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TESTIMONY OF

RICKI HELFER
CHAIRMAN
FEDERAL DEPOSIT INSURANCE CORPORATION

ON

S. 650, THE ECONOMIC GROWTH AND REGULATORY
PAPERWORK REDUCTION ACT OF 1995

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND REGULATORY RELIEF
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE




TUESDAY, MAY 2, 1995
ROOM 216 HART SENATE OFFICE BUILDING

INTRODUCTION
Mr. Chairman and members of the Subcommittee, I am pleased
to present the views of the Federal Deposit Insurance Corporation
on S. 650, the Economic Growth and Regulatory Paperwork Reduction
Act of 1995, and related issues.

I enthusiastically support the

purposes of the bill and, with a few exceptions, am pleased to
endorse the specific changes in the law.

Over the past 25 years, a variety of new laws and
regulations affecting banks in the areas of safety and soundness,
crime detection, and consumer protection have been imposed on
financial institutions.

While these laws were enacted to protect

consumers and the deposit insurance funds, the cumulative effect
has imposed significant additional costs on the financial
transactions that are essential to sustain a vital and
competitive economy.

At times, the burden falls

disproportionately on insured banks and thrifts, as compared with
other types of financial institutions, resulting in significant
competitive disadvantages.

In addition, regulatory burden

generally has a disproportionate affect on smaller institutions.
One-quarter of the banks supervised by the FDIC have fewer than
13 employees on a full-time basis, a small number to deal with
the complexity and sheer volume of regulatory and legislative
requirements.




2

To begin my testimony today I will share with you the
results of an informal survey of banks conducted by the FDIC on
the potential savings that might be associated with the repeal or
modification of specific legislative or regulatory requirements.
Second, I will comment on the legislation introduced by Chairman
Shelby, S. 650, the Economic Growth and Regulatory Paperwork
Reduction Act of 1995.

Next, I will review current efforts of

the FDIC to alleviate regulatory burden in the safety and
soundness and consumer compliance areas —

some commenced at our

own initiative, others with the impetus of legislation.

Finally,

I will propose additional statutory changes to further reduce
regulatory burden on insured institutions.

FDIC SURVEY OF THE COSTS OF SPECIFIC REGULATORY BURDENS

Regulatory burden came into being through accretion.

Each

law and related regulation may be only marginally burdensome, but
taken together their cumulative effect has become greatly
burdensome.

In accordance with section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994, I have
initiated a complete review of the agency's regulations and
policy statements in an effort to identify those that have become
obsolete or those for which the cost to comply substantially
outweighs the intended benefits.




I want to commend Congress for

3
examining the level of burden imposed by statute.

Working

through laws and regulations developed over many years will
require time, effort, and considerable attention, but it can and
should be done.

The challenge for Congress and the regulators is

to identify those laws and regulations that may be modified,
streamlined or eliminated without adversely affecting the safety
and soundness of the banking industry or necessary protections
for consumers.

To accomplish this task, we must test regulations

against specific criteria:

1) whether the regulations are

necessary to ensure a safe and sound banking system, 2) whether
the regulations enhance the functioning of the marketplace, or 3)
whether the regulations can be justified on strong public policy
grounds related to consumer protection.

Within the past month we conducted an informal survey of
just over 60 institutions that the FDIC supervises in order to
gauge the potential cost savings from the elimination of specific
legislative requirements and regulations currently on the books.
The items included in the survey were based on provisions of
S. 650 that we support and believe would result in identifiable
savings.
included:

The regulatory and legislative requirements surveyed
Truth in Lending and Truth in Savings disclosures,

loan data collection and reporting, auditor attestation
requirements for bank compliance with laws and regulations, as
well as the costs of various applications and notifications.




4
A broad cross-section of institutions by size and location
provided dollar estimates of their costs in meeting 15 very
specific regulatory requirements.

While the survey was informal —

and, therefore, cannot be

used to make industry-wide estimates —
support two general conclusions.

we believe the results

First smaller institutions bear

higher proportionate costs than larger ones.

When measured in

relation to net income, the estimated costs incurred from the 15
requirements surveyed ranged from over 16 percent at very small
institutions to just over one percent at the largest.

Second, the responses clearly suggest that positive cost
savings could be achieved if the surveyed requirements were
eliminated.

For all recurring requirements included in the

questionnaire, the median cost of compliance per bank was
reported to be approximately $40,000 per year.

In addition,

respondents reported that the median cost estimate of submitting
various non-recurring applications and notifications ranged from
$500 to $20,000 per action.

Taken together, we estimate that the savings from completely
eliminating all requirements covered in the survey could increase
the annual rate of return on assets from 5 to 10 basis points on
a pre-tax basis for institutions the FDIC supervises.

The

results of this survey are discussed in greater detail in




5
Appendix A to this testimony.

The FDIC also is pursuing other

specific efforts to reduce regulatory burden, which are discussed
at the conclusion of the testimony.

8, 650 - ECONOMIC GROWTH AND REGULATORY PAPERWORK
REDUCTION ACT OF 1995

The bank and thrift regulatory agencies can and should
pursue efforts to reduce regulatory burden within their existing
authority, but we must recognize that a substantial share of the
burden on depository institutions derives directly from statutes
that are beyond the jurisdiction of the agencies to change.

In

this regard, it is incumbent on the agencies to monitor the
effectiveness and impact of applicable statutes and to make
appropriate recommendations to Congress for changes in those
statutes to reduce unnecessary burden and improve effectiveness.
Included in this testimony, and set out in detail in Appendix B,
are the FDIC's suggestions on provisions of law that can and
should be amended or eliminated because they do not conform to
any of the three criteria set out at the beginning of this
testimony.

I also want to commend you Mr. Chairman, Senator Mack and
this Subcommittee for your considerable efforts at dealing with
regulatory burden.




S. 650, the Economic Growth and Regulatory

6

Paperwork Reduction Act of 1995 is a strong attempt to address
these issues.

In reviewing S. 650, as you have requested, we have
identified provisions that we support as drafted, those we
support but with some modification, and those few that we do not
favor.

FDIC staff recently provided the Subcommittee staff with

technical suggestions on the bill.

Truth in Lending

The Truth in Lending Act ("TILA”) was enacted 27 years ago
to enable consumers to shop comparatively for credit by requiring
lenders to disclose interest rates and other information about
credit terms and costs in a uniform way.

TILA, as implemented by

Regulation Z, has been largely successful in providing bank
customers with comparable information on interest rates
applicable to credit that enhances the effective functioning of
the marketplace.

It also has been successful at remedying many

of the deceptive and misleading lending practices it was enacted
to correct.

Unfortunately, Regulation Z, has become

substantially more complicated, as it has been adapted to fit the
variety of loan products introduced since 1968.

Hence, the real

value of TILA to the efficient functioning of the marketplace and
to consumers has been obscured because of the complexity of the
required disclosures.




7
The complexity of TILA can be demonstrated in a variety of
ways.

First, the Federal Reserve Board's Official Staff

Commentary on Regulation Z, which provides official
interpretations, is longer than the regulation itself.

Second, the complexity of Regulation Z is such that the FDIC
cited more than 2,700 of the 3,500 institutions we examined in
1994 for at least one violation.

The majority of these

violations were technical rather than substantive in nature,
however, and were most often the result of recording errors
rather than material misrepresentations to consumers that would
require reimbursement.

As a result, the FDIC asked only 279 of

the 2,700 institutions cited for violations in 1994 to reimburse
a total of $2.8 million to customers based upon violations cited
under Regulation Z.

Third, the banks that responded to our survey indicated that
TILA is a relatively costly law to comply with on an annual
basis.

Specifically, the median reported dollar cost of $10,000

to comply with TILA was almost twice as high as for any other
survey item.

Clearly, Regulation Z is overdue for major

revision.

The FDIC is supportive of the revisions to TILA prescribed
by S. 650.

We believe the Federal Reserve Board should have the

flexibility to streamline or eliminate any TILA disclosures that




8

do not provide appreciable benefits to consumers.

We also

believe that the Federal Reserve Board should have the authority
to exempt certain transactions from these requirements.

In

addition, the Federal Reserve Board should review the application
of the right of rescission and consider exempting certain
transactions from these provisions where appropriate.

Finally,

we are supportive of those provisions which would modify TILA as
a result of the Rodash decision.

The FDIC supports the changes to the Real Estate Settlement
Procedures Act ("RESPA”) and TILA prescribed by sections 101, 102
and 104 of S. 650.

We believe that granting the Federal Reserve

Board the authority to conform TILA with RESPA, where possible,
will reduce regulatory burden for financial institutions and
avoid confusion and complexity for consumers.

Consumers today rarely rescind credit transactions with
insured financial institutions.

In fact, many consumers complain

that the inability to waive their right of rescission is
inconvenient and costly since it delays the disbursement of
funds.

Therefore, the FDIC supports exempting all refinancing

and consolidations of credit secured by first liens from the
right of rescission as contained in section 114 of S. 650.

These

transactions would continue to be subject to early "good faith
estimate” disclosures required by RESPA, so consumers would




9
continue to have the opportunity to evaluate the implications of
their actions.

In addition, the FDIC supports granting the Federal Reserve
Board the flexibility to expand the ability of consumers to waive
their right to rescind transactions beyond those circumstances
constituting "personal financial emergencies," as captured in
section 119 of the legislation.

The Federal Reserve Board would

have the ability to determine how such a waiver would be
administered, and through the rulemaking process public comment
could be solicited.

The FDIC has no objection to section 115 of the bill which
replaces the current $5 or $10 tolerance level for finance
charges prescribed by Regulation Z in 1981, with a statutory
tolerance level of $100.

We believe it is reasonable to allow a

higher tolerance level than Regulation Z currently provides for
closed-end credit secured by real estate, as these transactions
are typically large dollar transactions.

This provision would

provide greater flexibility to institutions without substantially
changing the practical level of protection afforded to the
consumer.




10

The Comm unity Reinvestment Act of 1977

In July of 1993, President Clinton asked the federal bank
regulatory agencies to undertake sweeping reform of the Community
Reinvestment Act ("CRA”) regulations to reduce unnecessary
regulatory burden and focus the CRA examination program on more
objective, performance-based assessment standards.

For the past

22 months, the agencies have worked jointly to produce
comprehensive reform of the CRA regulations.

To initiate the

process, the agencies held hearings in seven locations across the
country during 1993, and heard from hundreds of witnesses
including representatives from financial institutions, the
business community, consumer and community groups, and state and
local government officials.

Proposed regulations were circulated

twice for public comment, which together produced almost 14,000
letters.

From this outpouring of public comment, the agencies

developed a final CRA rule, which was approved by each agency in
April.

The FDIC believes the new CRA rule accomplishes the goals
established at the outset, particularly in the area of reducing
•t

regulatory burden.

*

The new CRA rule provides for an effective

and meaningful evaluation of the performance of an institution
without burdensome paperwork and recordkeeping requirements and
without undue reliance on ratios and formulas.

In keeping with

the original intent of the CRA, the new rule encourages




11

institutions to meet the credit needs of their community,
consistent with safety and soundness.

First, the new CRA rule emphasizes performance in lending,
investment and service, rather than process and paperwork, and
provides institutions with considerable flexibility in meeting
the credit needs of their communities.

The new rule eliminates

the requirement that institutions prepare CRA statements, review
them annually and document them in the minutes of the board of
directors' meetings.

Institutions are no longer required to

justify the basis for community delineations or to document
efforts in marketing or ascertaining community credit needs.
Resources formerly devoted to such procedural requirements ——
time, money and personnel —

are now available for making loans

and investments and providing services in the community.

Second, the new CRA rule distinguishes between large and
small institutions by providing a streamlined examination process
and exemption from data collection on loans to small business and
small farms for independent banks and thrifts with assets under
$250 million, or banks and thrifts with assets under $250 million
that are members of a holding company with total assets under $1
billion.

Under the streamlined examination procedure, regulators

will determine whether an institution's loan-to-deposit ratio and
lending record are reasonable relative to its size, financial
condition and management expertise, and the credit needs of its




12

community.

The streamlined examination provides meaningful

relief to 81 percent of the banking industry.

All institutions, regardless of size, have the option of
being evaluated on the basis of a strategic plan rather than on
lending, service and investment tests.

A strategic plan is

required to specify measurable goals, and to be aired in advance
of adoption for public comment.

After the comments have been

addressed, the institution must submit the plan for agency
review.

Thereafter, the institution will be evaluated based upon

how well it meets or exceeds the goals it has established for
itself in the strategic plan.

This approach encourages greater

management involvement in an institution's effort to meet the
credit needs of its community while reducing the regulatory
burden of the institution for compliance with CRA.

The FDIC believes the new CRA regulation provides meaningful
relief in the area of regulatory burden, particularly for small
banks.

The streamlined examination and the focus on lending

rather than creating a paper trail, as well as the reduced
reporting requirements when compared with the previously proposed
regulations, will reduce substantially the burden CRA previously
placed on small and large institutions alike.

S.

650 contains some provisions that overlap with changes

already made by the pew CRA rule.




For example, section 133 of

13
S. 650 contains a provision requiring the agencies to publish the
list of institutions to be examined.
CRA rule.

This is required by the new

In addition, the agencies currently publish a list of

the CRA ratings of the institutions we examine.
the bill addresses special purpose banks.

Section 134 of

Under the new CRA

rule, wholesale and limited purpose banks may request approval to
be assessed under a Community Development Test emphasizing
community development lending and investment performance.

The FDIC is concerned that some provisions of S. 650 would
effectively preempt the positive changes in the new CRA rule.
First, we urge the committee to reconsider the need to include
the "small bank exemption” provision in section 132 of the bill.
The FDIC firmly believes that the new CRA rule substantially
reduces the compliance burden for small banks.

Periodic

examinations are an effective way to ensure that insured
institutions are providing credit and service in their
communities.

The new streamlined examination methods are

designed specifically to provide maximum flexibility for
institutions and to ensure consistency in evaluation criteria,
while reducing the burden of compliance on small institutions.
•t

*

Second, from the FDIC's perspective, the safe harbor created
by section 133 of S. 650 is not necessary at this time.
the FDIC rarely receives CRA protests.




First,

Of the 2,749 applications

14
subject to CRA on which the FDIC took action in 1994, only eight
were protested on CRA grounds.

In addition, when the FDIC considers an application from a
state-chartered institution, we must consider a variety of
factors prescribed by the Federal Deposit Insurance Act.

These

statutory factors include, but are not limited to, the financial
history and condition of the institution and the convenience and
needs of the community to be served.

Although the CRA rating of

an institution is important in this process, particularly in
assessing the degree to which the institution is serving the
convenience and needs of the community, it is not conclusive.

We urge the Subcommittee to allow the agencies to implement
the new rule and to evaluate its effectiveness in reducing
regulatory burden before instituting further changes to the CRA,
such as a small bank exemption and a safe harbor.

The new CRA

rule should be given an opportunity to demonstrate that it does
what the agencies intend —

allow banks, large and small alike,

to focus on lending, not on paperwork.

If we have an effective

regulation, there will be more confidence in the CRA ratings and
less reason for protest.

The FDIC has some concern with two other sections of S. 650.
Sections 131 and 231 of the bill would insert similar language
prohibiting the agencies from imposing recordkeeping and/or




15
reporting requirements on institutions unless the requirements
would lessen regulatory burden.

The FDIC is concerned that such

a provision could be interpreted as limiting our ability to have
access to loan data in the course of an examination.

Such

limitations would critically impair our ability to conduct a
meaningful examination.

We recommend clarifying these provisions

in a way that ensures that the agencies' access to relevant
lending data during the examination process is not called into
question.

Section 231 of S. 650 would prohibit agencies from requiring
institutions to collect and report loan data under the CRA.

Our

new CRA regulation imposes some additional data collection and
reporting requirements on large banks.

This is balanced,

however, by the usefulness of the information collected.

The

data, which will be collected on small business and small farm
loans, will give a more comprehensive view of how the reporting
institutions are meeting the credit needs of their communities.

HMDA data alone presents an incomplete view of a bank's
lending, since it only focuses on mortgage lending.

The small

business and small farm loan data will help to complete the
picture of how an institution meets the credit needs of its
community.

This will benefit many institutions that are not

given full credit today in their CRA ratings for the entire scope
°f their lending efforts.




To limit burden, the data collection

16
requirements for large banks are streamlined, and do not require
loan-by-loan reporting.

Instead, information will be collected

by census tract and will be reported in the aggregate by the
agencies, not by the banks.

Once again, we urge the Subcommittee

to reconsider the aspects of S. 650 that would affect efforts to
implement the new CRA regulation.

The final regulation is

greatly improved over the current regulation, as well as the two
prior CRA proposals, in terms of the level of burden on financial
institutions.

The FDIC believes everyone will benefit from full

implementation of the CRA reforms.

Truth in Savings

The Truth in Savings Act ("TISA'*) requires institutions to
provide accurate and uniform disclosures and terms of advertising
to enable consumers to shop comparatively for financial savings
products.

While TISA provides the consumer with some valuable

information, Regulation DD is overly complicated.
substantially streamline TISA.

S. 650 would

Institutions would only be

required to disclose the method they use to calculate the
interest rate.

While the FDIC supports reducing the complexity and
regulatory burden imposed by TISA, we caution the Subcommittee
that such a sweeping amendment would eliminate some of the
initial disclosures that provide meaningful assistance to bank




17
customers in their effort to comparison shop for deposit
products.

For example, institutions would not be compelled to

disclose minimum balance requirements, service charges or
penalties for early withdrawal of funds.

While it would seem

logical for banks to disclose this information to their customers
as a matter of good business, it was the lack of such disclosures
that in large part prompted the enactment of TISA.

We recommend

that the Subcommittee consider legislation that directs the
Federal Reserve Board to review Regulation DD and revise those
specific sections that do not enhance the ability of consumers to
make informed decisions about deposit accounts and products.

streamlining Government Regulation

Evam-i nations.

Section 221 would extend the maximum

permissible examination cycle for certain small institutions from
12 or 18 months to 24 months.

We believe extending the

examination cycle in this manner would tend to establish 24
months as the norm for the time between examinations, which we
believe would not be prudent.

It was the FDIC's experience in

the mid-1980s, that examination cycles were stretched out for
smaller institutions on the theory that they did not present
systemic risk problems.

In fact, serious problems developed in

the interim and those problems went undetected for some time.

In

some cases, they ultimately caused significant losses to the
deposit insurance funds.




Although we are in a relatively stable

18
period at the moment, it also has been our experience that
conditions in the industry can deteriorate rather quickly,
especially in the highly competitive and rapidly changing
environment of today.

Moreover, the regulators are most

effective when the examination process is used to encourage sound
banking practices and strong management and to observe the
philosophy and practices of management and the changes that occur
over time between examinations.

We believe examinations every

two years may not be frequent enough for those purposes.

At the same time, we are mindful of the need to reduce
supervisory regulatory burden, especially on smaller, wellcapitalized and well-managed institutions.

We believe this is

best accomplished, however, by streamlining the process,
increasing offsite monitoring to reduce onsite examination time,
and staffing the examination with no more examiners than needed
in order to keep to the necessary minimum demands on the
resources of the institution and its management.

It is true that bankers are concerned about the burden of
examinations.

The FDIC recently began surveying bankers for

suggestions on ways to improve the quality and effectiveness of
safety and soundness examinations.

The effort, which is expected

to run for one year, is aimed at detecting and changing aspects
of the examination process that are ineffective or inefficient.
Over the next year, approximately 3,500 FDIC-supervised




19
commercial banks and savings banks are expected to undergo safety
and soundness examinations.

At the end of these examinations,

the institutions will be given a three-page survey that asks
questions about the appropriateness and thoroughness of
examination procedures; the quality and professionalism of the
FDIC team that conducted the review; and the usefulness of the
written and oral reports from the FDIC regarding examination
findings.

Respondents will have the option to remain anonymous

or to give their names so that the FDIC can seek follow-up
information or clarifications.

Participants also will be able to

speak with a senior management official of the FDIC to discuss
any additional problems or issues.

We also are asking our banks if they prefer having safety
and soundness examinations conducted concurrently with or at
different times than compliance examinations.

Concurrent

examinations may not be practical for all institutions, as space
constraints and personnel resources may be insufficient to
facilitate simultaneous examinations.

The FDIC recognizes that

an examination can be disruptive to the normal business of a
bank, particularly for smaller institutions and we are making an
effort to develop examination schedules that will accommodate the
preferences expressed by banks with respect to concurrent or
separate examinations whenever practical.




20

While it is too early in the survey process to provide even
preliminary results, we expect that the program will provide a
valuable source of information on how the FDIC can minimize the
regulatory burden on banks while, at the same time, improving the
effectiveness and quality of our safety and soundness examination
program.

As a result of these efforts, we urge the Subcommittee to
reconsider the need and justification for extending the
examination cycle beyond 18 months.

We also note parenthetically

that many states follow a 12- or 18-month examination cycle so
that FDIC coordination with state examinations can more readily
be maintained if an 18-month examination cycle is retained.

Applications.

With respect to section 204(c) of the bill,

the FDIC supports the elimination of prior approval for the
establishment of a domestic branch by institutions that operate
safely and soundly.

Today, the establishment or relocation of a

branch is not the major business decision it once was.

The bank

regulatory agencies have other sufficient enforcement tools to
stop unsafe or unsound expansion.

In 1994, the FDIC approved over 1,200 applications to
establish or relocate a branch, including three that were
protested on CRA grounds.

None of the three were denied.

Given

this record, there is simply no justification on either safety




21

and soundness or community service grounds for continuing to
require institutions to endure the costs and delays, however
short, that are associated with the preparation and processing of
applications for prior approval to establish a branch.

In addition, we suggest that the scope of section 204(c) be
broadened to include applications to relocate a branch as well as
to establish a branch.

As a corollary, we suggest that

institutions only be required to give the FDIC or their primary
federal regulator a simple notice of the location of the new or
relocated branch.

It is necessary for the regulators to know the

location of all branches in order to schedule examinations and to
prepare for emergencies.

The FDIC also supports section 207 of the bill, which would
exclude automated teller machines and remote service facilities
from the definition of ”domestic branch.”

Remote service

facility is defined as an automated teller machine, cash
dispensing machine, point-of-sale terminal, or other remote
electronic facility where deposits are received, checks paid or
money lent.

We do not see a compelling reason for an agency to

approve these facilities in advance or even to have prior notice
of their establishment.
to changed technology.

It is time for the statutes to catch-up
The FDIC approved over 700 of these

facilities in 1994 and volume will likely pick up in the future.




22

Eliminating the prior approval requirement will significantly
reduce burden for the industry and the agency.

Reporting Requirements and Certain Exemptions.

The FDIC

supports section 210 of the bill, which would revise section 32
of the FDI Act to eliminate notice requirements in certain cases
involving a new member of a bank/s board of directors or senior
executive officer.

The FDIC regards the existing requirements as

unnecessary impediments to the routine management of depository
institutions.

It is entirely appropriate that, as revised, the

prior notice requirement is confined to institutions that are
either undercapitalized or otherwise in a troubled condition.

Section 212 of the proposal would liberalize the
requirements governing insider lending.

We support the creation

of an exemption for extensions of credit available to a wide
group of employees.

Similarly, we support eliminating reporting

requirements related to loans that executive officers receive
from other banks that exceed limits available at their own bank,
as well as the requirement that corporate quarterly reports
include information on loans to officers.

We would go further,

however, by amending section 22(g) of the Federal Reserve Act to
allow home equity loans of up to $100,000 and loans secured by
readily marketable assets.

In addition, we suggest amending

section 22(g)(4) of the Federal Reserve Act, which requires each
agency to promulgate separate regulations to provide for




23
additional exceptions to the '’other loans" category.

A uniform

Federal Reserve regulation would suffice.

Finally, we fully support the branch closure provisions of
section 214 of the bill.

These provisions substantially mirror

the federal regulators' interagency policy statement on branch
closings and would reduce regulatory burden by eliminating the
need to give prior notice of decisions to close remote service
facilities, same neighborhood relocations, and certain branches
acquired through mergers.

Elimination of Appraisal

S u ^ gomm-i

*■*•<*«

Section 213 of the

bill would abolish the Appraisal Subcommittee and transfer
certain of its functions to the Federal Financial Institutions
Examination Council.

We fully support this approach.

There is

no justification for a separate semi-autonomous Appraisal
Subcommittee.

We suggest that the language make clear that the

Subcommittee would be obligated to return funds to the Treasury
only after it has wound-up its affairs in an orderly manner and
has satisfied its obligations and commitments to creditors and
others, including the current grant to the Appraisal Foundation.

Regulatory Burden Review.

The FDIC supports section 223 of

the bill, which would require a review of all agency regulations
no less frequently than every 10 years.
entirely appropriate.




Such a review is

Indeed, it will be the FDIC's policy to

24
review regulations as often as every five years to assure that
they continue to serve the intended purposes effectively and
efficiently without undue burden to financial institutions.

We

hope that the Subcommittee would clarify the intent of section
223(e) with respect to the role of the Federal Financial
Institutions Examination Council (FFIEC) in the procedure in
order to assure that the process of regulatory review is not
unintentionally encumbered or slowed.

The FFIEC can serve an

important function by providing interagency coordination and
consistency in the efforts of bank regulators to reduce
regulatory burden, as long as the efficiency of its involvement
is assured.

The FDIC supports section 235 of S. 650, which would repeal
call report requirements for small business and small farm loans.
The CRA regulatory reform effort has considered those reporting
requirements extensively and has required reporting by larger
institutions for CRA purposes.

There is no reason to maintain

duplicative reporting requirements.

Home Mortgage Disclosure Act

Section 236 of S. 650 amends the Home Mortgage Disclosure
Act (HHMDAH) by increasing from $10 million to $50 million in
assets the size of institutions that are exempt from reporting.
This section also provides the Federal Reserve Board with the




25
authority to exempt institutions if it determines that the
compliance burden outweighs the usefulness of the data required
to be disclosed.

The FDIC supports this provision, as it would substantially
reduce regulatory burden on small banks, without significantly
reducing the level of data reported on residential lending.
Currently, 3,187 FDIC-supervised banks are required to report
under HMDA.

Raising the reporting threshold to $50 million would

exempt 33 percent of these reporters, but would result in a total
reduction in the level of data reported by FDIC-supervised
institutions by only 6 percent.

The resulting cost savings to

smaller individual institutions, however, would be material.

We also support section 236(b) of the bill that relieves the
burden associated with having HMDA data available at each branch
location.
data.

The public will still have the ability to access the

Institutions would be required to provide notice at their

branch locations that the information is available for review at
the institution's home office, or the data will be provided
directly to members of the public requesting it either in paper
or electronic format no later than 15 days after receipt of a
written request.




26
FDIC Board Composition

Section 243 of the bill would add a State bank commissioner
to the FDIC board.

We support the concept of assuring state bank

regulatory experience on the FDIC board.

We do not support a

six-member board for the FDIC where half of the board members
would have primary responsibilities that do not involve the FDIC.
It is our view that the FDIC's independence as guardian of the
insurance funds can be assured more effectively if a clear
majority of its board members have primary allegiance to, and
responsibility for, the FDIC.

This statement is not meant in any

way to derogate from the strong sense of commitment that the
Comptroller of the Currency and the Director of the Office of
Thrift Supervision bring to their service on the FDIC board.

It

is instead meant to recognize that where a board member has
substantial responsibilities for directing another agency, the
FDIC by definition cannot have the director's primary attention.
The FDIC is too important an agency and its responsibilities too
significant for half of its board members to be so distracted.
For that reason we urge that consideration be given to keeping
the FDIC board at five persons, while designating that one of the
seats be held by an individual with state bank regulatory
experience.

This would allow the board member to commit full­

time to FDIC matters, which would not be possible if the board
member were required to manage a state banking department at the




27
same time, while still assuring state regulatory expertise on the
FDIC board.

We believe that having such state bank supervisory
experience on the FDIC board would complement our continuing
strong efforts to coordinate supervisory activities with state
banking departments.

This effort has been a central theme of the

FDIC's functions and activities for sixty-one years, and a
particular interest of mine as FDIC Chairman.

Regulatory Impact on Cost of Credit and Credit Availability

We support the thrust of section 301 that removes the
requirement that auditors of banks attest to the institution's
compliance with designated laws and regulations and allows an
exemption for minority membership on an institution's audit
committee of insiders.

However, we suggest that the provision

calling for individual regulators to issue regulations on this
exemption is unnecessarily burdensome and confusing, given the
FDIC's current role in issuing audit regulations for all FDICinsured institutions, after consultation with the other agencies.




28
Self-testing

The goal of fair lending laws is to ensure that the free
flow of credit is not impaired by market distortions created by
illegal discrimination on repugnant grounds, such as race,
national origin, sex or age.

The best way to ensure that this

goal is met is by enlisting the help of all financial
institutions in identifying and correcting illegal discriminatory
behavior.

Hence, the FDIC strongly supports the use of self-

testing by financial institutions as the most comprehensive
approach to assuring compliance with fair lending laws and to
effecting corrective action that resolves any problems.

This

view is reflected in the recent decision of the Federal Reserve
Board to propose amendments to Regulation B to permit financial
institutions to request race, color, gender, religion and
national origin from all applicants.

We are pleased to see that

this view is shared by the Subcommittee and reflected in S. 650.
We offer the following comments for consideration.

First, section 302 provides institutions with certain
protections to encourage their use of self-testing.
•,

To further

i

encourage self-testing, the Subcommittee should consider
expanding this provision to include language that would shelter
an institution's self-testing results from discovery in the
context of civil litigation.

However, under the normal rules of

discovery, if an institution elects to use the results of its




29
self-testing in its defense, this protection would be waived.
Second, section 302 of S. 650 prohibits the regulators from
reviewing the self-testing report.

We believe that institutions

should have the option of sharing self-testing results with their
regulators.

We recommend, therefore, that the language be

changed to allow regulators to review self-testing reports if the
institution voluntarily provides the information to the agency.

Finally, we believe that the terms "test or review” are too
broad to describe the type of information to which the agencies
may not have access.

We believe that such terms could be

interpreted broadly to prevent the agencies from having access to
the kind of internal review and audit materials necessary to
conduct a normal compliance examination.

Hence, we would suggest

clarifying the language to avoid such consequences.

Due Process Protections

Section 311 of the bill would affect the FDIC in
administrative proceedings when it is acting in its regulatory
capacity, when it is acting as conservator or receiver, or in its
corporate capacity as an assignee of assets of a receiver of a
failed insured depository institution.

The bill would apply a

more stringent standard than currently applies to the FDIC when
ft seeks to obtain pre-judgement attachment of assets or other




30
injunctive relief.

Section 311 of the bill would require the

FDIC to show immediate or irreparable injury as a condition for
obtaining such relief.

We oppose this provision to the extent it would affect our
roles as conservator, receiver, and corporate liquidator of a
failed financial institution under section 11(d)(19) of the FDI
Act.

The authority to seek temporary injunctive relief in the

form of asset freezes without having to show irreparable and
immediate loss allows the FDIC, in appropriate cases, to move
quickly to prevent fraudulent conveyances or concealment of
assets.

The statutory power provided under section 11(d)(19) is

consistent with similar statutory injunctive provisions where
Congress deems a type of action to merit relief from this common
law requirement.

There are times, such as soon after a failure, when we
urgently require an injunction to prevent dissipation of assets.
On such occasions, we might not yet have sufficient information
to satisfy the irreparable and immediate injury standard, and in
some cases it can be difficult to establish irreparable harm when
money damages, as opposed to land or some other unique asset, are
at issue.

Congress wanted special status to be applied to cases

involving money damages when deposit insurance funds were at
risk.

Without that authority, the FDIC may be powerless to

prevent dissipation of assets.




A consequence could be that

31
losses to the deposit insurance funds from bank failures would
increase.

Further, the law as it stands does not deprive borrowers or
other defendants, such as directors and officers of failed
institutions, of due process protections.

Under sections 8 and

11 of the FDI Act, the FDIC must still establish in court that an
asset freeze is in the public interest, that the FDIC has a
substantial likelihood of winning its case, and that the
inconvenience to the defendant is outweighed by the potential
harm to the FDIC as receiver or in another capacity.

Moreover,

the law in its present form, has a limited impact because it is
temporary and does not determine ultimate entitlement.

Assets

are placed under court supervision, and defendants may still
obtain money for legal expenses, or sell the assets for adequate
consideration after obtaining prior court approval.

Present law

is intended to prevent parties from making fraudulent or abusive
transfers or dissipation of assets until the FDIC's suit for
collection can be heard by a court on the merits.

Thus, the due

process rights are fully protected.

THE FDIC'S SPECIFIC BURDEN REDUCTION EFFORTS TO DATE

As discussed earlier, regulatory burden falls
disproportionately on small institutions.

In recent years, the

FDIC has become sensitive to the issue of regulatory burden




32
because state nonmember banks are typically small —
or fewer employees; a third, 13 or fewer.

half have 25

We are continuing to

review our regulations, policies, and procedures and seek to
simplify or eliminate them where appropriate.

In doing so, we

have also recognized that the banks with the best examination
ratings need a lighter regulatory hand than those that give us
concern.

I will highlight previous and ongoing efforts of the

FDIC to identify and change areas where burden can be reduced
without impairing regulation for safety and soundness purposes or
necessary consumer protections.

Safety and Soundness

nations

The FDIC has acted to minimize the burden of its safety and
soundness examination program through careful allocation of
resources, a simpler and better focused examination report format
and an increased emphasis on coordination with other federal and
state bank supervisors.

For example, as permitted by statute,

well-capitalized insured depository institutions below $250
million in total assets are subject to less frequent examinations
—

if they are rated 1 under the CAMEL rating system, as are

well-capitalized CAMEL 1- and 2- rated institutions with total
assets of $100 million or less.

To promote better consistency

among examinations, the FDIC has adopted a Uniform Report of
Examination form with the other Federal banking agencies.




33
To minimize the burden of duplicative and overlapping
examinations, the FDIC coordinates its safety and soundness
examinations with state banking authorities and in most cases
alternates responsibility for examinations of CAMEL 1- and 2rated institutions with state authorities.

We also coordinate

safety and soundness examinations of subsidiary banks of large
multibank holding companies with other federal and state bank
supervisors to eliminate overlap.

We have also worked with the

Federal Reserve Board and with state regulators to develop a
coordinated and unified supervisory program for U.S. operations
of foreign banking organizations.

In addition, the FDIC and other federal regulators recently
reached an agreement with the National Association of Securities
Dealers to coordinate the examination of broker-dealers
affiliated with insured depository institutions operating on bank
premises.

Compliance Kyamjnations

The FDIC has also undertaken initiatives in the consumer
compliance area to minimize and reduce the burden on banks.

With

the creation of a new Division of Compliance and Consumer Affairs
in 1994, the FDIC began a comprehensive review of its compliance
examination activities to identify specific areas for
modification.




To reduce the time and burden associated with

34
onsite compliance examinations, we are streamlining the process
by providing examiners with better analytical tools and computer
software.

For example, to reduce the time examiners spend onsite

in banks conducting compliance examinations, the FDIC is
expanding and enhancing its offsite pre-examination analysis.
The use of specialized data integration software will enable
examiners to perform a substantial amount of loan portfolio
analysis at the field office, instead of in the bank.

In conjunction with our efforts to streamline the compliance
examination function we will be surveying a cross-section of
banks over the next month to solicit their views about how that
process may be improved.

The responses we receive will be

compared with a survey conducted again in twelve months to enable
us to measure the success of the modifications we are
implementing in the compliance examination process.

To ensure a consistent application of the new CRA
examination criteria, the agencies will be working together
through the FFIEC to develop standardized procedures and to
coordinate examiner training.

Through this joint effort, we can

ensure a well-executed implementation of the new regulation.




35
Regulation Review and streamlining

As mentioned earlier, in accordance with section 303 of the
Riegle Community Development and Regulatory Improvement Act of
1994, the FDIC is undertaking a comprehensive review of its
regulations and policy statements to streamline, eliminate or
modify them where possible.

The purpose of the review is to

improve efficiency and reduce unnecessary costs, as well as to
eliminate inconsistencies, and duplicative requirements.

We have

developed a schedule for an orderly review of the various
regulations and policy statements and have targeted several for
early attention.

Where appropriate, we are working on an

interagency basis to review comparable regulations and policies
at all the agencies on a uniform basis.

In this regard, we claim

an early success in the new CRA regulation.

As I noted at the outset, through a broad range of other
previous initiatives that parallel the goals of section 303, the
FDIC has sought to change or modify existing regulations to
reduce the regulatory burden on banks while improving the
regulation of safety and soundness.

The breath and scope of

efforts is illustrated by the following examples of recent
actions taken to reduce burdensome supervisory requirements:

•

The FDIC has implemented pursuant to statute a prompt

corrective action regimen under which well-capitalized and well-




36
managed institutions are freed of prohibitions and restrictions
otherwise applicable to under-capitalized institutions.

•

Institutions with a CAMEL rating of 1 or 2, and that

exceed $5 billion in total assets, are eligible for the holding
company exception when complying with the FDIC's rules and
regulations regarding annual audits.

These institutions may now

use the holding company's audit committee and submit holding
company reports in order to satisfy the FDIC's requirements.
Thus, such an institution is no longer required to have its own
separate audit committee and need not file annual reports
prepared at the institution level as previously had been
required.

•

The FDIC adopted a final rule clarifying regulatory

capital treatment for net unrealized holding gains and losses on
"available-for-sale" securities.

Including unrealized gains and

losses in regulatory capital could cause bank capital levels to
be unnecessarily volatile, without appreciable benefit to the
safety and soundness of the banking system.

The FDIC's rule

excludes most of these unrealized gains and losses from Tier 1
capital, thereby minimizing the possibility that temporary
fluctuations in market interest rates could cause an institution
to fall below its minimum capital requirements.




37
•

The FDIC has acted to waive, under certain conditions,

burdensome disclosure requirements related to a bank's commission
on securities transactions for bank customers.

This waiver

eliminates a disparity in the rules for state nonmember banks in
relation to other banks, which are not required to provide the
disclosures.

In addition, it alleviates the problem many banks

faced in determining the amount of their fee in advance or
immediately after a trade.

The FDIC's new waiver authority

conforms to authority the Federal Reserve Board and Comptroller
of the Currency already have.

•

Statutes requiring regulations on real estate lending,

safety and soundness standards and external audits and
attestations have been implemented with simple, short regulations
and supplemented with less draconian supervisory guidelines.

•

The FDIC recently withdrew a proposed rule on contracts

that may be adverse to a bank's interests.

We determined that

potential abuses can be handled through normal supervision and
existing authority and that it is therefore not necessary to
implement additional regulations pursuant to section 30 of FDI
Act.

•

Banks rated satisfactory or better for CRA purposes have

a streamlined and expedited application process when establishing




38
or relocating an automated teller machine instead of filing a
formal application and awaiting approval.

•

The FDIC adopted a final rule reducing the amount of

risk-based capital that FDIC-supervised banks must maintain for
low-level recourse transactions.

For risk-based capital

purposes, when assets are transferred with recourse, capital
normally must be held against the full outstanding amount of the
transferred assets regardless of the level of recourse retained
by the transferor.

The final rule relieves banks of this

excessive regulatory capital burden by limiting the amount of
risk-based capital required to be held in low level recourse
transactions to the maximum amount of loss possible under the
recourse agreement.

•

In 1992 the FDIC, under the auspices of the FFIEC,

adopted a uniform policy concerning the frequency and timing of
changes to the Report of Condition and Income (call reports) and
similar reports filed by other depository institutions.

Changes

in regulatory reporting requirements impose a burden on
institutions because they must make modifications to their
•t

*

recordkeeping and reporting system to accommodate the reporting
changes.

Limiting the frequency of changes and providing lead

time between the announcement of the change and its effective
date reduce regulatory burden.

Under the interagency policy,

changes in regulatory reporting requirements are to be announced




39
prior to the start of the calendar year in which the revisions
will take effect, thereby giving institutions at least 90 days
advance notice.

•

The FDIC Board adopted a formal appeals process on

March 21, 1995, that provides FDIC-supervised institutions with
an avenue to appeal material supervisory determinations including
CAMEL, compliance and CRA ratings, the adequacy of loan loss
reserve provisions and cited violations of law or regulation.

•

The FDIC has adopted a new approach for collecting

deposit insurance premiums.

Effective April 1, 1995, for the

semiannual assessment period beginning July 1, 1995, the
assessment amount will be calculated by the FDIC rather than by
each institution.

This will improve the accuracy of the

computations and relieve institutions of the burden of performing
the calculations.

Furthermore, assessments will be collected via

direct debits initiated by the FDIC through automated clearing
house processes which reduces paperwork for insured institutions.

Our efforts to identify areas for regulatory relief are
ongoing and we continue to seek out opportunities to make further
inroads into burden reduction.




40
ADDITIONAL REGULATORY RELIEF MEASURES

Appendix B provides a description of additional statutory
changes that we believe would help to reduce regulatory burden.
Our proposed amendments add to the efforts of the Subcommittee to
reduce burden without compromising safety and soundness.

For

example, we recommend repealing section 39 of the FDI Act that
requires federal banking agencies to prescribe operational and
managerial standards for all insured depository institutions.
The standards required by section 39 are widely viewed as
unnecessary micromanagement of financial institutions.

Another recommendation, that is mentioned earlier in the
testimony, is to amend section 22(g) of the Federal Reserve Act
to expand the statutory exceptions to the restrictions on loans
to executive officers to include home equity lines of credit.
This amendment would provide flexibility in lending to executive
officers without compromising safety and soundness.

We have provided language on these and additional
suggestions for reducing burden in seven other areas to the
Subcommittee staff and would be pleased to assist them further in
regulatory and legislative relief efforts.




41
CONCLUSION

Let me again state that we are encouraged that Congress is
committed to reducing regulatory burden.

The FDIC too is engaged

in an intensive effort to identify regulations and policies that
may be modified, streamlined or eliminated, without compromising
safety and soundness or essential consumer protections.

We are

pleased that Congress is engaged in efforts to identify statutory
requirements that also add to the level of burden without
compensating benefits.

We encourage Congress to continue review the many laws and
resulting regulations that institutions find most burdensome.
This review should be subject to the criteria I referred to at
the outset of my testimony:

1)

whether the laws are necessary

to ensure a safe and sound banking system, 2)

whether the laws

enhance the functioning of the marketplace, and 3) whether the
laws can be justified on strong public policy grounds related to
consumer protection.

Against these criteria, the laws should be

reviewed with respect to their underlying premises and whether
they achieve their purposes.

In addition, the costs and any

side-effects should be examined to determine whether there are
simpler, less-costly and more straightforward means of achieving
those ends.




42
The regulatory burden on the banking industry grew
incrementally over a number of decades —

rule by rule,

requirement by requirement, report by report.

The time has come

to search through the baggage to determine what is really
necessary to carry forward.

We welcome the opportunity to work

with you Mr. Chairman, this Subcommittee, and the Congress in
this important effort.




A PPEN D IX A
Costs o f Selected Regulatory and Legislative Requirements:
An Informal Survey
In conjunction with current efforts to reevaluate the benefits and costs of various legislative and
regulatory requirements for the banking industry, the FDIC conducted an informal, voluntary survey
of a small group of banks it supervises. (A copy of the questionnaire is attached.) Each institution
was asked to estimate its total cost— both direct and indirect — of compliance with the requirements
contained in the survey. A cross section of institutions was chosen with regard to size and location.
Sixty-one banks participated, representing every region of the country. The smallest participant had
assets of only $4.6 million at year-end 1994; the largest had $9.2 billion of total assets. Random
sampling could not be used with only 61 banks, so the results are representative of only the
institutions selected, but not the banking industry generally.
This study differed from others that have been conducted in recent years. For reasons of time and
burden on the institutions surveyed the FDIC focused only on specific provisions for regulatory relief
generally supported by the FDIC rather than on overall regulatory cost or broad categories of
regulation or legislation. Respondents were asked only to report costs associated with specific
requirements that would not otherwise be incurred.

Recurring Regulatory Costs
The annual cost estimates for the recurring legislative and regulatory requirements included in the
survey are presented in Table 1. The reported costs of compliance for each question varied
considerably among institutions; therefore, median values (the midpoint of estimates received) are
used to describe the results. This measure was chosen because it is not affected by extremes in
either direction.
Table 1
FDIC REGULATORY BURDEN SURVEY

Estimated Recurring Costs Incurred by a Single Bank: Selected Initiatives

Legislative Initiatives

Median
Annual
Dollar Cost
for Reporting
Institutions

Truth in L ending A ct beyond basic interest rate inform ation

$10,000

Truth in Savings A ct beyond basic interest rate inform ation

5,400

0.67

Cost as Percent
of Net Income
(Median for
Reporting
Institutions)
1.03%

Savings from consolidation o f R E SPA /T IL disclosure requirem ents

5,000

0.38

R ight-of-R escission provision o f T ruth in Lending A ct

2,500

0.20

A ccountant attestations on internal controls & regulatory com pliance

3,000

0.28

Pass-through insurance disclosures to em ployee benefit plan depositors

1,250

0.08

550

0.04

250

0.01

500

0.05

3,000

1.46

Federal R eserve A ct reporting o f loans to executive officers
Federal D eposit Insurance A ct reporting o f bank stock collateral
Small business and agricultural credits reporting
H M D A lim it raised to $50 m illion (for applicable institutions only)

Total Recurring Regulatory Costs




$42,394

3.35%

l

Consumer and Supervisory Issues. Several questions dealt with various aspects of consumer
protection requirements. For instance, respondents indicated that the median cost of providing
customers with Truth in Lending information over and above disclosure of the basic, annual
percentage rate was $10,000 per annum. The comparable figure for Truth in Savings was $5,400.
Lower estimated costs were reported for the overlapping information requirements in RESPA and
Truth in Lending and for the cost of right of rescission under Truth in Lending. To put these dollar
figures in perspective, in no case did the reported cost of any specific regulation exceed 1.1 percent
of net income in 1994 for the relevant institutions.
Other questions focused on supervisory issues. For instance, the median cost of obtaining an
outside auditor to attest to an institution’s assertions regarding its compliance with internal controls,
regulations, and legal requirements was reported to be $3,000. No other question regarding
supervisory issues yielded median cost estimates that exceeded $1,250.
Reporting Burden. With respect to reporting burden, the cost of providing data on small loans
to business and agriculture was less than $500 for half of the respondents. On a per loan reported
basis, the median cost was $1.70. A proposal has been offered to increase the cutoff for the Home
Mortgage Disclosure Act (HMDA) reporting exemption from an asset level of $10 million to $50
million. Banks in the $10 million to $50 million range estimated that the median cost of collecting,
reporting, and making public HMDA data was $3,000 per year (just under 1.5 percent of net income).
The responses regarding HMDA costs are presented in Table 2. The median cost per application
received was $119.

Table 2
FDIC REGULATORY BURDEN SURVEY

HMDA Costs For Selected Size Categories

Institution Size
(Assets)

Cost as Percent
of Net Income
Median Annual
(Median for Reporting
Dollar Cost for
Institutions)
Reporting Institutions

Special Measures
(Median for Reporting
Institutions)

1.19%

$ 97.31 / Application

3,000

1.46

$118.80 / Application

22,000

0.25

$ 17.52 / Application

$10 to $25 million

$2,300

$10 to $50 million
Greater than $50 million
(Institutions not affected by
current proposals)

Total Recurring Costs. For all recurring requirements included in the survey, the median annual
cost of compliance was reported to be approximately $40,000 per institution (3.35 percent of net
income). If those requirements had not been in place, the responses suggest that half the institutions
would have seen a pre-tax increase in their return on assets of more than 5 basis points.

Differences by Size of Institution
The FDIC survey confirmed the findings of other studies which have shown that small institutions
generally bear a higher proportional regulatory burden than large ones. Smaller institutions reported
that a clearly higher proportion of their budgets is devoted to meeting the recurring requirements

2




FDIC REGULATORY BURDEN SURVEY

Median Recurring Costs for Reporting Institutions: Selected Initiatives
Cost/Net Income (Percent)
1 6 .3

Less Th an
$ 1 0 Million

$ 1 0 Million$ 2 5 Million

$ 25 Million$ 50 Million

$ 5 0 Million$ 2 5 0 Million

$ 2 5 0 Million- G reater Th an
$1 Billion
$1 Billion

Asset Size

addressed in the survey. Specifically, the proportion of net income devoted to these items ranged
from over 16 percent at the smaller institutions to just over one percent at the largest. As may be
seen in Table 2, the cost to comply with HMD A requirements was proportionally higher for small
institutions than for larger ones.

The Cost o f Various Applications/Notifications
Respondents also were asked to estimate the cost of various applications and notifications that
they periodically submit to the FDIC (see Table 3). The estimates for these items ranged from a
median cost of $500 for a notification of a change in senior management to $20,000 for reporting
Table 3
FDIC REGULATORY BURDEN SURVEY

Estimated Costs: Selected Applications/Notifications

Legislative Initiatives
E stablishm ent or relocation o f a branch
C hange in senior executive officer or
B oard o f D irectors
Exercise o f trust pow ers
“Phantom ” m erger o r corporate
reorganization
FD IC perm ission to conduct activities not
allow ed national banks




Number of
Institutions
Responding to
Question

Median
Annual
Dollar Cost
for Reporting
Institutions

Cost as
Percent of
Net Income
(Median for
Reporting
Institutions)

40

$5,000

0.15%

39
14

500
1,000

0.04
0.02

15

20,000

0.23

13

2,500

0.07

3

major corporate reorganizations. These estimates were based on a subset of the institutions queried,
as not all participants had experience in all types of actions.

Overall Costs
Because the survey was informal and voluntary, it could not employ a statistically-representative
sample of institutions. Thus, it is not possible to provide statistically-based industry-wide estimates
of the potential cost savings from the elimination of the requirements in question. However, to
approximate the larger scale of savings for all FDIC-supervised institutions, the figures from the
participating banks were generalized to all such institutions. (All FDIC-supervised institutions to
which that requirement was applicable were assigned the same proportional costs as those responding
to the survey.) For applications and notifications, the overall cost was obtained by multiplying the
actual number of filings with the FDIC in 1994, times the estimated per unit cost. Because of the
variability of the estimates received, a range of costs was developed based on the median and mean
answers in each category.
Using the median cost estimate for each category, the total compliance costs for all questions in
the survey for FDIC-insured institutions would sum to approximately $500 million in 1994. Because
several institutions reported unusually high estimates of costs for each question, the mean estimate
was always higher than the median for each question. Using the mean estimates as a basis for
aggregating, the total cost of compliance for those selected requirements for all FDIC-supervised
institutions was slightly more than $1 billion. Therefore, the range of costs for compliance of
FDIC-supervised institutions can be credibly set at $500 million to $1 billion. These figures compare
to total net income of all FDIC-supervised institutions for 1994 of $12.6 billion.

Results Relative to Other Surveys
In recent years two other surveys of banking institutions were undertaken regarding the costs of
regulations. These surveys covered a much broader range of regulations than did the FDIC survey.
In 1991, the American Bankers Association (ABA) asked a sample of their members about the “cost
of regulation” in general; their industry-wide estimate based on the survey answers was $10.7 billion.
The Independent Bankers Association of America (IBAA), which surveyed its community banks in
1992 on 13 broad regulations, estimated that compliance costs for all such institutions were $3.2
billion.
Because the questions asked by the FDIC were much narrower and more specific than those
contained in the two earlier surveys, our cost estimates are proportionately lower. Moreover, the
cost estimates involved a much different set of institutions. Each estimate of total cost was related
to total assets of the relevant population of banking institutions to facilitate comparison of the various
results. After that adjustment, the estimates from the FDIC survey ranged from 15 to 30 percent of
the industry-wide ABA figure of total compliance costs and from 10 to 20 percent of the IBAA figure
for all community banks. This was probably a reasonable result given the more limited scope of the
FDIC survey.

4




SURVEY QUESTIONS ON REGULATORY BURDEN

1.

What is the overall, estimated annual cost to your institution o f Home Mortgage
Disclosure Act (HMDA) data collection, review, and reporting, including the cost o f
making the results available to the public?

2.

What is the overall, estimated annual cost of all other disclosures required by the Truth
In Lending Act beyond the disclosure o f the basic, annual percentage rate?

3.

What is the:
a.

Percentage o f home loans and lines o f credit subject to rescission under the Truth
In Lending Act that has been rescinded at your institution in recent years?
%

b.

Overall, estimated annual cost of compliance with the right-of-rescission provision
o f the Truth In Lending Act?
$

4.

What is the amount o f estimated, annual savings which could be attained from the
coordination and/or consolidation (i.e ., elimination of overlaps as well as o f differences
in definitions and coverage) of disclosure requirements o f the RESPA and the Truth in
Lending Act?




5.

What is the overall, estimated annual cost o f providing customers with the disclosures
required by the Truth in Savings Act, over and above those revealing the rate and method
used to calculate interest?
$ ___________________

6.

You currently are required to report data on various types and size categories o f small
business and agricultural credits on the June call report. What is the overall, estimated
annual cost of having to comply with this reporting requirement?
$ ___________________

Note: Banks are required to report on Part II o f Schedule RC-C o f the June call both the
number, and amount outstanding, o f business loans with original amounts o f $1 million or less
and o f outstanding farm loans with original amounts o f $500,000 or less. Included are loans
secured by nonfarm, nonresidential properties, commercial and industrial loans, loans secured
by farm land, and other loans to farmers.

7.

8.

What is the anticipated cost o f providing required disclosures to employee benefit plan
administrators regarding the availability o f pass-through deposit insurance coverage on
employee benefit plan deposits (effective July, 1995 as outlined in FIL-14-95)?
a.

Initial cost

$ _______________

b.

On-going cost

$ _______________

Section 36 of the FDI Act requires attestation by an institution’s independent public
accountant to management’s assertions regarding internal controls and compliance with
FDIC regulations and federal laws. What is the overall, estimated annual cost of
compliance with this requirement?
$ ___________________

Note: Section 36 (c) o f the FDI Act requires an institution’s independent public accountant to
attest to, and report separately on, the assertions o f the institution’s management contained in
any internal control report required by Section 36(b)(2) o f the Act. Section 36(e) o f the FDI Act
requires the institution’s independent public accountant to apply procedures agreed upon by the
FDIC to objectively determine the extent o f compliance o f the institution with laws and
regulations designated by the FDIC.




9.

Proposals have been made regarding the streamlining of notice and application processes.
What is the overall, estimated cost of preparation and submission of an application or
notice for:
a.

Establishment/relocation o f a branch?
$ __________________

b.

Change in senior executive officer/board of directors (pursuant to Section 32 of
the FDI Act)?
$ __________________

c.

Exercise of trust powers?
$ __________________

d.

''Phantom" merger/corporate reorganization?
$ __________________

e.

An application to conduct activities not permissible for national banks (pursuant
to Section 24 of the FDI Act)?
$ ____________

10.

What is the estimated, annual cost to your institution o f maintaining and reporting data
required by Section 22 (g) o f the Federal Reserve Act regarding loans to executive
officers—both from outside sources and from your institution?
$ ___________________

Note: Section 22(g)(6) o f the Federal Reserve Act requires executive officers to report to their
Board o f Directors, detailing the extensions of credit from another institution whenever the
aggregate amount o f those extensions exceed the permissible limits from their own institution.
Section 22(g)(6) is made applicable to insured nonmember banks through Section 18(j) o f the
FDI Act. Section 22(g)(9) of the Federal Reserve Act requires that each institution include with
its call report data on all loans to executive officers since the filing of the previous call report
made pursuant to Section 22(g).




11.

Section 7(j)9 of the FDI Act requires reporting of credit extensions secured by 25 percent
or more of any class of stock o f an insured depository institution. What is the overall,
estimated annual cost of this reporting requirement?
$ ___________________

Note: Section 7(j)9 of the FDI Act requires any financial institution and any affiliate that has
credit outstanding which is secured directly or indirectly by 25 percent or more o f any class of
shares o f another insured depository institution to file a report with its federal banking agency.
A copy also is required to be filed with the appropriate federal banking agency o f the institution
whose stock secures such extensions o f credit.

12.

Are there any other areas of banking law or regulation which you feel are particularly
costly to your institution that you feel should be eliminated?

Regulation

_______________

Estimated annual cost

$

Regulation
Estimated annual cost




$

APPENDIX B

ADDITIONAL REGULATORY RELIEF MEASURES

The FDIC also believes the following additional statutory
changes would help significantly to reduce regulatory burden.

We

recommended their inclusion in the bill.
•

Repeal section 39 of the FDI Act. Section 39 requires the
Federal banking agencies to prescribe standards, by
regulation or guideline, for all insured depository
institutions relating to asset quality, earnings, stock
valuation, various operational and managerial matters, and
compensation. The standards required to be prescribed by
the agencies represent an extraordinary foray into the
micromanagement of a depository institution and are
unnecessary to ensure safety and soundness. Not only are
the standards difficult and burdensome for the agencies to
establish, but the agencies already have sufficient
authority to deal with abuses and unsafe or unsound
practices on a case-by-case basis under section 8 of the FDI
Act and other provisions of law and regulation. The
guidelines which the agencies may issue in satisfaction of
this statute are likely to be more confusing than helpful.

*

Repeal section 37(a)(3)(D) of the FDI Act. Section
37(a)(3)(D) requires the Federal banking agencies to develop
jointly a method for insured depository institutions to
provide supplemental disclosure of the estimated fair values
of their assets and liabilities, to the extent feasible and
practicable, in any balance sheet, financial statement,
report of condition, or other report of any insured
depository institution required to be filed with a Federal
banking agency.
Section 37(a)(3)(D) has not only been difficult and
burdensome for the agencies to implement but also places
additional regulatory burden on insured depository
institutions by requiring them to disclose a variety of
information, much of which the agencies already are able to
obtain. For example, financial statements that are filed
annually with the agencies by institutions subject to the
audit and reporting requirements of section 36 of the FDI
(i-e«, institutions with $500 million or more in assets)
and any other institution with financial statements prepared




2

in accordance with Generally Accepted Accounting Principles
already include information on the fair value of their
financial instruments. While not all of an institution's
assets and liabilities are financial instruments, the vast
majority are. Other real estate (which is one of the more
significant assets that is not a financial instrument) is
carried on an institution's balance sheet at an amount that
does not exceed fair value less estimated selling costs.
Also, certain securities are carried at fair value on the
balance sheet and, for those securities that are not carried
at fair value on the balance sheet, supplemental disclosure
of their fair value is provided.
In addition, institutions with assets in excess of $100
million will be required to disclose the fair value of their
off-balance sheet derivatives beginning March 31, 1995. For
institutions subject to section 36 of the FDI Act (i.e.,
institutions that pose the largest risk to the insurance
funds), the fair value disclosures required by section
37(a)(3)(D) essentially duplicate much of the information
that they already disclose. For the few assets and
liabilities for which fair value is not currently disclosed,
it may not be feasible or practicable to determine fair
value. Moreover, the agencies have the authority under
section 36 of the FDI Act to require fair value disclosure
as they determine to be necessary.
•

Amend section 11(a) (IMP) of the FDI Act. Section 11(a) of
the FDI Act prohibits the FDIC from providing pro rata or
"pass-through” deposit insurance coverage to employee
benefit plan deposits that are accepted by an insured
depository institution at a time when the institution may
not accept brokered deposits under section 29 of the FDI
Act. Consequently, if an institution accepts employee
benefit plan deposits at a time when it is unable to accept
brokered deposits (i.e., when it is undercapitalized), such
deposits would only be insured up to $100,000 per plan (as
opposed to $100,000 per participant or beneficiary). Under
existing law, the depositor, rather than the institution,
would be penalized for the institution's behavior.
By limiting "pass-through" coverage on employee benefit plan
deposits, the burden is placed on plan administrators every
time a deposit is made to inquire as to an institution's
capital category and ability to accept brokered deposits
before placing plan deposits with the institution, even
though many plan administrators may not be aware of such
restrictions. Even if they are aware of such restrictions,
plan administrators must inquire each time as to the
institution's continuing ability to provide "pass-through"
coverage. Not only are the "pass-through" restrictions
burdensome and unfair to plan administrators and




3
participants, but they also are burdensome to the
institution by subjecting it to frequent requests for
information concerning its ability to offer "pass-through”
insurance to employee benefit plan deposits.
We suggest amending section 11(a)(1)(D) of the FDI Act to
prohibit undercapitalized institutions from accepting
employee benefit plan deposits. The effect of the suggested
amendment would be to provide "pass-through” deposit
insurance coverage to employee benefit plan deposits that
are accepted by an institution that violates the law and
accepts such deposits at a time when it is undercapitalized.
Under the amendment, the institution, rather than the
depositor would be penalized, which is consistent with the
way brokered deposits are treated under the law.
•

Repeal section 29A of the FDI Act.
Section 29A requires
deposit brokers to file notices with the FDIC and imposes
certain recordkeeping and reporting requirements on deposit
brokers. The FDIC believes that the requirements of section
29A serve no useful supervisory purpose and that the receipt
and use of brokered deposits can be monitored through call
reports and the examination process. The effect of repeal
would be to reduce the burden on deposit brokers who have no
reason to know what their clients are doing with the
brokered funds, and on any institutions that may be acting
as deposit brokers, as well as on the FDIC in receiving and
maintaining reports filed by deposit brokers. Repeal would
in no way change the existing restrictions on depository
institutions accepting brokered deposits. The amendment
would also eliminate what appears to be an incipient problem
whereby individuals or entities file the notice with the
FDIC that they are acting as deposit brokers and claim or
misrepresent themselves to potential customers as
"registered,” "licensed,” or "approved" by the FDIC.

•

Conform the interest-rate limitations contained in section
39 of the FDI Act. As currently drafted, section 29
contains three separate and dissimilar provisions that limit
the rate of interest payable by insured institutions that
are not well-capitalized.
The first of these provisions is section 29(e) which
prohibits an adequately capitalized institution that has
received a waiver to accept brokered deposits or an
institution for which the FDIC has been appointed
conservator from paying interest on brokered deposits that
significantly exceeds the rate paid on deposits of similar
maturity in the institution's normal market area or the
national rate paid on deposits of comparable maturity, for
deposits accepted outside the institution's normal market
area.




4
The second provision limiting interest rates is section
29(g)(3). This section provides that any insured depository
institution (other than a well—capitalized institution) that
solicits deposits by offering significantly higher rates of
interest than the prevailing rates in the institution's
normal market area is deemed to be a "deposit broker." This
provision essentially limits the rate that institutions that
are not well-capitalized may pay on deposits obtained
without the intermediation of a third-party broker.
The third provision limiting interest rates is section
29(h). This section prohibits an undercapitalized
institution from soliciting deposits by offering rates of
interest that are significantly higher than the prevailing
rates of interest in the institution's normal market areas
or in the market area in which such deposits would otherwise
be accepted.
Computing effective yields in an institution's normal market
area or in any particular area is conceptually difficult.
There is a need to simplify and harmonize these provisions
by eliminating the references to "normal market area" and
"market area in which such deposits would otherwise be
accepted" and replacing these "point-of-origin" or
"geographically—determined" interest rate restrictions with
a single interest-rate restriction that is independent of
the geographic origin of the deposit.
•

Repeal section 30 of the FDI Act. Section 30 prohibits an
insured depository institution from entering into a written
or oral contract with any person to provide goods, products,
or services to or for the benefit of the institution if the
performance of such contract would adversely affect its
safety or soundness.
Since enactment of section 30, there has been a significant
decrease in the types of activity that the statute was
intended to eliminate (i.e., abuses involving contracts made
by or on behalf of an insured depository institution that
seriously jeopardize or misrepresent its safety or
soundness)• This decrease is due in part to increased
awareness of the potential for contracts to be structured in
a manner that is adverse to an institution's safety or
soundness and the use of alternative supervisory actions by
the agencies to address such abuses if they arise. Not only
has section 30 been difficult and burdensome to implement,
but the agencies already possess adequate supervisory
authority under section 8 of the FDI Act and other
provisions of law and regulation to address adverse
contracts.




5
•

Amend section 22(g) of the Federal Reserve Act. Section
22(g) of the Federal Reserve Act prohibits a member bank
from extending credit to its executive officers except in
the amounts, and for the purposes, and upon the conditions
specified therein. Section 18(j)(2) of the FDI Act and
section 11(b) of the Home Owners' Loan Act make such
restrictions applicable to nonmember banks and savings
associations, respectively. Among the exceptions to the
prohibition on loans to executive officers specified in
section 22(g) are loans secured by a first lien on a
dwelling of an executive officer which is expected to be
owned by the executive officer and loans to finance the
education of the children of an executive officer. The
following amendments would expand the statutory exceptions
to the restrictions on loans to executive officers to
include home equity lines of credit up to $100,000 and loans
secured by readily marketable assets up to 50 percent of
fair value. The effect of such amendments would be to
provide additional flexibility in lending to executive
officers without compromising safety and soundness
standards.




SUMMARY OF STATEMENT BY CHAIRMAN HELFER
FEDERAL DEPOSIT INSURANCE CORPORATION
ON REGULATORY BURDEN AND RELATED ISSUES
MAY 2, 1995, SENATE BANKING COMMITTEE
The FDIC supports the purposes of H.R. 650, the Economic
Growth and Regulatory Paperwork Reduction Act of 1995 and, with a
few exceptions, endorses the specific changes in the law.
Chairman Heifer begins her statement by setting forth three
specific criteria that should be used to test the necessity for
and effectiveness of current laws and regulations. These are:
1) whether the regulations are necessary to ensure a safe and
sound banking system, 2) whether the regulations enhance the
functioning of the marketplace, and 3) whether the regulations
can be justified on strong public policy grounds related to
consumer protection.
The Chairman then discusses the results of an informal
survey of banks conducted by the FDIC on the potential savings
that might be associated with the repeal or modification of
specific legislative or regulatory requirements. Next, her
statement comments on the legislation introduced by Chairman
Shelby, S. 650. Then, she reviews current efforts of the FDIC to
alleviate regulatory burden in the safety and soundness and
consumer compliance areas — some commenced at the FDIC's own
initiative, others with the impetus of legislation. Finally, she
proposes additional statutory changes to further reduce
regulatory burden on insured institutions.
FDIC Survey
Within the past month, the FDIC conducted an informal survey
of just over 60 institutions that the FDIC supervises in order to
gauge the potential cost savings from the elimination of specific
legislative requirements and regulations currently on the books.
The regulatory and legislative requirements surveyed included:
Truth in Lending and Truth in Savings disclosures, loan data
collection and reporting, auditor attestation requirements for
bank compliance with laws and regulations, as well as the cost of
various applications and notifications. While the survey was
informal — and, therefore, cannot be used to make industry-wide
estimates — the FDIC believës the results support two general
conclusions. First, small institutions bear higher proportionate
costs than larger ones. Second, the responses clearly suggest
that positive cost savings could be achieved if the surveyed
requirements were eliminated. Taken together, the FDIC estimates
that the savings from completely eliminating all requirements
covered in the survey could increase the annual rate of return on
assets from 5 to 10 basis points on a pre-tax basis for
institutions the FDIC supervises.




2

Comments on S. 650
The FDIC believes that S. 650 is a strong attempt to address
regulatory burden and the effectiveness of applicable statutes.
Truth in Lending. The FDIC is supportive of the revisions
to TILA prescribed by S. 650.
The Community Reinvestment Act of 1977. The FDIC urges the
Subcommittee to allow the agencies to implement the new CRA rule
and to evaluate its effectiveness in reducing regulatory burden
before instituting further changes to the CRA, such as a small
bank exemption and a safe harbor. The new CRA rule should be
given an opportunity to demonstrate that it does what the
agencies intend — allow banks, large and small alike, to focus
on lending, not on paperwork. If the regulation is effective,
there will be more confidence in the CRA ratings and less reason
for protest.
Truth in Savinas. While the FDIC supports reducing the
complexity and regulatory burden imposed by TISA, the agency
cautions the Subcommittee that such a sweeping amendment would
eliminate some of the initial disclosures that provide meaningful
assistance to bank customers in their effort to comparison shop
for deposit products. The FDIC recommends that the Subcommittee
consider legislation that directs the Federal Reserve Board to
review Regulation DD and revise those specific sections that do
not enhance the ability of consumers to make informed decisions
about deposit products and accounts.
Examinations. The FDIC does not believe it is prudent at
this time to extend the maximum permissible examination cycle for
certain small institutions from 12 or 18 months to 24 months. It
was the FDIC's experience in the mid-1980s, that examination
cycles were stretched out for small institutions on the theory
that they did not present systemic risk problems. In fact,
serious problems developed in the interim and these problems went
undetected for some time. In some cases, they ultimately caused
significant losses to the deposit insurance funds. The FDIC
recommends no change in the law with respect to the examination
cycle.
FDIC Board Composition. The FDIC supports the concept of
assuring state bank regulatory experience on the FDIC Board. The
agency, however, strongly suggests that consideration be given to
keeping the Board at five persons for administrative ease, while
designating that one of the seats be held by an individual with
state bank regulatory experience. This would allow the
individual to commit full-time to FDIC matters. The addition of
another part-time member to the FDIC Board would result in over
half of the board members being part-time.




3
Other Provisions. The FDIC supports provisions of the bill
with respect to branch approvals and closures, notice
requirements for new board members or senior executive officers,
liberalization of the requirements governing insider lending,
abolishment of the Appraisal Subcommittee, review of agency
regulations every ten years, repeal of call report requirements
for small business and small farm loans, increasing the size of
banks required to report under HMDA, and self-testing for
compliance with the fair lending laws.. The FDIC opposes the
provisions of the bill with respect to due process that undermine
our ability to protect a bank conservatorship or receivership.
Current Efforts of the FDIC to Reduce Regulatory Burden
The testimony also reviews specific burden reduction efforts
that the FDIC has already taken. The examples fall in the
categories of safety and soundness examinations, compliance
examinations, and regulation review and streamlining. In
addition, in accordance with section 303 of the Riegle Community
Development and Regulatory Improvement Act of 1994, the FDIC
initiated a complete review of the agency's regulations and
policy statements in an effort to identify those that have become
obsolete or those for which the cost to comply substantially
outweighs the intended benefits.
Additional Statutory Suggestions to Reduce Regulatory Burden
The FDIC offers additional statutory changes that would help
reduce regulatory burden without compromising safety and
soundness. For example, the FDIC recommends repealing section 39
of the FDI Act that requires federal banking agencies to
prescribe operational managerial standards for all insured
depository institutions.
The FDIC concludes by urging Congress to continue to review
the many laws and resulting regulations that institutions find
most burdensome. The review should be subject to the same
criteria referred to in the outset of the testimony.