Citing growing concerns from community bankers about the regulatory burden on their institutions, Federal Reserve Bank of San Francisco President Mary C. Daly today said regulators must strive to find a “middle ground” between protecting the public and giving banks free rein to engage in risky behavior.
During a speech at the Conference for Community Bankers in Phoenix, Daly said that federal regulators issued 157 final rules and programs applying to community banks from 2008 to 2019, or roughly one every 28 days. She said the nation needs a regulatory and supervisory framework that fits the size, complexity and risk of the institutions, “but we were hearing generally that this is not the case.”
“All of this adds up to an environment where community banking has become more challenging, become harder,” she said. “Between increased competition, compressed margins and the growing cost of complying with regulatory frames, it has become more challenging to become or to stay a community bank.”
Daly outlined a set of principles for tailoring bank regulation. The first principle is that tailoring is a continuous process of evaluating and changing the rules when necessary, she said. The second is the cost-benefit ratio for every rule “must pencil out” so regulatory policy and actions do not give a single institution or group of institutions a competitive advantage or disadvantage. The final principle is to consider the cumulative impact of all regulations on banks.
“Rules and regulations are made individually, atomistically, but their effects for banks and for firms are felt as a whole,” she said.
After her remarks, Daly took part in a Q&A with ABA President and CEO Rob Nichols, where she was asked about allowing banks to engage with cryptocurrency and other digital assets more freely. Daly again stressed the need for balance.
“Bankers are really good at assessing risks, and this is an emerging business, so we don’t want to reflexively cut that off from what banks could participate in,” she said. “But we also want to recognize there’s more risk to any emerging industry … My own view is bridling innovation or not allowing banks to participate in at all until it’s completely risk free is not actually how we traditionally do business.”
