Banks serving hemp producers no longer have to automatically fill out reports used to detect money laundering activities. This reduction in regulatory burden can be traced to the 2018 farm bill (officially titled the Agriculture Improvement Act of 2018), which legalized hemp by removing it as a Schedule 1 controlled substance. Properly licensed industrial hemp producers can now be treated the same as other bank commercial customers for anti-money-laundering regulatory purposes.
Since the end of the financial crisis more than a decade ago, lawmakers and regulators have worked to balance the needs of a growing, vibrant financial services sector with the regulations necessary to ensure a safe and sound one. In some ways, much has been achieved. The nation’s largest banking organizations are now subject to substantially higher capital and liquidity requirements. They are also regularly “stress tested” to understand the effects on capital should economic conditions deteriorate significantly.
At the same time, efforts are continuing to alleviate the regulatory burden faced by smaller banking organizations. Beginning this year, those that meet certain qualifications can opt into a simplified regulatory capital framework. The framework—dubbed the community bank leverage ratio (CBLR)—went into effect Jan. 1. The Federal Deposit Insurance Corp. estimates that more than three-quarters of all community banks will qualify to opt in.
Banks—especially small banks—have traditionally made money by accepting deposits from local customers and then lending the money at a higher rate. The difference—called the net interest margin—was and is used to:
Cover overhead, other expenses and provisions for loan losses
Pay taxes
Reward investors with dividends
That model worked pretty well for decades. However, growing competitive and technological changes are altering the banking landscape. And the changing behavior of “core” depositors is affecting small-bank balance sheets.
Funding and cybersecurity top the concerns for community banks, according to the latest annual community bank survey conducted by the Conference of State Bank Supervisors (CSBS). It is a marked shift from previous years, when regulatory compliance costs were found to be the chief issue for community banks. The survey was released in the conference volume of the seventh annual Community Banking in the 21st Century research and policy conference. The conference, which is sponsored by the Federal Reserve System, CSBS and the Federal Deposit Insurance Corp., is hosted each fall at the Federal Reserve Bank of St. Louis.
Last month, I reviewed a new accounting standard for banks called the current expected credit loss model, dubbed CECL. The financial crisis made it apparent that the current methodology for credit loss reserves fell short.
CECL is designed to improve the quality of financial information, especially approaching and during times of economic stress.
Gearing Up
The new accounting standard is being phased in, beginning in 2020 with the nation’s largest publicly traded banks. A recent proposal by rulemakers will defer transition for most other institutions—such as community banks and credit unions—until January 2023.1
Information provided by community banks about CECL preparation indicate that most have started the implementation process by gathering and analyzing data. Some have gone further by selecting a methodology and testing it.
Despite the progress, many bankers continue to express concerns about the transition. These concerns typically center on the time required to prepare, vendor fees, the time and effort needed to obtain and organize data, and even the uncertainty of knowing if they have “gotten it right.”
