Posted on 2nd Feb 2012 @ 9:24 AM

Community banks continue to face numerous challenges, including those posed by the enhanced regulatory regime that has evolved in the wake of the financial crisis, Federal Reserve Board Governor Sarah Bloom Raskin acknowledged in a January 6 speech to the Maryland Bankers Association.

“From my many conversations with you, I have a sense of the challenges that you face regarding the changing regulatory landscape,” Gov. Raskin added. She focused her comments on “two vitally important topics”: how the Federal Reserve’s monetary policy aims to increase the availability of credit to foster economic growth, and how the Fed is tailoring its examination and supervision of community banks to ensure that it is not inadvertently constraining lending.

“One way we at the Federal Reserve are working to ensure that our supervisory program is properly tailored to the wide array of institutions we supervise is to review policies that are under development with an eye toward considering the effect that these policies might have on smaller institutions,” Raskin said.

She noted that a subcommittee of the Board oversees the supervision of community and small regional banking organizations. “Among other things, we consider not only whether specific policies are appropriate for community banks, but also whether these policies could have the effect of reducing the availability of credit to sound borrowers. We are actively involved in providing greater clarity and specificity regarding the applicability of supervisory policies to community banks.”

Timely and Important Topic

In her speech, Raskin said the examination and supervision of community banks is a timely and important topic because community bank lending plays an important role in the ongoing economic recovery, especially by providing credit to small businesses. “And it is absolutely critical,” she added, “that examination and supervision do not produce outcomes that are barriers to small business expansion.”

Although Raskin said she does not think the examination and supervision of lenders is hindering “in any significant way” the ability of creditworthy businesses to access credit, she noted that “it is an issue that we at the Federal Reserve focus on continually.”

One issue regulators must constantly evaluate is the appropriate balance in the allocation of responsibilities between banks and examiners, Raskin said. In addition, we must always think about whether the allocation of responsibilities should be different depending on whether the supervision is of a community bank rather than a large bank, especially one whose failure could significantly disrupt the broader financial system.”

Examiners the Last Line of Defense

Raskin said the risk-management system of a healthy bank can be pictured as a series of concentric circles. “The inner circles consist of the systems and functions that keep the bank healthy and allow it to meet the credit needs of its community while remaining financially sound and compliant with its legal and regulatory obligations. Moving outward, additional circles include processes and checks such as internal audit, executive management committees, risk-management and internal controls, and appropriate governance by the board of directors. The outermost circle is effective supervision.”

“The critical element of this model is that problem identification is first and foremost the responsibility of the bank, while banking supervisors kick the tires of the bank’s risk-management and internal control systems,” Raskin said. “The examiners are, in this sense, a last line of defense and do not substitute for a bank’s own processes for risk identification and mitigation. They are not a guarantee of the bank’s ultimate success or failure.”

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