U.S. Fed at odds with bank regulators on community lending standards

By Pete Schroeder

WASHINGTON (Reuters) - A top U.S. Federal Reserve official said on Wednesday that bank regulators should pursue a more nuanced approach to updating community lending standards for banks.

Fed Governor Lael Brainard argued that a new uniform standard proposed by other U.S. banking regulators would fail to account for differences across communities nationwide, and also said regulators should apply an additional test to larger banks.

U.S. regulators are endeavoring to update rules around the 1977 Community Reinvestment Act, which requires regulators to assess how well banks are serving the needs of lower-income communities. The rules were last updated in 1995.

The Fed shares responsibility for enforcing the CRA with two other bank regulators, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. But those two regulators proposed a rule update in December without the U.S. central bank's support, which would establish a uniform standard to evaluate all banks' efforts to support lower-income communities.

But Brainard, who is in charge of the Fed's attempt to update the rule, argued against such a broad-based approach, saying it failed to capture differences in communities with different amounts of lower-income families, as well as changes in the business cycle.

"Any comprehensive and uniform metric does have the risk of unintended consequences (and) of not being responsive to local community needs," she said at an event in Washington.

She added that while the other regulators are moving aggressively to rewrite the rules sometime in 2020, the Fed is not feeling the same pressure despite a desire to ultimately get all three agencies to agree on a consistent rule.

"It's extremely important to eventually find common ground," she said. "It is so much more important, in my view, to get this done right than to get it done fast."

Beyond evaluating a bank's retail lending and banking services, Brainard also said larger banks should face an extra, broader test on how they support communities overall through larger financing projects.

(Reporting by Pete Schroeder; Editing by Chizu Nomiyama and Paul Simao)

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