Pub. 3 2015 Issue 3

6 The Community Banker www.mibonline.org W elcome to our Fall 2015 edition of the Community Banker. At the time I write this, this has been one of the most beautiful stretches of fall weather I can recall. There is no substitute for living in Montana at any time of year, but particularly in the late summer and fall. The obvious being stated, I recently returned from Kan- sas City where I attended the annual meeting of the Council of Community Banking Associa- tions. This meeting presents an opportunity for the directors of the various state associations to come together to discuss best practices in the industry and to meet with ICBA officials and our community banking partners. The highlight of this year’s meeting was an informative tour of the Federal Reserve Bank of Kansas City, and the accompanying Money Museum and Truman Coin Collection. As to the latter topic, the Truman Collection features examples of more than 450 coins minted during every presidential ad- ministration. Among the useless but interesting currency trivia learned during the visit is that the motto ‘IN GOD WE TRUST’ was first placed coins due to increased religious sentiment arising during the U.S. Civil War. In addition, in 1956, then President Eisenhower approved a Joint Resolution of the 84th Congress, declaring ‘IN GOD WE TRUST’ the national motto of the United States. The first pa - per currency bearing the motto entered circulation on October 1, 1957. As part of the tour of the K.C. Federal Reserve Bank, we had the opportunity to hear from Esther L. George, the Presi- dent and CEO of the Bank. Ms. George addressed the majority of her remarks to the topic of the growing regulatory burden being placed on traditional community banks. In her remarks, Ms. George recognized that the changes implemented by the Dodd-Frank Act have placed a ‘heavy burden’ on tra- ditional banks, meaning those that do not engage in risky financial services activities. This ‘heavy burden’ was reinforced by a presentation to the CCBA made by Continuity, which posited that the average bank will require an additional 1.23 full time employee equivalents to research and address just the regulatory changes imposed during the third quarter of 2015. Continuity appropriately repre- sented the increased regulatory cost as ‘the new normal’ for community banks. In her remarks, Ms. George recognized what we all know, that the too-large-too-fail insti- tutes are getting even bigger than they were at the time the banking crises of 2008 hit. Yet the capitalization ratios for the too-big-too-fail institutions reflect that these entities are carrying less loss-absorbing capital than community banks. The June 2015 Global Capital Index, which measures the cap- ital ratios for Global Systemati- cally Important Banks (G-SIBs), indicates that for the largest U.S. banking firms, each dollar of their assets is funded with about 94 cent of borrowed money. In contrast, the largest community banks have capital ratios that are between 1.32 and 1.56 times more funding provided by their own ownership than do G-SIB institutions. The take away from those numbers is that commu- nity banks are generally more sound financially and are in a better position to absorb losses than are the too-big-too-fail institutions. Recognizing the reality of disproportionate regulatory compliance burdens between community banks and the G-SIB institutions, Thomas Hoenig, Vice Chairman of the FDIC has advanced a community bank regulatory relief proposal that is not premised on asset size thresholds, but is focused on im- posing regulation based on the complexity of the institution’s financial model. To this end, the FDIC has actually sent a draft bill to Congress that would provide immediate regulatory relief to banks that meet 4 criteria. These banks must: 1. Hold no trading assets or liabilities; 2. Hold no derivative positions other than interest rate and foreign exchange derivatives; 3. Have a total notional val- ue of derivative exposure of less than $3 billion, and 4. Maintain a ratio of Gen- erally Accepted Account- ing Principles tangible equity-to-assets of at least 10%. The FDIC estimates that more than 90% of the roughly 6,400 banks in the U.S. would meet the first three criteria. Further, the FDIC estimates that half the banks would meet all four criteria. As applied to Montana banks, every bank in the State satisfies the first three criteria. If all four criteria are applied, six- ty-six percent of Montana banks would qualify for enhanced regulatory relief. The aforementioned proposal is quite intriguing in that it is in keeping with what the MIB Board has discussed on many occasions—the need to better define for regulatory purposes what is a ‘community bank’ (after all, is a $50 or $75 billion institution truly a community bank?) and to better direct banking regulations to actual operating risk. I am hopeful, after hearing President George’s remarks, that this much-needed discussion is taking place at ‘higher’ levels and that, perhaps, Congress will take note of the just discussed FDIC regulatory relief proposal. This is a propos- al that the Association will keep its eye on. By Jim Brown, MIB Executive Director Executive Director’s Report