New Rulings and Proposals: How They Impact Community Banks

By Diane Sweeney

This past spring, both the Federal Reserve Board and the Consumer Financial Protection Bureau announced changes and rulings that will have significant impact on the banking industry. Below are summaries of both and how banks and associations are responding.

Proposed Changes to Capital Requirements

In July, the Federal Reserve Board announced a proposal to revise the measurement of risk-weighted assets and the definition of regulatory capital for banking organizations with at least $100 billion in total consolidated assets. The agencies explicitly said the proposal is for banks identified as “large banks” and would not apply to community banks.

The regulatory agencies are proposing this change to increase the strength and resilience of the banking system. The proposal would modify large bank capital requirements to better reflect underlying risks and increase the consistency of how banks measure their risks.

An “expanded risk-based approach” is introduced in the proposal to standardize aspects of the capital framework. These standards are more conservative than currently used internal risk measurement models. This approach would utilize a broad set of risk weights to better capture the risk profile of a bank’s credit exposure. The standardized method calculates total risk weighted assets using credit risk, equity risk, operational risk, market risk and credit valuation adjustment (CVA) risk. 

As these changes will not affect community banks, with the implementation of these regulations, if passed, there could be an opportunity for PACB community bankers to offer more competitive rates compared to mega banks. The proposal is expected to be finalized after the public comment period ends in November 2023 and the regulations would go into effect in a three-year transition period that starts July 1, 2025.

ICBA has called upon the agencies to be sure the rules will not affect community bankers as stated in the proposal. Even so, bankers should be sensitive to the changes in the value of assets and consistently assess their risk profile so as to align with current regulations and requirements.

Rule 1071 Challenged

In March, The Consumer Financial Protection Bureau (CFPB) issued its final rule to implement Section 1071 of the Dodd-Frank Act. Section 1071 amended the Equal Credit Opportunity Act to require financial institutions to collect and report certain data in connection with credit applications made by small businesses, including women-or minority-owned small businesses. 

The rule is intended to increase transparency in small business lending, promote economic development and combat unlawful discrimination. Under the required small business lending rule, lenders will collect and report information about the small business credit applications they receive, including geographic and demographic data, lending decisions and the price of credit. 

The final rule was effective June 28, 2022, but the earliest date on the tiered compliance date schedules is Oct. 1, 2024.

That date would be for financial institutions that originate the most covered credit transactions, with later compliance dates for institutions with lower transaction volumes.

A lawsuit has been filed by the Texas Bankers Association (TBA), the American Bankers Association (ABA), Rio Bank and the International Bankers Association of Texas seeking a motion for preliminary injunction challenging the validity of the CFPB’s rule. ICBA has joined this lawsuit. 

The lawsuit’s three main arguments are:

  1. The CFPB’s funding structure is unconstitutional.
  2. The CFPB dramatically increased the number of data points
  3. The CFPB failed to account for allegedly high compliance costs to lenders.

At implementation this rule as currently written will greatly affect community bankers; we will continue to support those arguing its validity and keep our members updated on the legal proceedings.



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