Time to Tailor our Regulatory Regime

Since the first of the year, I have written and spoken frequently about what I see as a change in attitude toward the banking business, particularly toward the community banking sector, by both the prudential regulators and Congress. Since progress moves slowly in Washington, D.C., I am certain that many bankers question my optimism. Recently, however, a couple of positive developments took place that support my belief that the tide has begun to turn.

Last month Republican Rep. Scott Tipton from Colorado introduced the TAILOR Act* bill. This common sense bill simply states that “the Federal financial institutions regulatory agencies shall (1) take into consideration the risk profile and business models of the various institutions or classes of institutions subject to the regulatory action; (2) determine the necessity, appropriateness, and impact of applying such regulatory action to such institutions or classes of institutions; and (3) tailor such regulatory action applicable to such institutions or class of institutions in a manner that limits the regulatory compliance impact, cost, liability risk, and other burdens as is appropriate for the risk profile and business model involved.”

Couple that bill with a speech titled “Dodd-Frank at Five; Looking Back and Looking Ahead,” delivered last week by Federal Reserve Gov. Lael Brainard before the Bipartisan Policy Center. Brainard said: “One thing we can all agree (on) is that we have a more resilient and dynamic financial system as a result of having a very large number of banking organizations, in different size classes, pursuing different business models. Indeed, that diversity is one of the hallmarks of the U.S. system, which distinguishes it from many other advanced economies. Accordingly, we want to make sure that our regulatory framework supports banks in the middle of the size spectrum, as well as community banks, and the customers they serve. Thus, by the same rationale that argues for the greater stringency of the standards associated with greater systemic risk at the top end of the scale and complexity spectrum, we will carefully examine opportunities to ease burdens at the lower end of the spectrum. And we will want to continue to refine our regulatory standards, using the authorities under Dodd-Frank to make sure they are tailored to be commensurate with the risk to the system.”

My interpretation is that Gov. Brainard is indicating that tailoring regulation to the size and complexity of the individual financial institution is something that the regulatory community must embrace to assure that the localized financial structure ‒ unique to the United States, the most successful and powerful economy ever on earth ‒ will be protected for future generations. At the same time, Congressman Tipton’s bill provides a legislative remedy if the regulators do not tailor regulation to the size and complexity of the individual institutions or classes of institutions.

The banking industry must remain vigilant in its efforts to continue to press both regulators and Congress for common sense relief from the oppressive regulatory burden that has been unleashed by the Dodd-Frank Act. I assure you that the Indiana Bankers Association, along with our affiliate state associations, the American Bankers Association and the Independent Community Bankers of America, will continue to pursue a tailored regulatory regime.

* Taking Account of Institutions with Low Operation Risk Act

-S. Joe DeHaven

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