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didn't the Dodd-Frank Act of 2010 end "too big to fail," and won't its "living wills" provision nudge our largest banks to become smaller and simpler?

"I can be hopeful. I am an optimist at heart, but I don't see any evidence of that."

his plans to protect commercial banking from riskier forms of finance

realizes regulatory tactics and strategies must evolve as banks balloon in size and scope, George insists boots-on-the-ground supervision is crucial. She worries complex approaches are overshadowing common-sense judgments.

Stress testing is a "useful tool to gauge potential losses from different economic scenarios. It is no substitute for supervisory judgment and examination," she said.

helps calibrate capital,

"but to really know a bank's condition, you have to go in and examine those credits."

While the central bank has taken many steps in recent years to open its monetary policy decisions to more scrutiny by outsiders, its regulatory policy making has grown more opaque. Gone are the days when Fed governors debated policy decisions in open meetings. George would reverse that trend.

we have to apply the transparency pledge to everything we do

Part of what we have succumbed to is a sense of urgency. Things are moving fast."

time to "ponder the unintended consequences."

These rules have big import

her philosophy on regulation.

concern I have

You can make any rule as complicated or as simple as you want. The more complicated you make it, and I learned this watching Basel II get crafted, I don't think you ensure any chance of success."

I would like to see us go back to a time when examiners were required to use judgment. You gave them simple, clear rules and they had to make judgments."

I have watched over the years. It is an accumulation of compliance, and community banks do not have the scale to spread those costs, so they bear them disproportionately."

I worry about the burden on small banks,

Consumer compliance issues seem to cause the most friction among bankers and their examiners, she said.

due to prescriptive rules that tell the examiner that you don't get to apply judgment here. If it meets this, this and this test, then it's a problem. That's the frustration of bankers."

Forbearance drags things out,

I think about it pretty simplistically. Anytime you have an asset, a loan, that gets into trouble, somebody has to take the loss. The sooner you take the losses," the better.

George belongs to a growing cohort of folks who question some of the conventional wisdom growing up around community banks, namely that a massive wave of consolidation is coming and the average size must increase.

I don't think there has to be a wave of consolidation."

I don't think they all have to be $1 billion" in assets

worried about credit risk at community bank

both margin pressure and competition from larger banks that can use lower funding costs to undercut smaller rivals.

is they [banks] need more yield so they will go out for more risk," she said. "And when they do that in a low interest rate environment it can look OK. But those borrowers start looking worse when rates start ticking up.

it's all going to affect a lot of people.

I hear bankers saying

I am going to have to start making some credits that I wouldn't normally make because I have to generate earnings.'

community banks also are telling her about losing business to large banks.

but that big bank is coming in and pricing a loan in a way that I cannot and would not."

They say I am trying to compete with the big bank in my market

Community banks that survive will be the ones that hold the line on risk but continue to adapt, she said

community banks are core to the payments system and core to lending in these markets. I don't see that model being outdated. It's always got to be tweaked, but I worry the thing that is going to drag them down is regulation. That seems like something we could address and should address."

Chancellor to take control and veto decisions made by the Bank of England

previous regulatory structure

not having clear lines of accountability

FSA will be abolished

creation of three new bodies to regulate financial services

Financial Policy Committee (FPC) will work within the Bank of England

responsibility for regulation and monitoring risks to the financial sector to the economy.

oversee and instruct two new financial watchdogs.

Prudential Regulation Authority

Financial Conduct Authority

PRA will supervise the safety and soundness of individual financial firms

FCA will focus on consumer protection and ensuring employees who work in financial services comply with the rules.

"The Consumer Panel welcomes the intention to transfer responsibility for consumer credit regulation to the FCA

George Osborne said: "The Financial Services Bill will overhaul the failed system of financial regulation which allowed such dangerous levels of leverage to emerge.

"Everyone was so focused on ticking off a regulatory checklist that nobody felt it was their responsibility to use their judgment. "We are putting in place clear lines of accountability, and restoring that crucial element of judgment."

ack of clarity over who was accountable for what created the conditions whereby the Royal Bank of Scotland (RBS) was able to complete its takeover of Dutch bank ABN Amro which led to RBS requiring a £45 billion bailout from the UK taxpayer

British Bankers' Association

“Good financial supervision is not just about structure - decisions taken made by bankers and regulators matter too.

an important milestone in rebuilding trust in the financial services sector. There are still many issues to work though and we will continue working with government so the new structures, as they emerge,

the Bank of England will be in charge of regulation in “normal” times but the Chancellor will have the power to take over in a crisis if taxpayers’ money is at risk.

Director of Financial Services at Consumer Focus

This is a once in a generation opportunity to reform our financial regulation and it is vital we get it right. Consumers have been losing out for too long.

The Financial Services Bill must be passed by parliament before it becomes law.

challenges from an enhanced regulatory regime that has evolved in the wake of the crisis.

The ultimate focus of examination and supervision is the safety and soundness of the bank, as well as compliance with laws and an assessment of the bank's ability to withstand risks and shocks.

how the Federal Reserve's monetary policy aims to increase the availability of credit to foster economic growth, and how we are tailoring our examination and supervision of community banks to ensure that we are not inadvertently constraining lending. 

examination and supervision of community banks is a timely and important topic. Why do I say that? Because, as I will discuss shortly, lending by community banks plays an important role in the ongoing economic recovery, especially by providing credit to small businesses. And it is absolutely critical that examination and supervision do not produce outcomes that are barriers to small business expansion.

potential effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Supervision and Examination of Large and Community Banks

good examiners will help them to be proactive and identify problems early, and because a strong and durable banking system is in everyone's best interest.

They are relatively diversified, but also tend to be more highly leveraged than smaller institutions, and often rely on more volatile wholesale funding. These organizations often are tightly interconnected, raising the prospect that the failure of one institution could rapidly destabilize the wider financial system, giving rise to the "too-big-to-fail" problem.7  

the examination and supervision of the lender should not hinder the ability of creditworthy businesses to access credit.

I am encouraged that community banks are faring better in the current environment.

While profitability remains below long-run historical norms, returns on equity and assets have reached their highest post-crisis levels.3

we must continue to think about how we can improve the examination and supervision of community banks. One issue that we constantly must evaluate is the appropriate balance in the allocation of responsibilities between banks and examiners.4

community bankers typically welcome effective and appropriate examination and supervision.

there are key differences between these two sets of institutions, and these differences have implications for our supervisory framework.

over at least the past decade indicates a trend toward greater concentration. Ninety-nine percent of banks in the United States are community banks, with most of these holding less than $1 billion in total assets. The remaining 1 percent of banks together hold more than 80 percent of the assets in the banking system, with much of this concentrated at a handful of the very largest banks. The four largest commercial banks, each of which has more than $1 trillion in consolidated assets, collectively hold just under half of all U.S. banking assets.6   

The largest commercial banks are characterized not only by their size, but also by their scope of operations and complexity.

we must always think about whether the allocation of responsibilities should be different depending on whether the supervision is of a community bank rather than a large bank,

The characteristics of the largest commercial banks stand in contrast with those of community banks.

community banks are not immune from taking on excessive risk. But there are reasons why risks at community banks are likely to be less dangerous to the financial system. First, community banks generally are less complex and more easily understood. Second, community banks tend to be more traditional in approach.

our supervision of these firms has become arguably much more intensive, which I believe is perfectly appropriate given the effect that problems at the largest firms had on the financial system and the broader economy. 

All of these characteristics have implications for how large and complex banks should be supervised, as compared with community banks. Notably, our supervision of large banks reflects the scope and complexity of their activities as well as their interactions with other firms and possible effects on financial markets, and incorporates systemic risk considerations that could arise from the failure of these banks.

In recognition of their systemic importance, the largest firms also are required to plan for their own orderly resolution in the event that they should fail. 

Because of their complexity and risk characteristics, these firms require intensive and continuous on-site supervision;

examiners also understand local market conditions to be able to put the bank's management and credit decisions in the proper context.

What does this have to do with community banks?

The community banking model is very different from that of the largest banks. Community banks are local by their very nature. They have deep roots in their communities.

This trait is particularly important when it comes to small business lending, where a local community bank may understand things about a prospective customer that cannot be captured in a more quantitative credit-scoring model that might be used by a larger institution.

these characteristics call for a very different model of examination and supervision than what is required for the largest banks.

Third, community banks are less interconnected, so when a community bank fails, the effects are less widespread. 

Strong lines of communication between examiners and community banks are vitally important.

Examiners need to listen carefully to management to understand their perspective where views may differ

We encourage our examiners to be responsive to questions from bankers and help banks understand new regulatory requirements, and they take this responsibility seriously.

the risk-management system of a healthy bank can be pictured as a series of concentric circles. The inner circles consist of the systems and functions that keep the bank healthy and allow it to meet the credit needs of its community while remaining financially sound and compliant with its legal and regulatory obligations. Moving outward, additional circles include processes and checks such as internal audit, executive management committees, risk-management and internal controls, and appropriate governance by the board of directors. The outermost circle is effective supervision. The critical element of this model is that problem identification is first and foremost the responsibility of the bank, while banking supervisors kick the tires of the bank's risk-management and internal control systems. The examiners are, in this sense, a last line of defense and do not substitute for a bank's own processes for risk identification and mitigation. They are not a guarantee of the bank's ultimate success or failure. 

this model of concentric circles generally holds true for banks of all sizes, the complexity of the largest institutions requires far more complex inner circles.

the outer circle that is necessary at a systemically important bank should be far more layered than what is needed at a small community bank. 

think about the effects these policies are likely to have on community banks and the areas they serve.

Federal Reserve are working to ensure that our supervisory program is properly tailored to the wide array of institutions

considering the effect that these policies might have on smaller institutions

we consider not only whether specific policies are appropriate for community banks, but also whether these policies could have the effect of reducing the availability of credit to sound borrowers.

Community Bank Supervision at the Federal Reserve

I hope my remarks will at least continue our conversation about how best to structure a regulatory and supervisory framework for the banking system that effectively supports the real economy and encourages sound and sustained lending to creditworthy borrowers. In order to sustain the economic recovery, we need strong, well-run community banks that operate in a framework of smart and effective supervision

the Treasury fear the banks have a supportive ear in Downing Street in the shape of Jeremy Heywood, No 10 permanent secretary and a former Morgan Stanley managing director,

The separation of high street banking and riskier investment banking operations is the centrepiece of the Vickers package.

the government is considering calls for new governance safeguards at the Bank even as it gets new powers.

had regulators focused on the big picture rather than box ticking they might have prevented the disastrous merger of Royal Bank of Scotland with ABN Amro.

There was no shortage of laws – there was a lack of judgment,

the creation of a Financial Policy Committee at the Bank to spot danger building in the system was breaking new ground; he also conceded that the regulators had to strike a trade-off between risk and economic growth. “We don’t want the financial stability of the graveyard,”

Mr Osborne was giving evidence to MPs about the future shape of Britain’s financial architecture and specifically on the draft financial services bill, which will put the Bank of England in charge of spotting future crises.

recommended replacing the Court of the Bank with a stronger supervisory body that could review interest rates and other decisions after the fact.

provided a stunning $1.2 trillion to large global financial institutions

The money has been repaid

sketchy collateral

surprisingly sketchy collatera

Royal Bank of Scotland received $84.5 billion, and Dexia, a Belgian lender, borrowed $58.5 billion from the Fed at its peak

provided this much assistance to the biggest institutions for so long, and then to have done in effect nothing for the homeowner, nothing for credit card relief.”

financial regulators are captured by the companies they oversee,

espouses the principle that all men and women are equal under the law,” Mr. Kane said. “During the housing bubble and the economic meltdown that the bursting bubble brought about, the interests of domestic and foreign financial institutions were much better represented than the interests of society as a whole.”

THIS inequity must be eliminated

regulators who have a duty to protect taxpayers should require these institutions to provide them with true and comprehensive reports about their financial positions and the potential risks they involve.

The banks really feel entitled to hide their deteriorating positions until they require life support.

Mr. Todd also questioned the Fed’s decision to accept stock as collateral backing a loan to a bank. “If you make a loan in an emergency secured by equities, how is that different in substance from the Fed walking into the New York Stock Exchange and buying across the board tomorrow?”

if we do nothing to protect taxpayers from the symbiotic relationship between the industry and their federal minders, we are in for many more episodes like the one we are still digging out of.

EVALUATING bailout programs like the Troubled Asset Relief Program and the facilities extended by the Fed against “the senseless standard of doing nothing at all,” Mr. Kane testified, government officials tell taxpayers that these actions were “necessary to save us from worldwide depression and made money for the taxpayer.” Both contentions are false, he said.

“Thanks to the vastly subsidized terms these programs offered, most institutions were eventually able to repay the formal obligations they incurred.” But taxpayers were inadequately compensated for the help they provided,

Government officials rewarded imprudent institutions with stupefying amounts of free money

three-pronged reform agenda

capital plan

capital holes

it would be somewhere between €100bn ($137bn) and €200bn.

the plan needs to change

forced to meet the planned 9 per cent core tier one capital ratio in such a short time

determined not to raise fresh money – either from shareholders, because equity prices are so disastrously low, or from the state, because of an understandable fear of being stigmatised as a bailed-out bank that is weaker than its rivals

they would shrink their balance sheets, reducing the risk-weighted assets (or lending commitments) that form the denominator of their capital ratios, rather than boosting the capital that forms the numerator.

shrinkage of available bank credit across Europe

protesting about the lack of funding.

politicians and small business

the banks are bluffing

There is a strong reason to call their bluff

second prong

that will not be enough

normalise banks’ access to liquid funds in the bond markets.

Dexia,

often not insufficient capital that kills a bank (Dexia’s ratios were top-notch) but a lack of liquidity

short-term funding and long-term lending commitments proved fatal.

International regulators

come up with a new measure

the net stable funding ratio

will limit profitability and the banks have protested. But it should happen.

there needs to be a quick fix, too

there has been no issuance of bank bonds

Only with a temporary guarantee from a European Union vehicle can bond markets be reopened.

policymakers need to tackle the root cause of the problems in the periphery – namely, their budgetary mismanagement.

Silvio Berlusconi

must be ousted by the Italian people

entirely within the gift of those preparing for the weekend summit.

first two reforms

brave political calls, laying policymakers open to accusations of handing money to bankers again

the lesser of two evils

accompanied by an enforceable regime of business lending commitments

normal rules of capitalism have already been suspended. We should stop pretending otherwise and make the necessary intervention quickly and decisively