Credit unions, fintechs and nonbank lenders should face the same regulation, guidance and supervisory expectations when involved in the same activities — and doing so is a core concept of financial regulation, Federal Reserve Governor Michelle Bowman said at a conference Friday.
Bowman highlighted the challenges community banks face while navigating a changing landscape, including competition from local rivals like credit unions, larger banks, payday lenders or other nonbank credit sources with the growing use of online banking. This has led fintechs and nonlocal lenders to expand their footprint outside their geographic area and compete for business, Bowman said.
Though community banks have maintained their foothold in the competitive markets, they are often subject to disadvantages when competing for the same banking opportunities while being required to pay taxes and stick to additional regulatory requirements, including the Community Reinvestment Act, which can have a “distortive effect” on competition.
“They are also subject to a broader range of restrictions imposed by regulatory requirements or the ‘soft’ power of supervision,” Bowman said Friday. “In short, where the financial regulatory framework can provide for parity of treatment, it should do so. The regulatory framework should not knowingly distort competition or effectively impose a regulatory allocation of credit.”
The current framework for evaluating bank competition significantly affects community banks during mergers and acquisitions, she noted. The screening process often labels rural market transactions as potentially adverse to competition, leading to possible rejections or delays, she said.
“Even when these transactions are eventually approved, the mechanical approach to analyzing competitive effects — which is grounded in the effect of proposed transactions on the control of deposits within individual banking markets — often requires additional review or analysis and can lead to delays in the regulatory approval process,” Bowman said.
Bowman has long said digital banks, credit unions and nonbanks should be factored into a revamped measure of market competition that comes with assessments of a proposed bank merger.
The central bank governor reiterated her concern over the uptick in credit unions buying smaller community banks.
Though credit union-bank acquisitions might address succession planning, they raise questions about the long-term impacts on the banking system. Credit unions have expanded their membership and services, becoming more similar to banks. Still, unlike banks, credit unions are not subject to the Community Reinvestment Act and certain other banking regulations, Bowman noted in June.
“As some prudential regulators continue to increase the regulatory scrutiny of bank M&A, it may increase the incentives for credit unions to acquire banks if there are fewer delays and more regulatory certainty related to those transactions,” she said at the time.
Bowman isn’t the first federal regulator to discuss imposing CRA requirements on credit unions and other nonbanks.
Consumer Financial Protection Bureau Director Rohit Chopra said that many states have enacted CRA compliance for some nonbanks, adding, “we should really see if a more level playing field is appropriate.”
Bowman also touched on other areas of concern for community banks, including cybersecurity, third-party risk management and consumer compliance.
“Both regulators and banks should be working toward a common goal — a banking system that supports economic activity throughout the country, in which banks operate in a safe and sound manner and in compliance with consumer laws and regulations,” she said.
For effective functioning, the banking system must include banks of all sizes, Bowman stressed.
“This diversity of our financial institutions is the greatest strength of our banking system, and it can easily be imperiled by insufficiently targeted regulation, supervision, and guidance,” she said.
