Federal Deposit
Insurance Corporation

October 18, 2004

Robert E. Feldman, Executive Secretary
ATTENTION: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429

Re: RIN 3064-AC50; Proposed Amendments to 12 CFR 345

Dear Executive Secretary Feldman:

The Community Bankers Association of Illinois (“CBAI”) appreciates this opportunity to comment on the Federal Deposit Insurance Corporation’s (“FDIC’s”) proposed amendments to 12 CFR 345. The proposal would change the definition of “small bank,” add a community development criterion for banks in the affected category and include banking services that benefit rural areas when assessing compliance with the Community Reinvestment Act (“CRA”).

With more than 500 banks and thrifts as members (“CBAI Members”) and more than 150 firms as associate members, CBAI is the largest state-organized financial institution trade association in Illinois and is among the largest in the United States. CBAI Members can be found in each of Illinois’ 102 counties. Among the roles undertaken by CBAI on behalf of CBAI Members are the monitoring of banking regulations and the attempt to influence the making of such regulations so that CBAI Members are not subjected to unnecessary regulatory burdens and so that CBAI Members and their customers can conduct banking business in a safe and sound manner. It is with these objectives in mind that CBAI now expresses its support for the FDIC’s proposed amendments to 12 CFR 345.

Illinois is a diverse marketplace with the metropolitan Chicago area; several cities with manufacturing, higher education or other specialized markets; and hundreds of small towns in rural areas dependent upon small businesses, agriculture or the mining of natural resources. Because of this diversity in the banking marketplace throughout Illinois, CBAI and CBAI Members are in a position to credibly analyze the merits of the FDIC’s proposal as it relates to the assessment of a financial institution’s efforts to service the needs of its community.

The FDIC proposal justifiably takes into account the changes in the banking landscape since the CRA was enacted more than a quarter of a century ago and since the $250 million “small bank” standard was adopted nearly ten years ago. A community bank’s natural growth in asset size over time does not make it less responsive to its community, and the consolidation of assets among the mega-banks provides a continuing and legitimate rationale for adjustment of the two-tiered CRA assessment approach (i.e., distinguishing between the truly “large banks” and the truly “small banks”).

It is also important to note that, with the proposed change in the definition of “small bank” to include banks having up to $1 billion in assets, the FDIC is not abandoning or abdicating CRA compliance examinations. Banks that were subject to CRA compliance examinations prior to the adoption of the FDIC proposal will remain subject to the compliance examinations after the adoption of the amendments. The assessment of compliance might change for some banks (i.e., those between $250 million and $1 billion in asset size), but regulatory scrutiny over whether the financial institution is satisfactorily meeting its mandate to serve the credit needs of its community will continue.

With regard to the specifics of the FDIC’s proposed amendments, CBAI fully supports the change in the definition of “small bank” to increase the asset threshold to $1 billion and to do away with the holding company component of the definition. Community-oriented financial institutions in Illinois, many of which fall into the affected category with assets exceeding $250 million but less than $1 billion, survive in large part based on their ability and desire to meet the needs of their local communities, businesses and residents. In that regard, there is absolutely no distinction between a community bank with $200 million in assets and a community bank with $300 million or even more. To subject a community bank to the “large bank” mandates because that community bank has $251 million in assets is arbitrary and does not realistically capture the distinction between small banks and large banks in today’s banking marketplace. Granted, setting any threshold (e.g., $1 billion) would arguably be arbitrary, but the $250 million standard clearly does not accurately define the financial institutions that are conducting business as “large banks” in today’s marketplace. The increase in the “small bank” threshold to $1 billion would be a vast improvement.

Similarly, there is no reason to maintain the holding company affiliation component within the definition of “small bank” for CRA purposes. In the background commentary that accompanied the FDIC’s proposed amendments to 12 CFR 345, the FDIC noted that some consumer groups had asserted that elimination of the holding company affiliation test would provide incentive for some holding companies to carve up their corporate empires so that the individual subsidiary banks would each be treated under the “small bank” standard for CRA purposes. There is simply no evidence to support that prediction by the consumer groups. On the contrary, mergers and acquisitions within and between bank holding companies have been common since the $250 million small bank test was adopted by the regulatory agencies, and the holding companies are much more influenced by the savings and profitability that they envision from these corporate consolidations than by issues of CRA compliance. Furthermore, as is clear from the commentary that accompanied the FDIC proposal, the large banks and the large holding companies generally have adequate human and financial resources to meet CRA compliance burdens.

Continuing to impose the same “large bank” CRA compliance standards on community banks with assets in excess of $250 million would be counterproductive. Such community banks, unlike the mega-banks, frequently lack the resources and opportunities to meet the same tests that are imposed on the truly large banks. Community investment opportunities are not always available in some markets, and when they are available it is often difficult for a smaller bank to compete with bids entered by the large banks for those investments. As a result, community banks sometimes have to divert resources from their local communities and invest in statewide or other investment vehicles in order to gain credit for purposes of CRA compliance assessment. In addition, community banks often have limited personnel resources and requiring them to compile the same compliance data as the larger banks impairs the ability of such community banks to actually meet the everyday banking needs of the customers in their communities.

The FDIC’s proposal represents a fairer and more productive distribution of the CRA compliance burden as that burden should be applied to smaller banks versus larger banks. Community banks with less than $1 billion in assets will be obligated to meet the credit needs of their communities, but under a special CRA criterion that takes into account the reality of their markets. The flexibility that is present in the proposed amendments to 12 CFR 345 will allow community banks to meet their burden through a blend of lending, investment and service options that reflects the economic and competitive opportunities in their respective locales. The reduction in the regulatory burden associated with less data collection by bank personnel will free human and financial resources that community banks can devote to the needs of their customers.

CBAI also supports the inclusion of banking services to customers in rural areas as part of the CRA compliance assessment for banks having less than $1 billion in assets. In many states, including Illinois, the financing of projects designed to stabilize or revitalize rural America is a key element of community banks’ efforts to service the needs of their specific local markets. CBAI appreciates the fact that the FDIC recognizes the value of a community bank’s financial service to its rural borrowers and communities when evaluating CRA compliance.

In conclusion, CBAI strongly supports the FDIC’s proposed changes to 12 CFR 345 regarding the definition of “small bank,” the inclusion of a reasonable and balanced community reinvestment criterion for banks in the new $250 million to $1 billion asset category and the inclusion of rural banking services when assessing CRA compliance. The stated legislative purpose of the CRA is to encourage financial institutions “to meet the credit needs of the local communities in which they are chartered consistent with the safe and sound operation of such institutions.” Nothing in the FDIC’s proposal represents a retreat from that stated purpose. On the contrary, these amendments will better enable a community bank having assets of less than $1 billion to direct its human and financial resources in the most productive way available in the service of its community and its customer base. These financial institutions will not be exempt from CRA compliance, they will merely be judged by a more flexible and more appropriate test that is tailored to the reality of the specific marketplace in which the bank operates. This new test for banks having assets of more than $250 million but less than $1 billion will recognize the special circumstances of such banks and the disadvantages that are sometimes present when compared to the ability of the truly large mega-banks to meet CRA compliance burdens. Finally, consideration of a community bank’s contributions to the credit and development needs of its rural locale is an appropriate element of CRA compliance assessment. States such as Illinois that have large rural areas and rural customer bases should be credited for the banking services that benefit those communities and customers in addition to the banking services that they may provide to low-income and moderate-income customers.

CBAI appreciates the efforts of the FDIC in this process. Likewise, CBAI notes with approval the adoption of new regulations by the Office of Thrift Supervision that revised the definition of “small bank” for CRA compliance purposes, increasing the “small bank” threshold to $1 billion. CBAI urges other federal regulators to favorably consider the benefits of these changes and the positive impact that such changes will have on the ability of community banks to more productively meet the needs of their communities in a safe and sound manner. The increased threshold is not a threat to CRA compliance or to community development or investment. It is a recognition of the reality of the marketplace in which community banks operate, and a recognition of the distinction between truly “small banks” that survive or perish based on their service to the businesses and customers in their local communities versus the operations and opportunities available to the truly “large banks” with more than $1 billion in assets.

If you have any questions regarding CBAI’s position or any related issues, please feel free to contact me. Thank you for your attention to these comments.

Sincerely,
Jerry D. Cavanaugh
General Counsel
Community Bankers Association of Illinois