WASHINGTON (Reuters Breakingviews) - Bankers’ long wish list for rule changes starts in the weeds. Executives have plenty of regulations they want a more industry-friendly Federal Reserve to overhaul. But for many the top target is an obscure supervisory letter that has turned often minor infractions into roadblocks for everything from new branches to M&A.
It’s known by its Fed designation, SR 14-2, and was introduced in 2014. The idea behind it was to provide more transparency on how the Fed deals with bank applications to expand their activities, be they mergers, asset purchases, investments or new branches. If a lender has been dinged for certain infractions like money laundering or inadequate risk management, the Fed can deny its request.
More often, a bank pulls its request before it gets that far. About 10 percent of applications were withdrawn between 2009 and 2012. That fell to 6 percent in 2016, but in part because the number of applications decreased by a fifth over the past five years because many executives assume their request will be denied. Banks say SR 14-2 has fast become one of the biggest hurdles to opening new branches – precisely at a time when they are being pressed by regulators about financial inclusion.
Banks that have committed serious misdeeds do, of course, need reining in. But many cases have dragged on for three years or more without a conclusion that a firm did anything wrong. Others concern small amounts of money – less than $200 in one case, people familiar with the matter told Breakingviews. At the very least the Fed needs to speed up its review process, especially for such minor infractions which are highly unlikely to hurt the safety and soundness of the financial system.
The Fed is reviewing rules and supervision put in place after last decade’s financial crisis. So is Congress: a bipartisan group of senators is planning a bill to raise from $50 billion in assets to $250 billion the threshold for a lender to be deemed systemically important, requiring it to hold more capital and submit to more stringent oversight.
Regulators need to exercise caution in rolling back the rules. But it’s smart to examine where they may have gone too far. SR 14-2 looks like unnecessary red tape.
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