Federal Reserve Governor Daniel Tarullo said Thursday regulators should consider different approaches in supervising banks and non-bank firms of various sizes and business models in the post-crisis banking sector. He also said individual large institutions might necessitate differing regulatory standards.
Speaking at a banking conference at the Federal Reserve Bank of Chicago, Tarullo said the current regulations have caused unnecessary costs for community banks but failed to oversee firms outside the traditional banking system.
“The principles informing regulation were basically the same whether the institution was a community bank or a holding company with a $1 trillion balance sheet whose failure might shake the entire financial system,”Tarullo said. “Lehman Brothers, whose failure did seriously shake the financial system, was not subject to even the micro prudential standards applicable to bank holding companies.” Major non-banks conducting financial business should be regulated, Tarullo said.
Tarullo said community banks should be treated differently as they are less likely to trigger systematic problems than the country’s largest banks. Community banks, usually defined as banks with less than $10 billion in assets, hold less than 20 percent of the total assets of commercial banks, Tarullo said.
However, he also recognized the “trickle down” impact, where smaller banks are expected to keep pace with stricter regulations designed for larger institutions.
“All these rules are particularly onerous for community banks,”said Terry Jorde, senior executive vice president and chief of staff of Independent Community of Bankers of America. “Regulatory and paperwork requirements have caused disproportionately burden for community banks because these institutions lack the staff and resources that large institutions can develop to compliance.”
While trying to avoid excessive regulations on small banks, regulators including Tarullo favored more stringent supervision of large institutions.
Separately in the conference, it was noted that shadow banking, such as hedge funds that function as a bank but are widely unregulated, has caught regulators’ attention due its significant buildup.
According to a report by the Financial Stability Board in 2013, shadow banking assets made up 174 percent of the banking system in the U.S. at the end of 2012, compared with 52 percent of the global level. If the shadow banking sector collapses, many people believe it may exert a domino effect on the overall financial system.
“Right now we regulate finance by the framework that is the charter—‘Are you a bank?’”said Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc. However, as shadow institutions entered the market, the business has changed, but regulations are lagging behind, she warned.
“I don’t know how much time our policy makers have,”Petrou said, pointing out the regulators have urgent sets of issues to consider as the financial system is evolving.