Community Bank-Focused Regulation Review

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chap. I

[Docket No. 99-05]

Community Bank-Focused Regulation Review

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is

undertaking a review of its regulations with a view toward identifying

rules that may impose disproportionate or unnecessary burden on

community banks. This advance notice of proposed rulemaking (ANPR)

identifies several parts of the OCC's regulations that are already

under review, requests comment on changes that could be made to these

regulations, and solicits suggestions for improvements in other areas

that would be helpful to community banks. The intended effect of this

action is to identify areas where the OCC could reduce unnecessary

burden on community banks without impairing their safety and soundness.

DATES: Comments must be received by July 12, 1999.

ADDRESSES: Please direct your comments to: Docket No. 99-05,

Communications Division, Third Floor, Office of the Comptroller of the

Currency, 250 E Street, SW, Washington, DC, 20219. You can inspect and

photocopy all comments received at that address. In addition, you may

send comments by facsimile transmission to FAX number (202) 874-5274,

or by electronic mail to [email protected]

FOR FURTHER INFORMATION CONTACT:

Stuart Feldstein, Assistant Director, or Heidi Thomas, Senior Attorney,

Legislative and Regulatory Activities, at (202) 874-5090.

SUPPLEMENTARY INFORMATION:

Background

The OCC supervises over 2,400 national banks that vary widely in

size, business strategy, complexity, and

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geographic diversity. The OCC has a strong commitment to ensure that

our regulations encourage, rather than impede, national banks'

efficiency and competitiveness, consistent with safety and soundness.

Toward that end, we continually reevaluate our rules in order to

identify and eliminate requirements that impose burdens on banks that

are not necessary to maintain safety and soundness, promote fair access

to financial services for consumers, or accomplish the OCC's other

statutory responsibilities.

In 1996, the OCC completed a three-year, comprehensive effort to

review and revise all of its regulations. The results of this effort,

which was called the Regulation Review Program (Program), were

positive. Most of the bankers, trade group representatives, banking

lawyers, and consumer representatives whom the OCC asked about the

effects of the Program thought that, on balance, it had been a success.

While some of the regulatory changes made pursuant to the Program were

designed to benefit community banks, the Program did not have the

community bank charter as a particular focus.

The OCC recognizes that community banks operate with more limited

resources than larger institutions and may present a different risk

profile. For example, many community banks have more direct ``hands-

on'' oversight by senior management and smaller spans of operations and

controls such that less complex risk-management or compliance systems

may be appropriate. Differences between community banks and larger

banks in operational structure and focus may result in inefficient or

uneven application of regulatory requirements. Therefore, we believe

that it is appropriate to take a fresh look at our regulations with the

community bank perspective in mind.1

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\1\ The OCC already recognizes and incorporates into its

supervisory approach the distinctions between large banks and

community banks. The OCC has, for example, developed approaches to

examination and supervision that are appropriate to each charter

type. See, e.g., Comptroller's Handbook, Community Bank Supervision

(August 1998), Large Bank Supervision (July 1998). See also id.,

Community Bank Fiduciary Activities Supervision (December 1998).

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Specifically, the OCC is considering further changes to our

regulations that would take into account the impact the rules have on

community banks' resources, as well as other factors that bear on

community banks' operations. For example, community banks typically

have smaller, less specialized staffs than larger banks, so the burden

of complying with complex regulations is proportionately higher. The

purpose of our community bank-focused regulation review is to eliminate

or modify regulatory requirements that impose unnecessary burden. In

addition, we are seeking to identify regulations as to which it may be

appropriate to develop alternative, differential regulatory approaches

that will achieve the OCC's goals while minimizing burden on community

banks.

This advance notice describes four areas of regulation that the OCC

is already reviewing. In those areas, commenters are invited to make

specific suggestions for change. Depending on the results of the OCC's

own review and the suggestions made by commenters, we will then

consider proposing specific revisions to our rules for comment. In

addition, commenters on this advance notice are invited to suggest

other regulations that could be modified in ways helpful to community

banks.

A few of the OCC's regulations distinguish among banks based on

asset-size categories and apply different requirements to smaller

banks. For example, 12 CFR part 25, the regulation implementing the

Community Reinvestment Act (CRA), provides for alternative means of

compliance for banks with less than $250 million in assets. The OCC

does not have a standard, generally applicable definition of

``community bank,'' however. We invite comment on whether to adopt such

a definition for purposes of this regulation review. If so, should the

definition be based primarily on asset size, and what should the asset

threshold be? Should the OCC consider factors other than asset size,

such as whether the bank is the sole provider of banking services in a

community, regardless of asset size?

Areas Currently Under Review

Part 5--Corporate Activities and Transactions

Community banks, like larger national banks, routinely seek OCC

approval for different types of corporate transactions. Recent

amendments to the OCC's operating subsidiary rule reduced burden by

grouping procedures for OCC approval of operating subsidiary activities

into different categories based upon the novelty of the activity and

level of risk it presents. The required approval procedures vary

depending upon the group in which the activity is placed. For example,

qualifying national banks need only file a simple after-the-fact notice

for certain, so-called ``plain vanilla'' activities (e.g., providing

accounting, data processing, and other business services for the bank

or its affiliates). A 30-day review under an expedited filing procedure

may be available for more complex operating subsidiary activities. See

12 CFR 5.34(e).

We invite comment on whether and how we could improve the current

rule to further reduce application burden for community banks seeking

to engage in certain routine bank-permissible activities. Specifically:

(1) Should the OCC expand the list of activities eligible for

after-the-fact notice or expedited filing to include more activities

that do not present significant safety and soundness concerns?

(2) What types of activities should the OCC include in such an

expanded list?

Banks that have experience with the OCC's applications process are

also invited to make suggestions about how that process could be

streamlined or improved for community banks. For example, could the OCC

modify the process to reduce the need for, and therefore the costs of,

community bank reliance on outside expertise to help them comply with

filing requirements?

Branching is an area in which community banks are especially

active. In 1998, national banks with assets of less than $250 million

filed approximately 358 branching applications. National banks with

assets of between $250 million and $1 billion filed 213 branching

applications. OCC intrastate branch application procedures generally

require a 30-day public comment period and a decision no later than 15

days after the close of the public comment period or 45 days after the

filing, whichever is later, for applications qualifying for expedited

processing, and no later than 30 days after the close of the comment

period for applications subject to standard processing. (The comment

period for applications to engage in a short-distance branch relocation

is 15 days.) OCC rules also require an applicant to publish notice of

its filing in a newspaper of general circulation in the community in

which the applicant proposes to engage in business.

We are requesting comment on whether there are alternative time

frames or methods of providing public notice that would reduce burden

for community banks while preserving the ability of the public to

provide meaningful comment pursuant to the CRA or otherwise. For

example:

(1) Would posting a conspicuous notice at the main office and all

existing branches of the bank in lieu of newspaper publication reduce

unnecessary burden but still provide adequately for public

participation?

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(2) Are there other reasonable regulatory alternatives that would

be less burdensome for community banks but that are consistent with

statutory requirements and the OCC's supervisory goals?

Part 32--Lending limits

Federal law (12 U.S.C. 84) limits the amount of loans and

extensions of credit a national bank can make to any one borrower to 15

percent of a national bank's unimpaired capital and surplus. A bank may

lend an additional 10 percent if the credit is secured by readily

marketable collateral. Section 84 also provides exceptions to these

limits for various types of loans or extensions of credit, such as

loans secured by certain obligations of the United States or fully

guaranteed by the United States, loans secured by a segregated deposit

account, and loans arising from the discount of certain types of

commercial paper. The OCC is authorized to issue rules to carry out the

purposes of Section 84 and to establish limits or requirements other

than those specified in this section for particular classes or

categories of loans or extensions of credit. The OCC's rule

implementing section 84 is set forth at 12 CFR part 32.

Community banks in a number of states have represented to the OCC

that disparities in the lending limits applicable to national banks

impair their ability to provide effective and competitively priced

services in many cases. We are interested in obtaining further

information about the extent to which these limits may constrain

community banks from prudently extending credit, especially as compared

with other financial services providers in the markets in which they

compete. Commenters are invited to provide specific information about

such disparities in particular states, and to address the following

questions:

(1) Does the national bank lending limit create competitive

disadvantages for community banks?

(2) Are community banks operating under national charters losing

significant business to competitors, as a result of the constraints

imposed by the national bank lending limits? If so, which types of

lending are most heavily affected?

(3) Are there factors in addition to the lending limits that could

be contributing to this business loss?

Because the lending limit promotes diversification of credit risk,

which is fundamental to the safe and sound operation of banks, the OCC

must undertake any revisions to the national bank lending limit rules

with great care. Commenters who recommend changes to the OCC's lending

limit rule therefore are asked to:

(1) Identify specific categories of loans or borrowers that might

be addressed;

(2) Identify prudential conditions that the OCC might impose, to

ensure that any change is implemented consistent with safety and

soundness; and

(3) Discuss whether any changes to the lending limits should

include safeguards, such as collateralization or margin requirements,

similar to those imposed by some states with lending limits that exceed

those in 12 CFR part 32.

Commenters are also invited to evaluate the effect of the lending

limit rules on structures, such as loan participations, that are

commonly used to diversify credit risk and to recommend any changes to

these provisions that would facilitate community banks' use of these

structures, consistent with safety and soundness.

Part 7--Corporate Governance

The OCC recently revised some of its rules to enhance a national

bank's flexibility to use the corporate governance procedures that are

best suited to a particular bank's operations. For example, part 7 of

our regulations now permits national banks to adopt the corporate

governance provisions in the law of the state where the main office of

the bank is located, the state where the holding company of the bank is

incorporated, the Delaware General Corporation Law, or the Model

Business Corporation Act, to the extent that these standards are not

inconsistent with applicable federal banking statutes or regulations,

or bank safety and soundness.

Community bank operations and management may present unique

concerns from a corporate governance perspective, and we invite comment

on whether there are additional ways to enhance the flexibility of

existing procedures. For example, are there specific state law

provisions that we should consider including in the regulation as

appropriate for adoption by community banks?

Part 3--Capital Adequacy

The OCC, and the other federal banking agencies,2

measure banks' capital adequacy according to a detailed set of uniform

standards based on an international agreement, commonly referred to as

the Basle Accord, which was concluded in 1988 by the Basle Committee on

Banking Regulations and Supervisory Practices (the Basle

Committee).3 The 1988 Accord applies to internationally

active banks.4 The OCC's capital adequacy standards,

however, apply to all national banks, and the other agencies' standards

similarly apply to all of the institutions they supervise.

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\2\ The OCC's capital adequacy standards appear at 12 CFR part

3. The Board of Governors of the Federal Reserve System (FRB), the

Federal Deposit Insurance Corporation (FDIC), and the Office of

Thrift Supervision (OTS) each have regulations containing similar

standards.

\3\ This Committee is now known as the Basle Committee on

Banking Supervision. The Basle Committee was established in 1975 by

the central bank Governors of the Group of Ten Countries. It

consists of senior representatives of bank supervisory authorities

and central banks from Belgium, Canada, France, Germany, Italy,

Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United

Kingdom, and the United States. It usually meets at the Bank for

International Settlements in Basle, where its permanent Secretariat

is located.

\4\ The Basle Committee is currently considering revisions to

the 1998 Accord. Any changes would be subject to a consultative

process and are expected also to apply to internationally active

banks.

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The OCC is interested in learning commenters' views about whether

the differences in activities and levels and types of risks between

large and community banks warrant a differential approach to

supervising capital adequacy. Commenters addressing this issue are

invited to:

(1) Suggest a different, simpler overall approach to measuring

capital adequacy for community banks; and

(2) Identify specific aspects of the OCC's part 3 standards that

could be revised or applied differently to community banks.

The part 3 capital adequacy standards are linked directly to the

prompt corrective action (PCA) provisions in 12 CFR part 6 of the OCC's

rules. The capital categories used for PCA purposes (e.g., well

capitalized, adequately capitalized, etc.) are defined by reference to

the standards and definitions in part 3. The PCA framework, which

derives from statute,5 is a crucial component of safety and

soundness supervision. Like the capital adequacy standards, it has been

implemented jointly by the OCC and the other federal banking agencies.

Accordingly, commenters favoring a differential approach to capital

adequacy supervision for community banks are encouraged to address how

such an approach could be implemented consistent with the PCA

requirements.

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\5\ See 12 U.S.C. 1831o (PCA statute); 12 CFR part 6 (OCC PCA

regulation).

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We expect to use the information that commenters provide on this

issue to inform our discussions with the other agencies about

alternative approaches to

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evaluating capital adequacy for small institutions. After receiving

comments in response to this ANPR, the OCC will consult with the other

agencies to determine if modifications to the capital regulations are

appropriate.

Comment Solicitation

The OCC invites comment generally on each of the areas identified

in this advance notice, as well as specifically on the questions asked

in each area. For each of these areas, we are interested in:

(1) Whether existing rules are requiring inefficient allocation of

the bank's existing resources or imposing undue burdens on in-house

staff.

(2) What community bank lines of business or community bank

operations are affected by the rule and what specific requirements

require the bank to obtain expertise from outside sources?

(3) Could we change or modify specific provisions to reduce burdens

on community banks without compromising safety and soundness standards?

(4) Are there reasonable regulatory alternatives that would be less

burdensome for community banks?

In addition, commenters on this notice are invited to suggest other

regulations that could be modified in ways helpful to community banks.

Dated: May 4, 1999.

John D. Hawke, Jr.,

Comptroller of the Currency.

[FR Doc. 99-12011 Filed 5-11-99; 8:45 am]

BILLING CODE 4810-33-P