Federal Deposit
Insurance Corporation

October 19, 2004

The Honorable Donald E. Powell
Chairman
Federal Deposit Insurance Corporation

Re: RIN 3064-AC50, Notice of Proposed Rulemaking, Community Reinvestment

Dear Chairman Powell:

The banking agencies issued an advance notice of proposed rulemaking (ANPR) in 2001 seeking input on what changes should be made to CRA. After a long review, the proposed rule was issued in February 2004. The agencies expanded the scope of institutions defined as “small” under the rule and therefore subject to only a streamlined lending test, rather than a full-scope CRA review. In July, 2004, the agencies abruptly withdrew the proposal, when the Office of Thrift Supervision (OTS) announced that it would unilaterally raise the small bank threshold to $1 billion, regardless of holding company affiliation.

The FDIC has now proposed to follow the OTS in raising the threshold to $1 billion. I commend the FDIC for seeking public comment on its proposal, and urge the FDIC to withdraw it. I first discuss key reasons for maintaining CRA’s basic framework, and explain why raising the small bank threshold is ill-conceived.

1. General Considerations

First, despite problems with aspects of implementation, the regulations have worked exceedingly well in expanding access to credit—far more so than any involved in the 1995 revisions could have expected. CRA has significantly expanded access to credit. The Federal Reserve Board’s study suggests that this significant expansion of credit has come at a relatively modest cost, if any, in terms of performance and profitability.

Second, the costs to banks, and to the agencies, of changing the regulations could be high. It has taken quite some time for banks and the agencies to work through complicated interpretive issues, operational and information system problems, and, perhaps most importantly, the training of bank employees and agency examination staff. Community-based organizations, state and local governments, and other bank partners have organized their community development activities in response, to some degree, to the current structure of CRA. New regulations might necessitate changes in those activities, with high transition costs. The start-up costs associated with changes in regulations account for a significant part of compliance costs.

Third, current economic uncertainties present complex problems for banks and serious hardships for the most vulnerable households. Now may not be the most opportune time to re-examine basic rules governing bank performance in serving the needs of low- and moderate-income households and communities.

2. Retain the Current Definition of Small Banks

The FDIC proposed to increase the asset level at which institutions are considered “small” under CRA. Currently, banks and thrifts are small if they have assets of $250 million or less, and are independent or are part of a holding company with under $1 billion in bank and thrift assets. Under the proposal, banks and thrifts would be considered small if they have assets under $1 billion, whether independent or affiliated with a holding company of any size.

The OTS plan exempts over 88 percent of all thrifts holding over $160 billion in assets, with 15 percent of total thrift assets—from the CRA large bank retail examinations. The FDIC proposal would exempt almost 96 percent of FDIC-supervised institutions from full-scope reviews.

With respect to the threshold, the proposal presented little evidence that banks between $250 and $1 billion faced special burdens from the full-scope review. If such

particular burdens exist, it would be better to deal with them through modifications of the investment and services tests, rather than eliminate the tests for those firms entirely. Regulators have the authority to be flexible on the investment test. As for the service test, small institutions often have a comparative advantage in providing retail services tailored to their local communities. These services are often vital to low- and moderate-income households, partly because such services are gateways to access to credit. Because there is little justification for not applying a service test to small banks it seems all the more ill-advised to expand the category of institutions not subject to the test. Lastly, smaller institutions often have a comparative advantage in relationship lending to small businesses. Thus, it makes little sense to avoid collecting small business data and evaluating institutions on their small-business-lending performance.

Even more problematic is the proposal to ignore the asset size of the holding company when determining whether to consider the bank “small.” This is so for two main reasons. First, banks within holding companies are less in need of regulatory “burden relief” than similarly sized independent institutions. Holding companies provide scale economies to their subsidiaries in complying with bank regulations. Banks that are part of holding companies face lower regulatory burdens from the same regulation than their non-affiliated counterparts of similar size. Thus, affiliation should generally be weighed, not ignored, in determining tradeoffs between regulatory burdens and benefits.

Second, banks that are part of holding companies have available to them the range of expertise of the holding company, which is useful for developing programs to meet community needs under CRA. The holding company is part of the bank’s performance context. Along with its subsidiaries, it can offer a range of services to the bank in helping the bank meet its CRA performance goals, such as innovative loan products, securitization, or expertise in investment and other matters. These affiliates do affect a bank’s CRA performance, and the bank should therefore be assessed using the CRA test for large retail institutions which includes the investment and service tests and which takes account of the expertise and resources of the parent institution.

For these reasons, the Federal Reserve Board and the Office of the Comptroller of the Currency were correct to withdraw the joint rule increasing the small bank asset thresholds, and the OTS was wrong to pursue even higher thresholds unilaterally. The FDIC should withdraw its proposed rule.

Thank you for providing the public with an opportunity to comment on the proposal.

Sincerely,
Michael S. Barr

THE UNIVERSITY OF MICHIGAN
LAW SCHOOL

MICHAEL S. BARR 625 SOUTH STATE STREET
ASSISTANT PROFESSOR OF LAW ANN ARBOR, MICHIGAN 48109
(734) 936-2878
MSBARR@UMICH.EDU