The legal landscape shaping community banks

Community banks beat larger counterparts in terms of their number and geographic span, but they lack the upper hand when it comes to compliance and the overhead that comes with it. Facing fewer compliance-related resources or direct political connections, individual community banks have less of a say in shaping the regulations affecting them than Wall Street institutions.

But community banks work as an aggregate through groups such as the Independent Community Bankers of America to influence the regulations that shape community banks. In turn, these efforts are directly affected by a range of variables, which determine how community-bank advocates position themselves when interfacing with regulators—and set course for community banking’s future:

Defining terms

A first-principles variable affecting community banking’s status is how regulators define the sector. At present, community banks are defined as financial institutions holding under $10B in assets.

These definitions are not static, and their scope has major implications. The FDIC reaffirmed its definition in a 2020 study on community banking, and other regulators such as the OCC have undertaken similar efforts. Falling under the category of “community bank” matters, because it may potentially determine how stringently regulators scrutinize a bank’s operations.

Regulatory strength

At present, however, community banks are still the focus of significant regulatory oversight and intervention. To groups like the Independent Community Bankers of America, this places a disproportionate burden upon community banks, which, individually, pose less of a systemic risk than large players.

“ICBA urges Congress and the regulatory agencies to continue to expand and refine a tiered regulatory and supervisory system that recognizes the significant differences between community banks and large, complex institutions in terms of the risks they pose to consumers and to the financial system,” the group writes.

Overdraft policies

The extent to which community banks remain a core focus of regulators—rather than being the recipients of regulatory relief—will determine the role of overdraft fees at community banks. Bigger players are already changing their overdraft policies in response to pressure from the CFPB, and it’s expected that this pressure will trickle down, though community banks are more reliant on these fees as a revenue source than larger players.

"There's certainly going to be pressure or scrutiny placed upon all institutions, no matter what size, no matter if they're federally chartered or state-chartered," said Charlie Stutts, partner and banking specialist at law firm Holland & Knight. "The focus will be on enhanced disclosures, and then customer communications and resolution to those instances where they are charging the fees."