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From Banking and Finance Law Daily, August 27, 2015

FAQs detail Hoenig’s regulatory relief recommendations

By J. Preston Carter, J.D., LL.M.

The Federal Deposit Insurance Corporation has published a list of frequently asked questions on recommendations by Vice Chairman Hoenig for regulatory relief for traditional banks. In remarks on August 4 at the Interagency Outreach Meeting on The Economic Growth and Regulatory Paperwork Reduction Act in Kansas City, Hoenig said he believes that regulations and supervisory requirements that burden community banks should not be the same as those that apply to complex institutions that do both trading and traditional commercial banking (see Banking and Finance Law Daily, Aug. 5, 2015).

“The public needs commercial banks to provide credit to small businesses and consumers across the country without the burdensome constraints of misdirected regulation,” Hoenig said at the meeting. He added that it is difficult to find agreement on what exactly defines a traditional bank and what specific regulatory changes would give such banks meaningful relief without compromising bank soundness or consumer protections.

The FAQs address this concern by asking, first, what criteria Hoenig recommends for banks to be eligible for regulatory relief. The answer is that relief would be offered to banks that emphasize the core commercial banking model and have strong equity capital, defined specifically as banks that:

  • hold no trading assets or liabilities;

  • hold no derivative positions other than interest-rate and foreign-exchange derivatives;

  • have a total notional value of all their derivatives exposures—including cleared and noncleared derivatives—that is less than $3 billion; and

  • maintain a ratio of Generally Accepted Accounting Principles equity-to-assets of at least 10 percent.

The FAQs explain that a bank of any size that meets the criteria would be eligible for regulatory relief. Also, more than 90 percent of the approximately 6,400 commercial banks in the United States meet the first three criteria above, and two-thirds of them meet the fourth, regarding capital.

The following specific relief is recommended by Hoenig, as listed in the FAQs:

  • exempting these more traditional banks from all Basel capital standards and associated risk-weighted asset calculations;

  • exempting these banks from several entire schedules on the call report;

  • allowing for greater examiner discretion, and eliminating requirements to refer "all possible or apparent fair lending violations to Justice" if judged to be minimal or inadvertent;

  • establishing further criteria that would exempt eligible banks from appraisal requirements;

  • exempting banks, if applicable, from stress testing requirements;

  • where judged appropriate, allowing for an 18-month examination cycle as opposed to the current required 12-month cycle for traditional banks; and

  • characterizing mortgages made by these traditional banks that remain in the banks' portfolio as being qualified mortgage loans for purposes of the Dodd-Frank Act.

Finally, the FAQs: explain why Hoenig recommends legislation, rather than regulations, to provide the relief; specify what capital requirement exemptions would cover; and address whether available-for-sale securities would be counted as trading assets in the capital calculation, among other topics.

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