George Says Small Banks Hurt by Rules Overhaul on Wall Street

Federal Reserve Bank of Kansas City President Esther George said community banks have been put at a disadvantage by a regulatory overhaul aimed at preventing excessive risk taking by the largest U.S. banks.

“Community banks have become entangled in a web of reforms intended to address the risks in the largest banks,” George said in a speech in St. Louis. “These reforms respond to a business model employed by a few large, globally active banks, but have created spillovers for community banks.”

She didn’t comment on monetary policy or the outlook for the U.S. economy in the text of her remarks.

The central bank is working to implement the 2010 Dodd-Frank Act, aimed at preventing a repeat of the financial crisis that led to the collapse or near-collapse of several of the country’s largest financial institutions. Smaller U.S. banks have said their behavior did not lead to the financial crisis and these regulatory changes put them at a disadvantage because they lack the resources to meet the tougher rules.

George said she favored changes that would ensure big banks have more capital and are “subject to failure” rather than protected by potential taxpayer bailouts that amount to a subsidy.

“Community banks continue to hold higher levels of capital than the largest banks,” George said at the Fed’s community banking research conference at the St. Louis Fed. “Unless and until the largest banks achieve commensurate levels of capital (inclusive of their off-balance-sheet assets), they retain a capital-ratio advantage over community and regional banks that is far more powerful than the funding cost subsidy” estimated in a recent study.

George, who became chief of the Kansas City Fed in 2011, was the Fed district bank’s No. 2 official under Thomas Hoenig, now vice chairman of the Federal Deposit Insurance Corp. She joined the Kansas City Fed in 1982 and spent much of her career in bank supervision.

The Kansas City district represents Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri.

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