Banking

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In recent years, a difficult banking climate has tested relationships between bankers and their regulators. In times like these, it is especially important for regulatory agencies to maintain open communications with the institutions they supervise, according to a panel of regulators at the Federal Reserve Bank of Atlanta's Banking Industry Outlook conference on March 1.

"I don't think the relationship is designed to be easy," said Michael Stevens, senior executive vice president of the Conference of State Bank Supervisors.

In addition to addressing tensions in the regulator-banker dynamic, the panelists discussed:

• the implementation of the Dodd-Frank Act
• the effect of Dodd-Frank on smaller institutions and
• the state of the banking industry generally and community banks in particular.

Good times made the living easy
The banker-regulator relationship was less stressed during the prosperous years preceding the recession and financial crisis, Stevens noted. The few disputes between banks and regulators tended to be minor. More recently, however, the stakes have risen, as many institutions faced potential failure.

In that environment, some bankers believe that voicing concerns about regulation can invite retribution from examiners, noted the session's moderator, the Atlanta Fed's Michael Handelman. That perception among bankers does exist, said the panelists—Stevens; Jim Watkins, deputy director, Division of Risk Management Supervision of the Federal Deposit Insurance Corporation (FDIC); and Jeremy Newell, senior supervisory financial analyst at the Federal Reserve Board of Governors.

Regulators value two-way communication
But the panelists emphasized that their agencies strictly forbid retribution. FDIC staff is always happy to meet with bankers and listen to their input, Watkins said. Stevens also noted that policymakers are willing to listen to the views of the industry regarding the costs and burdens of regulatory compliance.

Fed working on 50 Dodd-Frank rules
Much of the regulatory discussion now centers on rule writing related to provisions in the Dodd-Frank Act. Newell noted that the Fed is developing or has completed 50 rules mandated by the reform legislation of 2010. Those rules include mechanisms to monitor systemic risk, living will provisions for large banks, and the Volcker Rule limiting proprietary trading. Concerning the Volcker Rule, the Fed and other agencies have received some 17,000 public comments, the most about any particular part of the Dodd-Frank Act, Newell said.

Dodd-Frank and community banks
Most of the Dodd-Frank rules do not apply to smaller financial institutions, the panelists said. According to Newell, the Fed is trying to make that clear in each rule it writes.

Watkins told the audience that the FDIC is conducting a yearlong study on the future of community banking. He noted that the dramatic decline in the number of federally insured banks—from 18,033 in 1985 to 7,357 at the end of 2011—has come mainly from dwindling numbers of small institutions. Community banks still make up 94 percent of the country's commercial banks. And small institutions make 40 percent of small business loans even as they hold less than 10 percent of the industry's total assets, Watkins pointed out.

2011 first $100 billion year since 2006
Finally, the FDIC official said that during 2011, for the first time since 2006, U.S. commercial banks as a group reported annual profits exceeding $100 billion. Across the industry, even though significant challenges remain for many banks, asset quality overall has improved, loan loss provisions have declined, and the number of problem banks is slowly falling.