns.
Whether a minority-owned urban neighborhood institution or an agricultural bank,
community banks have several things in common. They are a major source of local
credit. Data from June 2003 show that the overwhelming share of commercial loans at
small community banks were made to small businesses. In addition, the data indicate
that commercial banks with assets between $100 million and $1 billion account for a
large share of all small business and small farm loans.
Community banks are the bankers for municipalities and school districts. Community
bankers generally know personally many small business owners and establish lending
relationships with these individuals and their businesses. These small businesses, in
turn, provide the majority of new jobs in our economy. Small businesses with fewer than
Corporation on the Impact of Regulatory Burden on America's Community-Based
Banks Before the Subcommittee on Financial Institutions and Consumer Credit of
the Committee on Financial Services U.S. House of Representatives
May 12, 2004 - 10:00 AM
2128 Rayburn House Office Building
Mr. Chairman, Ranking Member Sanders, and Members of the Subcommittee, I very
much appreciate this opportunity to testify on the impact of regulatory burden on
community banks. As a former community banker with 23 years of experience in the
industry, and as the current leader of an inter-agency effort to reduce regulatory burden,
I have a strong commitment to eliminate unnecessary burden while maintaining the
safety and soundness of the industry and protecting important consumer rights.
After describing the vital importance of community banks, my testimony will highlight the
burden imposed by banking regulations and the impact those regulations have on
community banks. Next, I will outline our efforts to review our regulations and address,
on an inter-agency basis, some of the existing regulatory burden, as well as the actions
the Federal Deposit Insurance Corporation is taking unilaterally to reduce burdens
imposed by our own regulations and operating procedures. Finally, I will discuss the
need for legislative action to reduce burden.
The Role of Community Banks
As Chairman Bachus noted in a recently-introduced House Resolution, community
banks play a vital role in the economic wellbeing of countless individuals,
neighborhoods, businesses and organizations throughout our country, often serving as
the lifeblood of their communities. The definition of a community bank is somewhat fluid,
but generally it is viewed as a financial institution with assets up to $1 billion that is
associated closely with the community where it is located. I will use that as a working
definition for community banks overall today, while paying special attention to small
community banks (those with less than $100 million in assets).
These banks are found in all communities—urban, suburban, rural and small towns.
Whether a minority-owned urban neighborhood institution or an agricultural bank,
community banks have several things in common. They are a major source of local
credit. Data from June 2003 show that the overwhelming share of commercial loans at
small community banks were made to small businesses. In addition, the data indicate
that commercial banks with assets between $100 million and $1 billion account for a
large share of all small business and small farm loans.
Community banks are the bankers for municipalities and school districts. Community
bankers generally know personally many small business owners and establish lending
relationships with these individuals and their businesses. These small businesses, in
turn, provide the majority of new jobs in our economy. Small businesses with fewer than
500 employees account for approximately three-quarters of all new jobs created every
year in this country.
More importantly, these banks also are an interdependent part of the entire local
community. The close relationship of the bank and the local community has many
tangible and intangible benefits. Recently, a community banker who is also a member of
the FDIC's Advisory Committee spoke about her small bank and its relationship to the
community. Terry Jorde is President and CEO of CountryBank USA, a $37 million
community bank with two offices in Cando and Devils Lake, North Dakota. Here's what
Terry Jorde had to say about the role of her bank and her bank's commitment to their
community:
o Local banks that fund local businesses are particularly attuned to the needs of
their communities and are uniquely equipped to facilitate the local economic
development process, which can be time-consuming and resource-intensive.
Community bankers provide tremendous leadership in their communities, which
is critical to economic development and community revitalization. For example, in
a recent week I spent six hours in a hospital board meeting, four hours in an
economic development corporation meeting, and another four hours working with
other local community bankers to develop a financial incentive package for a
potential new business in our community. You could argue that this is not an
efficient and cost-effective way to spend my time, but like most community
banks, the very survival of my bank depends on the economic vitality of my
community. I have a very real incentive to work to assure the success of Cando
and Devils Lake.
The loss of community institutions can result in losses of civic leadership,
charitable contributions, and local investment in school and other municipal debt.
The Proliferation of Regulations and Their Impact on Community Banks
Regulatory burden is an issue for all banks. Since enactment of the Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989, the banking and
thrift regulatory agencies have promulgated a total of 801 final rules (see Chart of 801
Final Rules). There were good and sufficient reasons for many of these rules and, in
fact, some were actually sought by the industry. However, 801 regulatory changes over
a 15 year period is certainly a lot for banks to digest, particularly smaller community
banks with limited staff. Rule changes can be quite costly since implementation often
requires computers to be reprogrammed, staff retrained, manuals updated and new
forms produced. Even if some of the rules do not apply to a particular institution,
someone has to at least read the rules and make that determination.
There are no definitive studies of the total cost of regulation. However, a survey of the
evidence by a Federal Reserve Board economist in 1998 found that total regulatory
costs account for 12 to 13 percent of noninterest expense, or about $36 billion in 2003.
For the banking industry, every change in reporting requirements or modification of
business practices involves new capital expenditures and increased human resources,
computer programming costs and vendor expenses. The same research indicates that
year in this country.
More importantly, these banks also are an interdependent part of the entire local
community. The close relationship of the bank and the local community has many
tangible and intangible benefits. Recently, a community banker who is also a member of
the FDIC's Advisory Committee spoke about her small bank and its relationship to the
community. Terry Jorde is President and CEO of CountryBank USA, a $37 million
community bank with two offices in Cando and Devils Lake, North Dakota. Here's what
Terry Jorde had to say about the role of her bank and her bank's commitment to their
community:
o Local banks that fund local businesses are particularly attuned to the needs of
their communities and are uniquely equipped to facilitate the local economic
development process, which can be time-consuming and resource-intensive.
Community bankers provide tremendous leadership in their communities, which
is critical to economic development and community revitalization. For example, in
a recent week I spent six hours in a hospital board meeting, four hours in an
economic development corporation meeting, and another four hours working with
other local community bankers to develop a financial incentive package for a
potential new business in our community. You could argue that this is not an
efficient and cost-effective way to spend my time, but like most community
banks, the very survival of my bank depends on the economic vitality of my
community. I have a very real incentive to work to assure the success of Cando
and Devils Lake.
The loss of community institutions can result in losses of civic leadership,
charitable contributions, and local investment in school and other municipal debt.
The Proliferation of Regulations and Their Impact on Community Banks
Regulatory burden is an issue for all banks. Since enactment of the Financial
Institutions Reform, Recovery and Enforcement Act (FIRREA) in 1989, the banking and
thrift regulatory agencies have promulgated a total of 801 final rules (see Chart of 801
Final Rules). There were good and sufficient reasons for many of these rules and, in
fact, some were actually sought by the industry. However, 801 regulatory changes over
a 15 year period is certainly a lot for banks to digest, particularly smaller community
banks with limited staff. Rule changes can be quite costly since implementation often
requires computers to be reprogrammed, staff retrained, manuals updated and new
forms produced. Even if some of the rules do not apply to a particular institution,
someone has to at least read the rules and make that determination.
There are no definitive studies of the total cost of regulation. However, a survey of the
evidence by a Federal Reserve Board economist in 1998 found that total regulatory
costs account for 12 to 13 percent of noninterest expense, or about $36 billion in 2003.
For the banking industry, every change in reporting requirements or modification of
business practices involves new capital expenditures and increased human resources,
computer programming costs and vendor expenses. The same research indicates that