Vice Chair for Supervision urges tailored rules, clearer reviews to protect community banks

The Vice Chair for Supervision at the Federal Reserve System used closing remarks at a conference on community banking to call for more tailored supervision and clearer regulatory processes for smaller banks.

"Community banks drive local and regional economic growth," the Vice Chair said, urging regulators to recognize relationship-based business models and to avoid a one-size-fits-all approach to supervision. She argued that relying on fixed asset thresholds to define community banks is flawed because thresholds do not account for economic growth and inflation and can push complex requirements onto otherwise stable institutions.

The official proposed indexing thresholds to growth so that the original policy choice behind a bank's classification would be preserved. "A simple fix would be for policymakers to adjust the community bank and other thresholds based on growth," she said, adding that indexing would prevent banks from unintentionally crossing into heavier regulatory regimes.

On capital rules, the Vice Chair discussed the community bank leverage ratio (CBLR) as an optional alternative to risk-based capital for community banks, saying past calibrations focused on how many banks could opt in rather than whether the approach delivered the relief Congress intended.

She also highlighted the regulatory application process as a practical point of friction for transactions and integrations, calling reviews "unpredictable in terms of timing and information" and urging clearer standards. "Regulatory application review should be effective, timely, and efficient," she stated, recommending that banks be told in advance what materials are necessary and that regulators act within statutory time frames.

The board recently issued FAQs and two templates aimed at mutual banks considering capital instruments that could qualify as tier 1 common equity or additional tier 1 equity, the Vice Chair said, inviting feedback to refine those approaches.

A central theme of the remarks was transparency. The Vice Chair argued supervisory practices often avoid public and internal scrutiny because they are designated confidential supervisory information (CSI). She recommended revisiting the definition and scope of CSI "which would promote greater public transparency and accountability."

The speech concluded with a call for calibrated supervisory standards so bank ratings reflect a firm's true size, risk and complexity, and a pledge to work with the FDIC and OCC on sensible reforms. The Vice Chair thanked conference organizers, Federal Reserve staff and attendees both in person and online.

The conference closed with no formal votes or regulatory changes announced; the remarks were framed as policy direction and invitations to refine guidance and processes going forward.