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Banking

Fed Chair Yellen: Fed Tailoring Actions for Community Banks

Janet Yellen Speech

The Federal Reserve is carefully considering the impact on community banks of any new regulations or other supervisory actions, Fed Chair Janet Yellen said in a May 1 speech.

In remarks at the Community Bankers of America 2014 Washington Policy Summit, the chair emphasized that the Fed is doing all it can to ensure that measures designed for large financial institutions will not place undue burdens on smaller banks.

For instance, the stress tests and capital requirements enacted since the financial crisis do not apply to community banks, she pointed out.

In particular, Yellen discussed the Fed’s efforts to address concerns about financial institutions perceived as too big to fail. To that end, the Fed is monitoring the reliance of some large banking firms on potentially volatile short-term wholesale funding.

“While it would be premature to indicate whether or how we might address these vulnerabilities, I can say that few, if any, community banks are reliant on levels of short-term wholesale funding that could raise concerns about systemic risk, and regulators would carefully consider the ramifications of any action, including the effect on community banks,” Yellen said.

Cultivating a thorough understanding of community banking
As part of its analysis of how supervisory actions affect community banks, the Fed is committed to understanding small institutions and their challenges, Yellen noted. The Fed is doing this through research and outreach. For example, research staff across the Fed System who were independently studying community banking are now collaborating. As a result of that work, the Board of Governors and the Conference of State Bank Supervisors held a research and policy conference on community banking. The October 2013 event at the Federal Reserve Bank of St. Louis, Yellen said, was one of select few research conferences to focus on community banks.

The two agencies are planning another community banking conference in September.

Outreach efforts are multifaceted
Along with research, the Fed deepens its understanding of community banks through outreach. Yellen noted that in addition to participating in forums such as the one where she was speaking, the Board of Governors meets twice a year with its advisory council of representatives from small financial institutions. Further, the Fed’s regulatory division has been using various platforms to better explain its supervisory expectations for community banks.

Through this outreach, one theme has clearly emerged: concern about regulatory burden. The Fed understands that concern and is taking a disciplined approach to judging which supervisory policies should apply to community banking companies, the chair said.

“The Federal Reserve will continue to promote a stronger and more resilient financial system,” Yellen said, “while carefully considering the effects of our actions on community banks and tailoring supervision appropriately.”

May 20, 2014