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Federal Reserve chief promises regulations that reflect realities of community banking

bank-graphic_rgb» Fed report includes summary of Mississippi bankers’ town conducted by state’s chief banking regulator

Mississippi’s community bankers earlier this month heard a promise from Federal Reserve Chairman Ben Bernanke that the Fed would craft supervisory polices and regulations “appropriately scaled to banks’ size and complexity.”

That’s encouraging news for the state’s small, independent banks which since the 2010 passage of the Dodd-Frank banking reform law have operated under a vastly changed regulatory landscape designed to rein in the nation’s giant banks.

“My colleagues at the Federal Reserve and I understand these concerns,” said Bernanke, who heads the Federal Reserve System and its 12 district banks which regulate state-chartered banks that are members of the Federal Reserve System.

Bernanke’s comments came at the opening of an Oct. 2 conference in St. Louis sponsored by the Federal Reserve and the Conference of State Bank Regulators. The conference served as an introduction of a report titled “Community Banking in the 21st Century – Opportunities, Challenges and Perspectives.”

The report resulted from a realization by Fed officials that even though community banks make up the bulk of the nation’s financial services sector, the agency has been working under a shortage of knowledge about the operating environment of community banks, typically defined as institutions with assets of $10 billion or less. The report includes a summary of comments drawn from town hall meetings with community bankers in 28 states, including Mississippi. Banking Commissioner Jerry Wilson conducted Mississippi’s town hall. Nationwide, about 1,700 community bankers participated.

The town halls, the report said, provided a means to better gauge the future viability of the community banking model and assess how it is adapting to changes in technology, regulation, customer preferences and demographic shifts.

The Mississippi meeting had a singular goal: “How we can save the Mississippi banks,” Commissioner Wilson said. “Not too many years ago I would go to the Mississippi Bankers Association Conference and 150 community banks would be there. It’s down into the low 80s now.”

Screen Shot 2013-10-24 at 8.19.49 AMWhile actual bank failures have been few in Mississippi recent years, the state has had frequent consolidation of banking charters, which Wilson and others familiar with community banking fear may cause a bank to disappear entirely from a community. Or, in some instances, the bank that has acquired a community’s bank may establish a branch in the community that does not offer the same support.

Charter acquisition in recent years became a popular way for a small community bank limited it its growth potential to branch out into other communities, Wilson noted. “Some of these small banks branched into large banks,”

And in the meantime, no bank start-ups have occurred, he said. His department, he said, hasn’t had an application for a new charter since at least 2007. “I don’t know of anybody who is even working on one.”

Wilson said the strain of regulations disproportionate to a bank’s size is particularly acute in Mississippi, where many of the community banks are at the $300 million level and 19 of them are under $100 million.

“The whole thing,” he noted, “is how can we come up with some community banking model that the regulators can live with and serve the community, too?”

While “scale and scope” of banking regulations topped the Mississippi portion of the Fed report, the state’s contribution also noted challenges linked to consumer regulations that encourage standardization of products.

This concern relates specifically to a new Consumer Financial Projection Bureau rule that removes “qualifying” legal protections from balloon loans, a mainstay of rural home loan lending in Mississippi and elsewhere in the county. “That’s going to be the biggest challenge – if low demand results,” Wilson said of the rule that goes into effect Jan. 1.

At The Peoples Bank in Ripley, non-standard home loans have been largely problem-free transactions for decades, said Bobby Martin, who started at the bank 52 years ago and rose to become its current chairman & CEO. “It would be hard for an examiner to find what would be a prime loan” in his part of rural Northeast Mississippi, Martin said.

Martin’s Mississippi colleagues selected him to represent the state at the two-day conference in St. Louis. He also served on a three-banker panel that he described as largely a discussion “of the pros and cons of ‘too-big-to-fail’ and the value of a community bank in your community.”

“The conclusion is that community banks can’t be treated and regulated like the too-big-to-fail banks,” he said.

During the panel discussion, one questioner from the audience asked Martin for his takeaway from the two days of idea sharing among community bankers, regulators and financial sector researchers.

“My answer was: ‘Does our national leadership want to continue to have community banks in America’?”



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