Norbert Michel and Christian Kruse
Regulatory compliance costs smaller community banks roughly double what it costs the largest institutions—the smallest banks spend 11–15.5% of payroll and 16.5–22% of data processing budgets on compliance, compared with 6–10% and 10–14% for their largest peers.
But just last month, the House Financial Services Committee marked up and passed the Main Street Capital Access Act, or the Main Street Act. Focusing on cutting red tape for small and medium-sized banks in the US, the Main Street Act would adjust leverage ratios, curtail governmental debanking, and provide transparency in the CAMELS rating system. The Main Street Act nails three critical reforms that will reduce costs while vastly improving banks’ autonomy and their ability to serve customers. Nevertheless, it could do without a few somewhat flawed provisions as well.
Right-Sizing the Community Bank Leverage Ratio
Community banks (those with assets under $10 billion) can earn exemption from the government’s complex risk-based capital requirements by maintaining a simple minimum capital requirement of 9%. This exemption, the Community Bank Leverage Ratio (CBLR), was codified in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, providing regulators a range of 8–10% to set the CBLR. They elected to set the CBLR at 9%, which has raised concerns from government officials and industry groups alike. In 2019, the American Bankers Association argued that setting the ratio at 9% (instead of 8%) would discourage banks from using the CBLR. They were right. While 41% of eligible banks take advantage of the exemption, the majority of community banks still bear the full weight of the risk-based capital framework.
The Main Street Act would mitigate this problem. First, by raising the capital threshold from $10 billion to $15 billion, the Main Street Act would increase the number of banks eligible to take advantage of the CBLR. Second, the Main Street Act would lower the range within which regulators can set the CBLR from 8–10% down to 6–8%, ensuring that an 8% (or lower) ratio is enforced, which could unlock billions in additional lending.
Reforming the “M” In CAMELS Rating
In addition to adjusting the CBLR, the bill would replace discretionary bank ratings with clear, quantifiable measures. The CAMELS rating system—named after its components: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk—is the primary tool federal banking regulators use to rate banks’ safety and soundness. But the system has long been criticized, particularly for its subjectivity in the management (“M”) component. Because the “M” in CAMELS is not tied to any empirical standard, examiners have used it as a catch-all to penalize banks for issues unrelated to financial condition—from CRA ratings to FTC complaints. One study finds that examiners place an average 50% weight on the management component when setting ratings, effectively allowing subjective judgment to override the system’s other, more objective components.
The Main Street Act would remove the subjectivity inherent in CAMELS ratings by requiring federal regulators to either revise the management component to limit the assessment to “objective measures of the governance and controls” or eliminate the component entirely. By requiring objectivity in CAMELS ratings, the Main Street Act would prevent—to the extent possible—federal examiners from substituting their own judgement for measurable standards of a bank’s risk profile.
Curtailing Governmental Debanking
Overhauling how regulators evaluate banks is one thing, but the Main Street Act also tackles what regulators pressure banks to do.
Governmental debanking is “what occurs when the government pressures a financial institution to close a customer’s account,” according to our colleague Nicholas Anthony. The most prominent recent example was Operation Chokepoint 2.0, in which the Biden Administration pressured banks to close accounts of customers involved with cryptocurrencies. Regulators have also used reputational risk to pressure banks to drop politically disfavored customers. And because banks are often barred from informing their customers why they’re being debanked per the Bank Secrecy Act (BSA) and confidentiality regulations, many wrongly point fingers at their bank rather than the government.
To put a stop to governmental debanking, the Main Street Act would prohibit federal regulators from using reputational risk as a factor in their supervisory roles, whether in examination ratings, enforcement actions, or informal guidance. By removing this kind of discretion from regulators, the Main Street Act would take away one of the main causes of governmental debanking.
A Couple of Cautions
The Main Street Act gets the big things right. But two provisions risk undermining the bill’s own goals by expanding the very regulatory discretion it seeks to constrain.
First, the Main Street Act would require regulators to consider banks’ compliance with the BSA and other anti-money laundering rules when determining CAMELS ratings, but it provides regulators with broad discretion over how compliance should be incorporated. While the Main Street Act aims to reduce governmental debanking by leveraging reputational risk, it may, in fact, give regulators another pathway to pressure banks to debank customers under the guise of BSA and anti-money laundering compliance.
Second, the Main Street Act would loosen the Federal Deposit Insurance Corporation’s (FDIC) least-cost standard for resolving failed banks. Under current rules, the FDIC must resolve failed banks at the least cost to its Deposit Insurance Fund. But in an attempt to prevent concentration in the banking sector by global systemically important banks (G‑SIBs)—banks whose failure some fear could lead to global financial instability—it would provide the FDIC discretion to accept higher non-G-SIB bids over lower G‑SIB ones. And since the Main Street Act also allows the FDIC to determine on a case-by-case basis how large a gap between bids is acceptable, there is no hard stop preventing the FDIC from favoring certain banks over others. The Main Street Act makes progress toward constraining regulatory discretion, but this provision would do the opposite. Loosening the least-cost requirement won’t free the market from banking industry concentration—it will simply expand the FDIC’s discretion over how failing banks are sold.
A Goal Worth Getting Right
Overall, the Main Street Act would be a welcome change to the banking system. By right-sizing the CBLR, returning objectivity to CAMELS ratings, and requiring regulators to remove reputational risk from their supervisory role, the Main Street Act would meaningfully expand banks’ autonomy and customer privacy while maintaining prudential standards.
That said, Congress should be careful not to undermine the core of the Main Street Act. Mandating BSA compliance in CAMELS ratings and loosening FDIC least-cost standards both replace market discipline and objectivity with the kind of regulatory discretion the bill seeks to curtail.
The Main Street Act gets the big things right. With a few changes, it could get even closer to the kind of regulatory framework banks should have had all along.
