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Small Bank Exemptions

posted by Adam Levitin

Community banks and credit unions are the darlings of Congress in the financial services industry. This is quite understandable--they play an important economic role in their communities and have a much greater civic presence than the big banks. The president of the local community bank is much more likely to be involved in major civic organizations than the Bank of America branch manager. As a result, a parallel regulatory system has developed for community banks and credit unions.  Small banks and CUs (net assets of less than $10 billion) are exempt from CFPB examination and from the Durbin Amendment's regulation of their interchange fees. They're subject to regular FDIC seizure, rather than OLA, and are not subject to SIFI regulation with higher capital requirements. And they would have been exempted from the proposed cramdown legislation.

Generally, this two-tracked treatment (other than being subject to regular FDIC seizure) is more favorable to the smaller financial institutions, which are subject to less regulation than their larger counterparts. This would seem to give small banks a competitive boost vis-a-vis larger banks. One would think that small banks would readily embrace this treatment, but they often have not. They generally opposed cramdown, opposed Durbin, and opposed the creation of the CFPB.

I've been puzzled by the apparent solidarity within the financial services community on regulatory issues where there should be clear divergences of interest between large and small banks. In the past I've urged small banks to embrace the Durbin Amendment, and while some people at small banks understand the benefits of Durbin intellectually, they remain generally opposed. Apparently, I'm not the only one they've been hearing this message from, but industry solidarity apparently trumps duties to shareholders. I wonder if this will start to change as more data comes in about things like the impact of the Durbin Amendment. So far, small banks' debit interchange revenue has held steady, even as large banks' debit interchange revenue has fallen. Will this win any converts from the small banks? Any thoughts from readers on why are the small banks so unwilling to break with the big banks many issues where they receive more favorable treatment? 


Don't bite the hand that feeds (finances) you. It's the big banks - upstream correspondants - that financed the community bank's shareholds' purchase of stock... Maybe not directly but that's the source of the capital funding

I would question whether this is truly a "two track" system. While they are not regulated and examined by the CFPB, the are subject to many of the regulations that are now administered by the CFPB. Keeping up with the changes to Truth in Lending, RESPA, flood insurance, qualified mortgages, remittance rules, Basel, etc. for smaller banks, particularly banks under $500m in assets, can severely cut into their revenue.

So while certain provisions may create a comparative advantage for smaller institutions, I imagine they perceive the benefits with a healthy dose of skepticism.

I agree with you that community banks and credit unions are the darlings of Congress in the financial services industry. But this has been the case for a very long time and this gives small banks and credit unions a competitive boost over larger banking institutions. Great Article. I absolutely agree with the points that you made about this subject.

Plus in exempting rural and small banks, we can help develop commerce better within the areas. What I personally like about small urban banks is that they are less stingy with their clientele.

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