The banking regulators have all indicated they wish to minimize the negative impact of Dodd-Frank rules where possible. Federal Reserve Chairman Ben Bernanke discussed the importance of community institutions at a small banking conference hosted by the Federal Deposit Insurance Corp. (FDIC) on Feb. 16. He told community bankers that regulators know Dodd-Frank was generally not intended to apply to them.

"Community banks express concern that the more stringent requirements for larger institutions will eventually find their way to smaller firms; that, however, is not our intent, and we will work to ensure that it does not happen," Bernanke said. By way of example, he highlighted interagency guidance issued in June 2010 covering incentive compensation.  

"In that guidance, we were careful to note simplified expectations for community banks that did not make extensive use of incentive compensation," he said. "We intend to continue this practice for other policies and guidance and to continue to speak with community bankers to respond to their questions and concerns."

While multiple regulators have promised to address community institutions' concerns regarding Dodd-Frank regulation, they are less unified in their response to community bankers who complain that the examination environment has become oppressive. U.S. Sen. Tim Johnson, D-S.D., echoed these concerns in a Feb. 10 letter to inspectors general at the Treasury Department, Fed, FDIC and National Credit Union Association.

"I have heard numerous concerns from community banks and credit unions that the financial regulators' examiners are conducting examinations with unclear standards or with inconsistent application of agency policies and procedures," Johnson wrote. "Community banks and credit unions indicate that examination concerns create uncertainty in their business operations and hesitation to provide credit to their customers.

"While the regulators must ensure the safety and soundness of financial institutions, I believe responsible lending to families and small business owners is one key to our economic recovery," he continued. "If current supervisory practices discourage business growth and responsible lending, we should understand the causes and possible solutions, if any."

Johnson asked the inspectors general to audit the banking agencies within their purview, focusing on examination processes for small institutions including examination timelines and how agencies ensure a consistent approach to bank examination around the nation.

Lawmakers are also considering a legislative alternative.

In November 2011, U.S. Reps. Shelly Moore Capito, R-W.Va., and Carolyn Maloney, D-N.Y., introduced HR 3461, the Financial Institutions Examination Fairness and Reform Act. The bill's proponents said the measure would codify existing supervisory guidance and help ensure that the examinations are conducted consistently.

Regulators' response to this heightened focus on examinations has been mixed.

In his remarks at the small banking seminar, acting FDIC Chairman Martin Gruenberg said his agency is looking into its examination processes.

"I have asked the directors of the FDIC's Division of Risk Management Supervision and Division of Depositor and Consumer Protection to review the examination process for both risk management and compliance supervision, as well as to review how we promulgate and release rulemakings and guidance, to see if we can identify ways to improve our processes and communication while maintaining our supervisory standards," Gruenberg said.

Bernanke promised no such review, but said the Fed's supervision framework offers institutions several opportunities to respond to the examination process.

"Although we hope that bankers are able to resolve all examination issues through discussion with the examiner-in-charge or Reserve Bank management, it is inevitable that examiners and bankers will sometimes differ over examination findings despite our best efforts," he said. "For those cases, the Federal Reserve has a robust appeals process, as well as an independent ombudsman, to provide institutions with a fair and thorough review of complaints."

Regulators with the Office of the Comptroller of the Currency have staunchly defended their examination practices. In a recent speech, interim Comptroller John Walsh said no one should be surprised that supervisory expectations have increased.

"In the wake of a financial crisis, the markets expect more of you; the public expects more of you; politicians expect more of you; and so do we," Walsh said. He insisted, however, that examiners understand the pressures banks now face.

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