Candace Franks: Right-Sizing Bank Regulation To Preserve Our Unique System

Editor’s note: Candace A. Franks, the author of this guest commentary, is commissioner of the Arkansas State Bank Department and chairman of the Conference of State Bank Supervisors, the national professional association of state financial regulators.

The United States’ banking system is uniquely American. It is incredibly diverse, ranging from small community banks to global financial conglomerates. This diversity is not a mistake, but rather a product of our unique dual-banking system. I am concerned, however, that the current regulatory framework fails to supervise these banks differently based on their size, complexity, overall risk profile and risk to the financial system.

In my 35 years as a state regulator, it has become abundantly clear that community banks are essential to the U.S. financial system and economy. Community banks excel at relationship lending, a business model that relies on the bank’s knowledge of its local market, citizens and economic conditions.

This makes them a vital source of credit for small businesses. In fact, community banks play an outsized role in small business lending, holding 46% of the banking industry’s small loans to farms and businesses, while only making up 14% of the industry’s assets.[1] The relationship-lending business model allows community bankers to offer personalized solutions designed to meet the specific financial needs of the borrower.

UNDUE BURDEN
Community banks also operate around the nation, from the largest U.S. cities to the smallest rural markets. Did you know that one out of every five U.S. counties has no physical banking offices except those operated by community banks? Here in Arkansas there are 96 towns that have only one physical banking location. For these towns, the community banking system is the banking system.

Recent regulatory reform efforts by policymakers in Washington, D.C., have rightfully centered on addressing the problems posed by the largest, most systemically important banks. However, there is also widespread concern among regulators, policymakers and the banking industry that many of these new rules pose an undue burden for community banks.

Instead of a one-size-fits-all approach to bank supervision, we need a tailored, flexible approach that is appropriate for banks of all sizes. Regulation must ensure safety and soundness and consumer protection, while still allowing banks to contribute to the economic stability of local communities, the state and the nation. This is what my fellow state regulators and I call “regulatory right-sizing.”

Regulatory right-sizing requires a process for determining how safety and soundness and consumer protection requirements can better reflect the community bank business model. To start this process, policymakers and regulators need to know which banks should be the focus of our right-sizing efforts. A consensus definition of community banking has proven difficult to come by, with policymakers ultimately relying upon simple asset thresholds to determine what is or is not a community bank.

OTHER FACTORS
However, my fellow state bank regulators and I have found that community banks cannot be defined by simple line-drawing based solely on asset thresholds. While asset size is relevant, there are other factors. Factors like market areas, funding sources and relationship lending are characteristics that must be considered.

Such an approach to defining community banks would provide the necessary foundation for a more appropriate regulatory framework for community banks. This definitional approach could be used as a basis for a broad range of regulatory right-sizing initiatives. With a new process in place to identify community banks, policymakers can move forward in a purposeful manner, designing statutes and regulations that are consistent with and foster a diverse economy and financial system.

My hope is such an approach will move us closer to a right-sized regulatory framework. There are significant operational and strategic differences among our nation’s banks. These differences reflect the admirable diversity of our financial system, and we must do our part to preserve our diverse and unique dual-banking system.