Yellen: Fed to Consider Treasury Call for Small-Bank Debt Relief

By Jeff Bater

Federal Reserve Chair Janet Yellen signaled she would consider a Trump administration recommendation to grant community banks a break on debt policy.

Yellen, appearing July 12 before the House Financial Services Committee, was asked whether she agreed with raising the asset threshold in the Fed’s Small Bank Holding Company Policy Statement to $2 billion from its current $1 billion.

“I think that’s something we could look at,” she told Rep. Trey Hollingsworth (R-Ind.) as he questioned her about finding relief for small banks from financial regulations.

Treasury Secretary Steven Mnuchin issued a report in June proposing the asset threshold be doubled, to $2 billion. President Donald Trump had requested the report as part of a larger plan to deregulate the financial services industry.

The policy statement facilitates transfer of ownership of small banks by allowing their holding companies to operate with higher levels of debt than would normally be permitted. Aside from enabling bank acquisitions, an increase in the threshold would allow community banks to raise capital by issuing debt and increase lending.

Volcker Rule

Yellen also reiterated support for giving small banks relief from the Volcker Rule.

A Dodd-Frank rule prohibits banks from conducting certain trading activities with their own accounts. Most community banks – those lenders with assets below $10 billion – do not engage in proprietary trading and have been given accommodations from the rule’s compliance program requirements.

However, the June Treasury report pointed out small banks have still been required to expend “considerable resources” to ensure their activities do not constitute prohibited proprietary trading.

“Banks with less than $10 billion in assets should be exempted from the rule entirely,” the report said.

The Independent Community Bankers of America has called for a Volcker Rule exemption for banks that are not systemically important. And Yellen has suggested in the past Congress might want to consider exempting community banks from the rule.

“I am very supporting of trying to reduce the burdens on community banks,” she said at the hearing July 12. “We have suggested there are things Congress could do to help reduce burdens – for example, the Volcker Rule.”

Leveraged Lending

Nonetheless, Yellen isn’t necessarily on board with everything in the Mnuchin report. She emphasized the importance, for instance, of regulatory scrutiny over leveraged lending by banks while under questioning on the topic.

In 2013, the Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued guidance that attempted to set forth their expectations for banks’ risk management of leveraged lending.

Banks have complained about ambiguity in the guidance. The Treasury report suggested the agencies reissue the guidelines for public comment.

“Following the public comment process, the guidance should be refined with the objective of reducing ambiguity in the definition of leveraged lending and achieving consistency in supervision, examination and enforcement,” the deregulatory blueprint said.

When asked about potentially retracting the guidance, Yellen said it was put into place for a very good reason. “We were concerned about underwriting practices for those kinds of loans, and want to make sure lending is safe and sound,” the Fed chair said.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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