Fed's George: Small Banks Ensnared in Regulation

Federal Reserve Bank of Kansas City President Esther George said Tuesday small banks around the nation are being hurt by rulemaking aimed at too-big-to-fail financial institutions.

In her speech at a banking conference held at the St. Louis Fed, Ms. George made no mention of monetary policy or the economy. She devoted her remarks to the regulatory climate surrounding the banking system.

"Community banks have become entangled in a web of reforms intended to address the risks in the largest banks," Ms. George said in the text of a speech prepared for delivery before the event. "These reforms respond to a business model employed by a few large, globally active banks, but have created spillovers for community banks," she said.

Ms. George noted in her speech that in much of the country community banks provide a vital mission in making credit available to small business and farms. She also noted that the size and management structure of community banks also makes them less risky relative to their bigger brothers on Wall Street.

But as regulation has developed in the wake of the financial crisis, these small banks are getting squeezed, the official said.

"As the national economy strengthens, community banks are prepared to resume their important role in their communities and the broader economy," Ms. George said. "However, they argue that the regulatory environment has thrown sand in the gears of efficiently and competitively meeting the credit needs of their communities."

Current regulations "impinged on thousands of community and regional banks," which suggests a different approach to smaller banks would be a good idea, Ms. George said.

"If our regulatory apparatus is going to effectively meet its aims, policy makers must understand how these commercial banking business models operate and why a locally owned community bank is not the same as a branch of a systemically important financial institution in meeting the credit needs of the local community," Ms. George said.