FDIC to examine compliance and risk management at community banks
[Update 1: clarifications added after further discussion with the FDIC] Under a new acting director, the Federal Deposit Insurance Corp. will begin reviewing its risk management and supervision practices of smaller community banks to make them more efficient and possibly less burdensome. Sandra Thompson, the director of risk management supervision at the FDIC, said the agency's new Acting Director Martin Gruenberg is maintaining vigilance on the community banks that have survived the financial crisis in the current period of regulatory turmoil. The FDIC scheduled a national conference early next year on future of community banks. Researchers within the agency are working on a study that traces the development of community banking, their business model changes and concerns with raising capital, keeping up with technology, and maintaining personnel. The FDIC will also host a series of regional roundtables in several cities including Chicago, Dallas and Atlanta. "It's going to be a priority in the coming year. We do want to see this segment regain its standing as a major player in economic growth and job creation," Thompson said at the Walters Kluwer CRA & Fair Lending colloquium in Baltimore Tuesday. "Supervisors have to take a holistic view." Of the 326 bank failures since 2007, 392 have been smaller, community banks. More than 320 have yet to pay back Troubled Asset Relief Program bailouts. But the amount of bad players being weeded out of the system is beginning to decline as the banking industry began to recover this year. So far in 2011, 87 banks were closed totaling $43 billion in assets. At this time in 2010, a total of 143 banks were shuttered holding $92 billion in assets same time. "It looks like this year will be the turnaround year for many banks," Thompson said. While much of the blame for the crisis landed on the largest firms, smaller institutions consistently complain they are being swept up and out of the lending business – especially for mortgages – because of burdensome regulations from the Dodd-Frank Act. But if you peel back the curtain on many of the community banks that have failed since the financial crisis in 2007, a trend of consistent noncompliance with lending rules begins to emerge, according to Michael Briggs, acting senior counsel for the consumer and compliance department at the FDIC. He said there were compliance problems at the heart of many failed banks. "If you were looking into the files of many of the failed banks, not in every case but in many cases, that compliance may have been short changed. Not that the people in charge of compliance at these institutions weren't doing their jobs, but they were not making their cases made and were not given the voice they should have had from their executives," Briggs said shortly before Thompson took made her address. Briggs admitted the new requirements under the Dodd-Frank Act and upcoming oversight from the Consumer Financial Protection Bureau has created a difficult environment for firms that survived the crisis. Martin Bishop, a partner of banking law firm Foley & Lardner, said the 2,300-page Dodd-Frank Act, already many times larger than any Wall Street reform before it, will mean tens of thousands of pages in new regulations. But he said any banker betting on the hope that a Republican presidential win in 2012 would mean an automatic repeal of Dodd-Frank and a dissolving of the CFPB was "swimming against the tide." Nearly every potential Republican nominee for president has stated in debates that they would effort to repeal Dodd-Frank if voted into office, but recent polls continually show voter support for the legislation. Roughly 63% of likely voters believe Congress should allow Dodd-Frank to be fully implemented, according to a poll conducted by the Center for Responsible Lending. And 61% of respondents to a USA Today/Gallup poll wanted increased regulations on banks. "We would like the view the CFPB as providing guidance and supervision to us," Bishop said. "Somewhat paradoxically, because of this mandate to protect consumers, it's looking at things from different perspective than what we're used to." Briggs said despite the volumes of pages and still unclear specifics from the CFPB, noncompliance will not be an option. That doesn't mean banks will have to choose between following the rules and profits, though, he said. Thompson agreed. "Failed compliance practices do not reflect well on the bank balance sheet," she said. "When institutions get in trouble, they usually redirect attention to other parts of the firm. They cut compliance when things get better, and they forget to put them back in place." Write to Jon Prior. Follow him on Twitter @JonAPrior.