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60 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T GOVERNMENT 'Simpler' Rules Urged for Small Banks A trio of federal agencies recommended less strict capital rules for community institutions. T he Federal Reserve, Fed- eral Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) in late August signed off on a proposal to hold on imple - menting stricter capital rules for small, community banks. According to the proposal, banks with less than $250 billion in assets and less than $10 billion in foreign exposure may continue to comply with the simpler temporary capital rules, while large banks will face stricter capital requirements beginning on January 1, 2018. FDIC Vice Chairman Thomas Hoenig has urged regulators to continue to peel back the regulation placed on small banks, pushing for less complicated rules. "Community banks engaging in traditional activities deserve meaningful relief from risk-based capital rules," Hoenig said in a statement. According to Hoenig, community banking activities are less complex, and small banks have higher levels of tangible equity, which puts them at a competitive disadvantage against large banks under the same rules. Regulators had previously announced that they will launch an effort to make regulation simpler for small, community banks, but following the mandatory 10-year review of existing rules, regulators found simplifying capital rules for community banks to be a priority, though no timeframe has been released yet. "While this step to freeze the phase-in of Basel rules is important, our actions do not go far enough in providing the permanent and comprehensive relief that community banks so badly need and that I have long been advocating," Hoenig said. Small banks will be able to rely on temporary rules regarding capital for their financial products, including mortgage servicing assets, certain deferred tax assets, and investments in the capital instruments of unconsolidated financial institutions. According to the FDIC, approximately 90 percent of U.S. commercial banks would fit the criteria of a "traditional bank," while two- thirds have capital levels that would allow for the rolling back of restrictions. Then, Now, and Later Janet Yellen surveyed the finance landscape in her speech at the Fed's annual conference, and safety surfaced as a major theme. T oday's financial system is a safer one, thanks, in large part, to the Great Recession—as well as the reforms that fol - lowed it. Janet Yellen, Chair of the Federal Reserve, said as much during her address at the Fed's annual conference in Jack - son Hole, Wyoming, in August. In her speech, Yellen looked back at the crisis—now nearly a decade in our rearview—offering insight into the lessons learned, the reforms made, and the impact both of these have on the financial markets of today. "Because of the reforms that strengthened our financial system, and with support from monetary and other policies, credit is available on good terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today's strong economy," Yellen said. "At the same time, reforms have boosted the resilience of the financial system. Banks are safer. The risk of runs owing to maturity transformation is reduced. Efforts to enhance the resolvability of systemic firms have promoted market discipline and reduced the problem of too-big-to-fail. And a system is in place to more effectively monitor and address risks that arise outside the regulatory perimeter." According to Yellen, some of the biggest, and arguably most impactful, reforms made following the crisis were those that "increased the loss-absorbing capacity of global banks." "Preeminent among these domestic and global efforts have been steps to increase the loss-absorbing capacity of banks, regulations to limit both maturity transformation in short-term funding markets and liquidity mismatches within banks, and new authorities to facilitate the resolution of large financial institutions and to subject systemically important firms to more stringent prudential regulation," she said. Still, while Yellen says post- crisis reforms have made the American financial system "substantially safer," there are still challenges to be addressed. "There is more work to do," she told the audience. "The balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth. But many reforms have been implemented only fairly recently, markets continue to adjust, and research remains limited. The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system." Yellen's term as Fed Chair will conclude on February 1. President Trump has not yet indicated whether he intends to reappoint her or not. "Community banks engaging in traditional activities deserve meaningful relief from risk-based capital rules." —Thomas Hoenig, Vice Chairman, FDIC