[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
STATE OF COMMUNITY BANKING:
IS THE CURRENT REGULATORY
ENVIRONMENT ADVERSELY AFFECTING
COMMUNITY FINANCIAL INSTITUTIONS?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
MARCH 20, 2013
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-9
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U.S. GOVERNMENT PRINTING OFFICE
80-875 PDF WASHINGTON : 2013
HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
JOHN CAMPBELL, California STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia
KEVIN McCARTHY, California AL GREEN, Texas
STEVAN PEARCE, New Mexico EMANUEL CLEAVER, Missouri
BILL POSEY, Florida GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK, KEITH ELLISON, Minnesota
Pennsylvania ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
SHELLEY MOORE CAPITO, West Virginia, Chairman
SEAN P. DUFFY, Wisconsin, Vice GREGORY W. MEEKS, New York,
Chairman Ranking Member
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
GARY G. MILLER, California MELVIN L. WATT, North Carolina
PATRICK T. McHENRY, North Carolina RUBEN HINOJOSA, Texas
JOHN CAMPBELL, California CAROLYN McCARTHY, New York
KEVIN McCARTHY, California DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico AL GREEN, Texas
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, NYDIA M. VELAZQUEZ, New York
Pennsylvania STEPHEN F. LYNCH, Massachusetts
LYNN A. WESTMORELAND, Georgia MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri PATRICK MURPHY, Florida
MARLIN A. STUTZMAN, Indiana JOHN K. DELANEY, Maryland
ROBERT PITTENGER, North Carolina DENNY HECK, Washington
ANDY BARR, Kentucky
TOM COTTON, Arkansas
C O N T E N T S
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Page
Hearing held on:
March 20, 2013............................................... 1
Appendix:
March 20, 2013............................................... 43
WITNESSES
Wednesday, March 20, 2013
Brown, Richard A., Chief Economist, Federal Deposit Insurance
Corporation, accompanied by Doreen R. Eberley, Director,
Division of Risk Management Supervision, Federal Deposit
Insurance Corporation, and Bret D. Edwards, Director, Division
of Resolutions and Receiverships, Federal Deposit Insurance
Corporation.................................................... 7
Evans, Lawrance L., Director, Financial Markets and Community
Investment, U.S. Government Accountability Office.............. 10
Rymer, Hon. Jon T., Inspector General, Federal Deposit Insurance
Corporation.................................................... 8
APPENDIX
Prepared statements:
Evans, Lawrance L............................................ 44
Joint FDIC statement......................................... 62
Rymer, Hon. Jon T............................................ 84
Additional Material Submitted for the Record
Capito, Hon. Shelley Moore:
Letter from the National Association of Federal Credit Unions
(NAFCU), dated March 19, 2013.............................. 91
Maloney, Hon. Carolyn:
Letter to Federal Reserve Chairman Ben Bernanke, FDIC
Chairman Martin Gruenberg, and Comptroller of the Currency
Thomas Curry from Representatives Carolyn Maloney and
Shelley Moore Capito, dated February 19, 2013.............. 97
Westmoreland, Hon. Lynn:
Written statement of Representative Tom Graves............... 99
Evans, Lawrance L.:
Written responses to questions submitted by Representative
Capito..................................................... 101
Written responses to questions submitted by Representative
Posey...................................................... 102
Written responses to questions submitted by Representative
Westmoreland............................................... 104
FDIC witnesses:
Written responses to questions submitted by Representative
Bachus..................................................... 117
Written responses to questions submitted by Representative
Capito..................................................... 118
Written responses to questions submitted by Representative
Pearce..................................................... 123
Written responses to questions submitted by Representative
Westmoreland............................................... 125
Rymer, Hon. Jon. T.:
Written responses to questions submitted by Representative
Posey...................................................... 141
Written responses to questions submitted by Representative
Westmoreland............................................... 142
STATE OF COMMUNITY BANKING:
IS THE CURRENT REGULATORY
ENVIRONMENT ADVERSELY AFFECTING
COMMUNITY FINANCIAL INSTITUTIONS?
----------
Wednesday, March 20, 2013
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:02 a.m., in
room 2128, Rayburn House Office Building, Hon. Shelley Moore
Capito [chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Miller, McHenry,
Campbell, Pearce, Posey, Fitzpatrick, Westmoreland,
Luetkemeyer, Duffy, Stutzman, Pittenger, Barr, Cotton; Meeks,
Maloney, Watt, McCarthy of New York, Green, Capuano, Murphy,
Delaney, and Heck.
Ex officio present: Representative Hensarling.
Chairwoman Capito. The subcommittee will come to order.
Without objection, the Chair is authorized to declare a recess
of the committee at any time. Also, without objection, members
of the full Financial Services Committee who are not members of
the subcommittee will be allowed to sit on the dais and
participate in today's hearing. Without objection, it is so
ordered.
This morning's hearing is the first hearing for the
Financial Institutions and Consumer Credit Subcommittee in this
Congress. I would like to welcome our new members to the
subcommittee, as well as the new ranking member, Mr. Meeks. I
think we will work very well together.
As chairman, I intend to highlight the many challenges
being faced by our community financial institutions and the
communities they serve across the country. This should not be a
partisan issue. It is my goal to work with the ranking member
to identify areas of agreement for fostering a regulatory
environment for community financial institutions that promote
economic growth and access to a wide range of consumer credit
products.
The focus of this hearing--I forgot to yield myself 3
minutes. So, the focus of this morning's hearing is on three
important studies on the state of community banking. Two of the
studies were products of legislation that Mr. Westmoreland of
Georgia authored last Congress.
As many of my colleagues know, the State of Georgia led the
Nation in the number of bank failures between 2008 and 2011.
Mr. Westmoreland and Mr. Scott, also from Georgia, have been
tireless advocates for the struggling financial institutions
and their districts in the State of Georgia and the communities
that have been adversely affected.
At the behest of Congress, the Inspectors General of the
FDIC and the GAO conducted studies on the FDIC's handling of
the failed community banks and lessons from community bank
failures. This subcommittee first began examining these issues
at a field hearing in Mr. Westmoreland's district in Newnan,
Georgia, in August of 2011. And I look forward to learning more
about the progress being made by the regulatory agencies to
mitigate the adverse effect of community bank failures on local
communities.
The third study to be discussed this morning is a study
that is a thoughtful contribution to the discussion that we
began in the last Congress on the importance of community
financial institutions and how the current regulatory
environment affects the viability of community financial
institutions and their role--and their model. We heard
countless anecdotal stories last Congress from community
bankers expressing despair and frustration about the future
prospects for a vibrant and diverse financial services system
that features community banks.
The FDIC study highlights many areas that demonstrate the
importance of community banks to the U.S. banking system. The
study points out that in many rural areas, such as the one I
represent, local community banks are the only source of banking
services for members of the community.
Although larger institutions may choose to enter these
markets, they will not maintain the same level of personal
service and understanding that the community--the local
community banks can offer. This element of relationship banking
is critical in rural communities like those I represent in West
Virginia. Lenders not only know their customers, but they know
their extended families and the businesses they operate in
these communities.
It is this level of understanding that allows the lender to
sit down with the borrower and develop alternative financial
strategies when economic downturns occur, or if there is a
life-changing event that might impact the borrower in some way.
Rural communities will not be well-served if the current
regulatory environment forces lenders to move away from
relationship banking and make decisions on a one-size-fits-all
form of regulation and compliance.
The FDIC study also attempts to quantify the growing burden
of complying with the myriad of financial regulations for
community institutions. I think we found in the study it is
difficult to quantify. In January of 2001, just 6 months after
Dodd-Frank, we learned from a community banker in West Virginia
that they have already had to hire an additional primary
compliance officer.
I understand that it is a difficult figure to quantify, but
we must keep up the discussion amongst policymakers,
regulators, and community bankers about ways to reduce this
growing burden. We need to have safely run financial
institutions in our local communities. But we must ensure that
any cost of compliance does not outweigh the benefits and the
regulations emanating from Washington.
I would like to thank our witnesses for being here this
morning to update the subcommittee on these important studies,
and at this time I would like to recognize the ranking member,
Mr. Meeks, for 3 minutes for the purpose of giving an opening
statement.
Mr. Meeks. Thank you, Madam Chairwoman, for holding this
hearing today. And as you have indicated, this is the first
hearing of the Subcommittee on Financial Institutions and
Consumer Credit during the 113th Congress.
I want to express how pleased I am to be working with the
chairwoman on this subcommittee. I know that we will find areas
of cooperation, and I look forward to collaborating with the
Chair on many areas of common interest, including regulatory
relief for smaller banks and credit unions and mobile payment
services, and the associated electronic payments field and many
other consumer protection issues. And I know that we are going
to be working very closely together.
While it is not explicitly the topic of today's hearing,
but since this is our first hearing of the subcommittee, I want
to state now that I am concerned about the impact that Basel
III can have on community banks. Previous iterations of Basel
have excluded smaller institutions from their capital
requirements, which are better designed to address the risk
portfolios of larger financial institutions. And of course,
smaller institutions must have adequate capital for their
activities. But it appears that Basel III takes a one-size-
fits-all approach.
I am concerned that Basel III is too complicated and does
not offer the appropriate risk ratings to different classes of
assets. For example, it would apply a discount to any asset
that isn't sovereign debt in the U.S. Treasuries or cash.
This means a bank that specializes in mortgages, for
example, may have to hold a lot more capital against those
mortgages to satisfy minimum capital requirements. However, I
would think that we learn to start to make sure capital
requirements don't stifle small banks in even medium-sized or
regional banks institutions that don't engage in the exotic
activities that some of the larger institutions do.
As we learned in the FDIC's Community Banking Study,
smaller and regional institutions are the engines of economic
growth in this country because they lend to their neighbors in
their communities to keep their farms or their small businesses
going, or to hire employees. In fact, the study noted that
though community banks hold only 14 percent of the banking
industry's assets, they make 46 percent of the smaller
denomination loans to farms and small businesses.
Along with credit unions, they are often the sole source
for mortgage financing and therefore the lifeline of the
housing industry in our communities. It was not their activity
that blew up the global banking system. And I think the capital
requirements we place on banks should recognize that. I want to
work with the chairwoman on that issue.
A concern that I often hear from my community banks is the
lack of certainty. And much of this arises from the timing of
rules on which the argument about uncertainty has credence. I
would hope that we would make sure that we start and do not cut
off funding for regulators, including the SEC, the CFTC, and
the CFPB, all of which creates additional regulatory
uncertainty.
A common complaint I hear from businesses when I am in New
York is on the timing of rulemakings. Businesses in the market
will adjust to rules and regulations, but they need to know
what they are. It is time to fully fund our regulators so they
can complete the process of implementing Dodd-Frank and
therefore restore confidence to the marketplace.
I look forward to hearing about the other issues that are
the focus of this hearing, including what I hope is a robust
discussion on the good things that the FDIC is doing in
protecting the Deposit Insurance Fund, and therefore taxpayers.
In reviewing the FDIC's programs in preparation for this
hearing, I was pleased to learn of some of the efforts the
agency has made to engage in mortgage modifications, something
I hope the industry proactively addresses further. And I also
hope we can explore some of the recommendations of the FDIC
Inspector General and how the FDIC is implementing them.
I look forward to the testimony. Thank you, Madam
Chairwoman.
Chairwoman Capito. Thank you.
I would like to recognize Mr. Duffy for 1\1/2\ minutes for
the purpose of an opening statement.
Mr. Duffy. Thank you, Chairwoman Capito. I appreciate you
calling this very important hearing. And I appreciate the panel
for coming in and talking about our community banks and their
health, and how we can make sure we have a strong community
bank system throughout our country.
Many of us know that our small community banks or credit
unions are the lifeblood of economic growth in our small
communities across this great country. And it is those very
institutions that get capital out to our small businesses which
are starting up or that small business or that manufacturer
which is going to expand their business and create jobs across
the country. They are the institutions in rural America which
get dollars out to our families who are going to buy a home or
buy a car; and if our community banks are failing, so too are
our small communities.
So I am pleased that the OIG and the GAO studies address
some of the issues that we have known for quite some time
affect our small community banks. Clearly, they face a lot of
challenges in this hyper-regulatory environment. And small
banks are constantly being forced to deploy resources, money,
time, and personnel towards regulatory compliance instead of
focusing on their traditional role of lending and serving our
customers.
I look forward to your testimony and the conversation we
are going to have today about the health of our small financial
institutions. I yield back.
Chairwoman Capito. Thank you.
I would like to recognize Mr. Westmoreland for 2 minutes.
Mr. Westmoreland. Thank you, Madam Chairwoman. I would like
to ask for unanimous consent to enter into the record a
statement from Representative Tom Graves, and some written
questions for the witnesses.
Chairwoman Capito. Without objection, it is so ordered.
Mr. Westmoreland. I want to thank the chairwoman for having
this hearing. This hearing is especially important to me
because I and others worked hard to authorize it last Congress.
I read the studies with interest, but unfortunately they
seemed to raise more questions than answers. I think the
biggest thing to come from these studies is finally an
admission that what my Georgia banks have been saying is true,
that acquiring banks will maximize their expiring loss share
agreements for commercial assets.
Unfortunately, the studies show the FDIC has no plan for
dealing with the potential new bubble in the commercial real
estate market. I am hearing from acquiring banks that they
really don't know what to do with their expiring loss share
agreements. I am also hearing stories from borrowers in Georgia
whose acquiring bank will not negotiate reasonable modification
terms.
This is a special concern since the studies also noted
examiners' ongoing failure to follow the spirit of the 2009
guidance on commercial loan modifications. And as if these
problems were not enough, the GAO study recognized that bank
examiners negatively classify a collateral-dependent loan
simply because the value of the collateral has declined.
Further, there are serious problems in the way appraisals
are handled by examiners and the application of impairment
accounting standards in the examination process. The IG found
examiners do not properly document appraisals or evaluation for
the best use of the underlying collateral. To me, this is code
for examiners to be able to do what they want in terms of
valuing collateral, but not having to justify it to the bank or
their bosses.
The FDIC IG found examiners do not have the necessary
training or background in appraisals, yet are relying on their
experience in this field during bank exams. The studies make it
very clear that the FDIC, the OCC, and the Federal Reserve have
had trouble handling the boom-and-bust cycles over the last 25
years. They are repeating the same patterns over and over, but
expecting different results.
And again, I would like to just thank the chairwoman for
having this hearing. It is very important to the constituents
and the bankers in Georgia.
Chairwoman Capito. I am glad you got that last line in.
I would like to recognize Mr. Watt for 1 minute.
Mr. Watt. Thank you, Madam Chairwoman. I want to join the
other members of the subcommittee in applauding you and the
ranking member for convening this hearing. This is a subject
that all of us are hearing about regularly. And I especially
want to applaud the composition of this panel, because we hear
the community banker side, and I am sure that is an important
perspective.
But it is also important to hear the perspective of the
regulators and to understand whether what we are hearing from
the banks is a regulatory matter or whether it is a matter of
legislative significance. When it is our responsibility as
legislators, we need to know that. And when we can push the
regulators to be more prompt as regulators in promulgating
rules, we need to push that. So, it is especially important and
I appreciate the opportunity to express that. I yield back.
Chairwoman Capito. Thank you. I would like to recognize Mr.
Miller for 1 minute.
Mr. Miller. Thank you, Madam Chairwoman.
The environment within which the regulators work today
should basically encourage innovation and growth rather than to
stifle it, but that is not what is happening. The government is
acting to help banks. But what they should do is serve their
customers. Instead, banks are having an onslaught of new
regulations they are having to deal with. We certainly need a
well-functioning regulatory system, but it should facilitate
growth, not stifle it.
We are starting to see a basic turnaround in the housing
market today. But what is stifling that ability to get loans?
AD & C loans are just not available to many builders today,
especially the smaller builders. Banks are being held back from
doing what they want to do. And because of regulations placed
upon them, you are seeing a certain group in the marketplace
who are just avoiding getting involved.
Representative Carolyn McCarthy and I introduced the Home
Construction Lending Regulatory Act today that addresses
overzealous regulators. It lets you do your job, lets you make
loans to well-qualified builders who have good projects but are
being held back today. And it is an issue I think we need to
bring up in this committee to basically turn the economy
around. And it is an issue I think is important to banks and to
builders. I yield back.
Chairwoman Capito. The gentleman yields back.
Mr. Fitzpatrick for 1 minute.
Mr. Fitzpatrick. Thank you, Madam Chairwoman. First of all,
I want to say I am looking forward to being a part of this
subcommittee in the 113th Congress. Among the important
responsibilities of the subcommittee is to work with consumer
financial institutions to find ways to provide credit for small
businesses and families who inject capital into our
communities.
In just the first few weeks, this Congressman made a point
to meet with representatives from some of the financial
institutions that serve my district in Pennsylvania. On a
recent conference call with community bankers, I was reminded
again about the grinding process and progress of our economy
and of the housing market, and how those factors more than any
others are dragging our communities down and causing high
unemployment in the communities.
And of course, I heard about regulations and financial
supervision, which are onerous and burdensome. We all agree
that we need oversight and regulation of financial
institutions. But the point is to be smart about it and not to
stifle economic growth. And this is, of course, why we are here
today. So I look forward to the hearing, and I yield back.
Chairwoman Capito. The gentleman yields back. I believe
that concludes our opening statements. So, I would like to
welcome our panel of distinguished witnesses.
My understanding is that Mr. Brown will give the statement
from the FDIC, and then Ms. Eberley and Mr. Edwards will be
here to answer questions for us. So, I appreciate that. I will
introduce all three of you, and then let Mr. Brown make the
statement.
Mr. Richard Brown is the Chief Economist and Associate
Director of the Division of Insurance and Research for the
FDIC. Ms. Eberley is the Director of the Division of Risk
Management Supervision, welcome. And Mr. Bret Edwards is the
Director of the Division of Resolutions and Receivership.
Welcome.
Mr. Brown?
STATEMENT OF RICHARD A. BROWN, CHIEF ECONOMIST, FEDERAL DEPOSIT
INSURANCE CORPORATION, ACCOMPANIED BY DOREEN R. EBERLEY,
DIRECTOR, DIVISION OF RISK MANAGEMENT SUPERVISION, FEDERAL
DEPOSIT INSURANCE CORPORATION, AND BRET D. EDWARDS, DIRECTOR,
DIVISION OF RESOLUTIONS AND RECEIVERSHIPS, FEDERAL DEPOSIT
INSURANCE CORPORATION
Mr. Brown. Chairwoman Capito, Ranking Member Meeks, and
members of the subcommittee, I appreciate the opportunity to
testify on behalf of the FDIC regarding the FDIC Community
Banking Study. This research effort was begun in late 2011 to
better understand the changes that have taken place among the
community banking sector over the past quarter century. The
effort was motivated by our sense of the importance of
community banks to small businesses and to local economies in
every part of the country, and by our understanding that
community banks face some important challenges in the post-
crisis financial environment.
Our research confirms the crucial role that community banks
play in our financial system. As defined by our study,
community banks make up 95 percent of U.S. banking
organizations. It has been mentioned that they hold 14 percent
of U.S. banking assets, but make 46 percent of small loans to
farms and businesses.
While their share of total deposits has declined over time,
community banks still hold the majority of bank deposits in
rural and other non-metropolitan counties. Without community
banks, many rural areas, small towns, and urban neighborhoods
would have little or no physical access to mainstream banking
services. The study identified 629 counties where the only
banking offices are those operated by community banks.
Our study examined the long-term trend of banking industry
consolidation that has reduced the number of banks and thrifts
by more than half since 1984. But the results cast doubt on the
notion that future consolidation will continue at the same
pace, or that the community banking model is in any way
obsolete.
Since 1984, more than 2,500 institutions have failed, with
most of the failures taking place during 2 crisis periods. To
the extent that future crises can be avoided or mitigated, bank
failures should contribute much less to future consolidation.
About 80 percent of the consolidation that has taken place
has resulted from eliminating charters within bank holding
companies or from voluntary mergers. And both of those trends
were facilitated by the relaxation of geographic restrictions
on banking that took place in the 1980s and the early 1990s.
The pace of the voluntary consolidation has slowed over the
past 15 years as the effects of these one-time changes were
realized.
The study also showed that community banks which grew
prudently and which maintained either diversified portfolios or
otherwise stuck to core lending competencies exhibited
relatively strong and stable performance over time, including
during the recent crisis. By comparison, institutions which
pursued more aggressive growth strategies underperformed.
With regard to measuring the cost of regulatory compliance,
the study noted that the financial data collected by regulators
does not identify regulatory costs as a distinct category of
non-interest expenses. As part of our study, the FDIC conducted
interviews with a group of community banks to try to learn more
about regulatory costs.
Most of the participants stated that no single regulation
or practice had a significant effect on their institution.
Instead, most said that the strain on their organization came
from the cumulative effects of a number of regulatory
requirements that have built up over time.
Several of those interviewed indicated that they have
increased staff over the past 10 years to support their
responsibilities in the area of regulatory compliance. Still,
none of the interview participants said that they actively
track the various costs associated with compliance, citing the
difficulties associated with breaking out those costs
separately.
In summary, despite the challenges of the current operating
environment, the study concludes that the community banking
sector will remain a viable and vital component of the overall
U.S. financial system for the foreseeable future. The FDIC's
testimony today also summarizes the congressionally mandated
studies by the GAO and the FDIC Office of Inspector General.
These studies provided valuable information on the causes of
the recent crisis and the FDIC's response.
The Inspector General also made several useful
recommendations that are highly relevant to the FDIC's efforts
to address the issues arising from the crisis. The FDIC concurs
with all of the OIG recommendations, and is now in the process
of implementing them.
I am joined today by Doreen Eberley, Director of the FDIC
Division of Risk Management Supervision; and Bret Edwards,
Director of the Division of Resolutions and Receiverships, who
can address your questions about how the FDIC is implementing
these recommendations. Thank you for the opportunity to
testify, and we look forward to your questions.
[The joint prepared statement of Mr. Brown, Ms. Eberley,
and Mr. Edwards can be found on page 62 of the appendix.]
Chairwoman Capito. Thank you, Mr. Brown.
Our next witness is the Honorable Jon T. Rymer, the
Inspector General for the FDIC. Welcome.
STATEMENT OF THE HONORABLE JON T. RYMER, INSPECTOR GENERAL,
FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Rymer. Thank you, Madam Chairwoman. Madam Chairwoman,
Ranking Member Meeks, and members of the subcommittee, I
appreciate your interest in the study conducted by my office as
required by Public Law 112-88. I ask that the report entitled,
``Comprehensive Study of the Impact of the Failure of Insured
Depository Institutions,'' issued on January 3rd of this year,
be made a part of the hearing's official record.
The report may be accessed at the following link:
http://www.fdicoig.gov/reports13%5C13-002EV.pdf
In the wake of the financial crisis of the 1980s, the
Congress passed two laws: FIRREA, passed in 1989; and the FDIC
Improvement Act, passed in 1991. These laws drove the closure
and resolution processes used in the most recent crisis.
Taken together, these laws amended the FDI Act and
required, among other things, that: (1) financial institutions
maintain minimum capital levels; (2) regulators promptly close
critically undercapitalized institutions; and the FDIC resolve
banks in the least costly manner. In response, banking
regulators issued rules, regulations, and policies that
pertained to many of the topics discussed in our report. In my
time today, I would like to highlight the two overarching
conclusions we reached, and then talk about four specific
observations.
The events leading to the financial crisis and the
subsequent efforts to resolve it involve the dynamic interplay
of laws, regulations, and agency policies and practices with
the real estate and financial markets. Banks expanded lending
using rapid growth in construction and real estate development.
Many of the banks that failed did so because management
relaxed underwriting standards and did not implement adequate
oversight and control. For their part, many borrowers did not
have the capacity to repay the loan, and sometimes pursued
projects without properly considering risk.
During the financial crisis, the regulators generally
fulfilled their responsibilities by using risk-based
supervision to react to a rapidly changing economic and
financial landscape.
Chairwoman Capito. Excuse me. Pull the microphone just a
little bit closer.
Mr. Rymer. Yes, ma'am.
Chairwoman Capito. Our ears are getting old up here.
Mr. Rymer. Yes, ma'am.
That said, however, most material loss reviews conducted by
the three banking regulatory IGs found that regulators could
have provided earlier and greater supervisory attention to
troubled banks and thrifts.
The four specific observations I mentioned earlier are as
follows.
First, the FDIC's resolution methods, including the shared
loss agreements, were market-driven. Often, failing banks with
little or no franchise value and poor asset quality did not
attract sufficient interest from qualified bidders for the FDIC
to sell the bank without a loss share guarantee. The FDIC used
these agreements to leave failed bank assets in the banking
sector, thereby supporting asset value and reducing losses to
the Deposit Insurance Fund, or DIF.
Second, most community bank failures were the result of
aggressive growth, asset concentrations, deficient credit
administration, and declining real estate values. These factors
led to write-downs and charge-offs on delinquent loans and non-
performing real estate loans.
Third, we found examiners generally followed and
implemented longstanding polices related to problem assets,
appraisal programs, and capital adequacy. We also found that
examiners did not always document the examination procedures
that they performed.
And fourth, the FDIC has investment-related policies in
place to protect the DIF, and to assure the character and
fitness of potential investors. By their nature, such policies
are going to impact FDIC decisions on proposed private equity
investments.
Finally, I would like to express my appreciation to the
regulators for making their staffs and the information we
requested readily available to us. I would also like to thank
those in my office who contributed to this study for their
dedicated efforts to comply with the law.
That concludes my prepared statement. I look forward to
answering your questions. Thank you.
[The prepared statement of Inspector General Rymer can be
found on page 84 of the appendix.]
Chairwoman Capito. Thank you very much.
And our next witness is Mr. Lawrance L. Evans, the Director
of Financial Markets and Community Investment at the U.S.
Government Accountability Office. Welcome.
STATEMENT OF LAWRANCE L. EVANS, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Evans. Thank you. Chairwoman Capito, Ranking Member
Meeks, and members of the subcommittee, I am pleased to be here
this morning as you examine issues related to bank failures in
community banking.
Between 2008 and 2011, over 400 banks in the United States
failed. Almost all of these failures involved smaller banks
which had less than $10 billion in assets and often specialized
in providing credit to local communities. My remarks today are
based on our January report, and I will briefly share some of
the key findings.
First, failures of small banks were associated with high
concentrations in CRE and ADC loans. These loans grew rapidly
as a percentage of total risk-based capital and exceeded the
regulatory thresholds for heightened scrutiny by a significant
margin. Heavy ADC and CRE concentrations were often associated
with aggressive growth, poor risk management, weak credit
administration, and the use of riskier funding sources, namely
broker deposits.
Second, we found that fair value losses related to some
mortgage-related assets were a factor in a limited number of
failures. But overall, fair value accounting standards were not
a major driver. In fact, our analysis found that most of the
assets held by failing institutions were not subject to fair
value accounting. The biggest contributor to credit losses at
failed institutions was non-performing loans recorded at
historical costs.
However, declining collateral values related to these non-
performing loans contribute to credit losses and surfaced
issues between examiners and some bankers over appraisals and
the classification of certain loans. Following accounting
rules, regulators will require that impaired collateral
dependent loans be written down to the fair value of the
collateral.
State banking regulators in bank associations we spoke with
said that given the significant decline in real estate values,
these impaired loans resulted in significant reductions to
regulatory capital. Two State banking associations maintained
that the magnitude of these losses was exaggerated or
exacerbated by Federal bank examiners' adverse classification
of performing loans, and by their challenging of appraisals
used by banks. This is at odds with regulatory guidance issued
in 2006 and clarified in 2009.
Third, loan loss reserves were not adequate to absorb
credit losses, in part because the current accounting model for
loan loss provisioning is based on historical loss rates or
incurred losses. As a result, estimated losses were based on
economic conditions that understated default risk and led to
insufficient reserving. This left banks vulnerable to the
sustained downturn that began in 2007 as credit losses ate
through reserves and depleted regulatory capital.
A more forward-looking model that focuses on expected
losses could reduce the need to raise capital when it is most
difficult to do so and encourage prudent risk management
practices. Accounting standard-setters are taking important
steps in this direction, and GAO will continue to monitor
development in this area.
Fourth, driven by market conditions, FDIC resolved nearly
70% of bank failures between 2008 and 2011 using shared loss
agreements to minimize the cost to the DIF. While estimated
losses are expected to be roughly $43 billion, FDIC estimates
that loss share agreements saved the DIF over $40 billion when
compared to the estimated cost of liquidating the banks.
Lastly, we found that the impact of failures on communities
may have been mitigated by the acquisitions of failed banks by
healthy institutions, although significant negative effects are
likely in a few areas of the country. Bank failures, by their
very nature, can impact consumers who rely on local banks
through their effects on the costs and availability of credit.
Our analysis of market concentration in geographic areas
that experience failures found that only a few local markets
raise these concerns. Some of these areas were rural counties
which were serviced by one bank that was liquidated or where
few banks remain.
Our econometric analysis found that failing small banks
extended progressively less credit as they approached failure,
but that acquiring banks generally increased credit after the
acquisition, albeit more slowly. Several acquiring and peer
banks we interviewed in Georgia, Michigan, and Nevada noted
that conditions were generally tighter in the period following
the financial crisis, making it difficult for some borrowers to
access credit, particularly in CRE and ADC markets.
Econometric analysis also shows that on average, bank
failures in a State were more likely to affect housing prices
than unemployment or personal income. These results could be
different at the local level and do not capture any changes in
the patterns of lending or philanthropic activity that might be
material for a community.
That concludes my opening statement. I will be happy to
answer any questions that you may have.
[The prepared statement of Mr. Evans can be found on page
44 of the appendix.]
Chairwoman Capito. Thank you. I would like to thank the
witnesses. And I will begin the questions with Mr. Brown.
We talked about relationship lending, how it defines what a
community bank is, and how important it is to certain areas. I
fear that as the CFPB drafts more regulations, this type of
relationship lending will cease to exist. I am already
concerned that the recent QM rule that the CFPB promulgated
will be unworkable for many of our rural lenders. And they will
get out of the mortgage business, which will cut out a lot of
our constituents from being able to obtain a mortgage.
What steps are you taking as a regulator to ensure that
these rules are workable for smaller institutions?
Mr. Brown. Madam Chairwoman, your sense of the importance
of relationship lending to community banks is something that
was borne out in our study. They do lending on a completely
different business model in terms of how credits are evaluated,
and I think that will remain their niche, their specialty in
the future. That is the thing that our study points out to us
most clearly of all.
In terms of rules coming about through Dodd-Frank, there is
concern that has been expressed by community banks in some of
the roundtables that we have conducted and the interviews that
we have conducted about rules in certain areas, including
mortgage rules. And I think that there are some community
bankers who have expressed that they might not plan to go on in
those lines of business, depending on how those rules are
promulgated.
So I do think that taking care to make sure that those
rules do not disadvantage community banks and their particular
business model, their way of doing business, is something that
is very important and that the regulators are taking into
account as the rules move forward.
I will allow my colleagues to chime in if they have
something to add.
Chairwoman Capito. Did you have a comment, Ms. Eberley?
Ms. Eberley. Sure. We can just add that we did have the
opportunity to consult with the CFPB on the rulemaking process.
And we were able to share the concerns that we heard from
community bankers through our Community Bank Initiatives
Roundtables and other venues. And we do believe that had an
impact on the final rule.
Chairwoman Capito. Are you presently using the FDIC's
Advisory Committee on Community Banking as a liaison to the
CFPB? Is this an ongoing relationship? Or is this just kind of
one phone call and then back to your relative responsibilities?
There is an advisory committee on community banks within
the FDIC. Are they coordinating with the CFPB and others to
show the effects that these regulations are having on our
smaller institutions?
Ms. Eberley. Our Community Bank Advisory Committee does not
coordinate directly with the CFPB, but they do inform us of
concerns that we share with the CFPB. So we essentially serve
as the liaison with the CFPB--between community bankers and the
CFPB.
Chairwoman Capito. Did you have a comment? Yes?
Mr. Rymer. Yes, ma'am. I would just like to add one thing.
We, at the OIG, do have some concerns. I want to make sure that
there is not overlap between the FDIC's Division of Consumer
Protection and the CFPB. Some of the initial work we will be
doing in the Division of Consumer Protection will be to try to
identify overlap.
Chairwoman Capito. I welcome that. I think that was one of
our ongoing concerns with the creation of the CFPB. At the
beginning, it was supposed to rid the silos and all the
prudential regulators were supposed to cede this authority. And
I think in actuality that is not occurring, which bears out in
your report.
Let's get to the cost of compliance. I know it is hard to
quantify. That is in your reports. But anecdotally, whether it
is hiring a single compliance officer in the smaller
institutions, maybe your chief lending officer, your HR person,
your vice president for community affairs, whatever officers
you have there, and having to devote more of their time to the
issue of compliance, is there anybody at the FDIC who looks at,
as the regulations come forward, the cost to the community
institutions?
Mr. Brown. During the process when the regulations are
considered and promulgated, the FDIC solicits input from the
industry on the costs of implementing the regulations. And also
about alternatives, different ways that the regulations could
be devised or implemented that could mitigate those costs.
And so that is a dialogue that happens not just through our
more informal processes such as our roundtables, and our
Advisory Committee on Community Banking, but specifically
during the rulemaking process. And we receive thousands of
letters on that topic that are carefully considered during the
rulemaking process.
Chairwoman Capito. My last question--or my last comment
because I have only 12 seconds left--would be that no new bank
charters were chartered in 2012, according to the FDIC. We have
seen all the closures. We have talked about how important to
the fabric of lending to small businesses and farmers and the
agricultural community and rural areas, and that these
institutions do for our constituents.
I would just launch a concern. When you see everything
closing and nothing opening, that to me is a red flag which we
need to monitor. And I hope that you will join us in that
effort.
I will now go to Mr. Meeks for questions.
Mr. Meeks. Thank you, Madam Chairwoman.
Let me start with, I guess, Mr. Brown.
As I stated in my opening statement, that community bank
study showed that community banks hold 14 percent of the
Nation's banking assets, while they offer 46 percent of small
business and farming loans. So would you agree that it seems as
though community banks are playing an outsized role in terms of
the impact on the economy? Please give me your thoughts on
that.
Mr. Brown. Yes. I think that is our clear sense. It was our
sense going into the project that obviously small businesses
are very important to job creation, creating two-thirds or more
of new jobs. Small businesses were hit hard by the recession,
and they depend on community banks as a source of credit.
Surveys over time have shown that small businesses prefer
to do business with small banks who understand their needs, can
customize their products, that sort of thing. So, that tight
connection between small businesses and and community banks was
borne out, I think, by the data that you are citing.
Mr. Meeks. And so now we are trying to make sure, I think,
that we get this balance right with reference to regulation in
this sector. Clearly, there is some compliance cost to
regulation. But what would you think the marketplace looks like
for consumers without regulations such as the Equal Credit
Opportunity Act, or similar fair lending bills?
Mr. Brown. Part of the stability of the banking industry is
a regulatory environment that maintains safe and sound banking
and that maintains fair treatment for consumers.
The confidence that bank customers have in their
institutions comes about in part because of standards that the
institutions follow for fair business practices, disclosure,
things that give consumers and borrowers confidence in that
institution. And so, safety and soundness and consumer
protection are really two sides of the same coin, and it is
something that is a strength of the banking industry.
Mr. Meeks. Let me ask Mr. Evans, one of the criticisms of
the shared loss agreements, one of the shared loss agreements,
really quick, is that banks are incentivized to dump assets
which allegedly depress housing and commercial real estate
markets. Did either the GAO study or the FDIC IG study turn up
any evidence of that occurring, to your knowledge?
Mr. Evans. I think--
Mr. Meeks. Mr. Edwards? Okay.
Mr. Evans. The FDIC IG's study covered those issues in much
greater depth. All we can say is what we heard. We talked to
some banks and they were concerned that was occurring. But we
also heard from acquiring banks who said something different.
But that is about the extent of what we did in that particular
area, so I guess I will just--
Mr. Meeks. Mr. Edwards?
Mr. Edwards. Sure. Of course we are concerned any time we
hear that. We believe the way we structure the agreements
incentivizes the banks not to do that, and in fact there are a
lot of controls in place, including regular compliance reviews
by our contractors and our staff, to ensure that kind of thing
is not happening.
The premise for these shared loss agreements really was to
allow the private sector, i.e., the banks that are acquiring
these failed banks, to work these assets appropriately and
maximize the value of the assets. And specifically, we have
provisions in the agreement that if an acquiring institution
wants to do a single note sale, they have to get our
permission.
And certainly if they want to attempt to do any bulk sales,
they have to get our permission. But our intent was for them to
work these assets, and we believe, especially early on in the
crisis, that we did not want these assets put out for sale
because we felt they were trading below their intrinsic value.
Mr. Meeks. Have the shared loss agreements saved the
Deposit Insurance Fund any money, and ultimately the taxpayers,
over the course of liquidation? And if so, what is your
estimate today?
Mr. Edwards. The estimate is a little over $40 billion, as
was noted earlier. And what that is, at the time that we do a
cost test, when we bid the failed bank out, we are required
under the statute to resolve the bank in the least costly
manner to the DIF. So the baseline case is if we had to
liquidate the bank, pay out all the deposits, and take all the
assets back ourselves. That is one cost. That is generally the
worst-case scenario.
Any other deal we have, i.e., a whole bank transaction
where we sell the failed bank to an acquiring institution with
a loss share agreement, if that saves us money then we count
that as a savings. So when you added up all the savings, it was
about $40 billion, because liquidating a bank and paying out
the deposits and putting the assets in the government's hand is
always going to be the worst-case scenario.
Chairwoman Capito. Thank you.
I now recognize Mr. Miller for 5 minutes for questions.
Mr. Miller. Thank you very much.
I enjoyed your presentation today. If you look at 2008 to
2011, lenders went through a very, very tough time, especially
rural banks. If you look at their AD & C loans, when the
regulators were forced to apply mark-to-market and the SEC
would not modify it, you put many of these loans in a poor
asset quality category and they were forced to sell them off.
It is sad because most of those loans are probably worth 3
times today in value than what they had to sell them off for,
and it is really sad to see. But it doesn't seem like after the
economy really got to where it was starting to pick up again,
and builders were starting to build again, which is going to
take builders putting houses out that will help the economy
return, it doesn't seem like the banks are being allowed to
make the loans they should.
Mr. Brown, what is your assessment of the current state of
lending for the construction industry today?
Mr. Brown. Real estate construction lending has declined.
The volume outstanding has declined quite a bit during the
crisis. And the loan charge-offs in that sector have exceeded
$70 billion since the end of 2007 to the present. So there have
been heavy losses in that area really associated with the large
declines in the market value of residential and non-residential
real estate assets.
Mr. Miller. No, I understand. That was what I said in my
statement. We have gotten to the bottom. Those assets have been
sold off. Those banks have taken a hit. Many of them are gone
today. But the market is starting to build again. We are
dealing with today. What do you see occurring today and in the
future? We know it has been bad. We know it has been awful. We
are past that.
Mr. Brown. Right. We are seeing some rebound in prices in
some of the formerly hard-hit markets like Phoenix, Las Vegas,
and Atlanta, where we saw a double-digit increase according to
the Case-Shiller Home Price Indices last year. But those market
prices, those indices remain far below their peaks from before
the crisis.
Mr. Miller. Yes. But what we are seeing out there is the
regulators are basically requiring banks to go above required
capital as far as lending. If you take the system that they
face today, say a bank had $50 million in deposits, required
reserves of $1,500,000, they are not allowed to lend about $3
million to $800,000. And that is about--that is 100 percent,
and it used to be 300 percent.
Ms. Eberley, how would you say that is working today in the
system?
Ms. Eberley. In our guidance, we encourage banks to make
loans to creditworthy borrowers, including homebuilders. And
there is no prohibition on making loans in the Acquisition,
Development and Construction sector. The thresholds that you
cite, the 100 percent and 300 percent, appear in guidance that
we issued in--
Mr. Miller. Well, 300 percent was before, but the
regulators today are not allowing anybody to exceed 100
percent. And that is stifling the industry.
Ms. Eberley. So we don't have any rules like that.
Mr. Miller. But the regulators are--there are no rules, but
the regulators are applying this in the banks. I have talked to
too many banks that keep coming back and saying the same thing.
And I think the regulators are being overly restrictive because
of the market situation in 2008-2011, which I am not saying
wasn't bad. It was horrible. Banks lost tremendous amounts of
money.
But you are seeing throughout different regions in this
country that the markets coming back. People are buying new
homes. When they buy new homes, the current value of existing
homes is going up with them. But builders who have qualified
credit and good projects can't get lenders to lend above this
100 percent because the regulators won't allow them to do that.
Ms. Eberley. I can just tell you that we do not have a
prohibition for institutions to make acquisition development
loans above 100 percent of their capital. To the extent that
you have an institution that is doing that or an examiner who
is telling an institution to do that, we would of course be
interested in hearing the specifics on that.
Mr. Miller. I probably have a room full of bankers who can
give you specifics on that. And that is the problem we are
facing. It seems like we are forcing and mandating a
restriction on lenders that currently does not exist in law.
And I understand the regulators are being cautious because of
what many banks went through. If we would have modified mark-
to-market, a lot of those banks would still be out there today.
If we would have modified mark-to-market and not forced
them to take respective losses, many of those banks could have
held those loans, and today, in a better marketplace, could
have sold those off. I am not blaming you for that. We did
nothing to modify it. I got language to the SEC to have them
look at that issue and they came back and did nothing.
So I am not blaming you. We didn't do our job to allow you
to do your job. But what we are facing out there to ensure that
bank examiners on the ground know that they are not empowered
to enforce that I think is something we need to work on
internally because it is occurring.
There is no doubt that it is occurring. And there is no
doubt that it is not restricted and regulated by law for them
to do that. But when you look at the situation they were
allowed, going to 300 percent of that and now they are forcing
the 100 percent guidelines as a standard and not letting people
exceed that.
It is just something that I--we introduced a bill to
directly deal with that. But it would be nice if you could
internally look at that and understand that system doesn't work
in a recovering market. And the market is recovering.
I see my time has expired, and I thank the chairwoman for
her generosity.
Chairwoman Capito. Thank you.
Mr. Watt for 5 minutes.
Mr. Watt. Thank you, Madam Chairwoman. I am always
interested in some of the unintended consequences of the
decisions we make here. I noticed that Mr. Brown, and I think
Mr. Evans, talked about how the bulk of the failures that we
have experienced, or a large part of them, resulted from
aggressive expansion. And I think Mr. Brown testified about a
change we made in the law at some point which made it easier
for community banks to expand by lifting geographic
restrictions.
First of all, Mr. Brown, tell me again what that change was
and when we made it.
Mr. Brown. Yes. Traditionally, there were restrictions on
branching at the State levels. Some banks were in unit banking
States. They really couldn't have branches. And those were
relaxed at the State level in the early 1980s and early 1990s,
allowing some banking organizations then to consolidate their
charters and run them as branches.
Moreover, restrictions on interstate banking at the State
level were essentially undone or relaxed through the Riegle-
Neal Act of 1994, and after that interstate banking became much
more prevalent. And both of those deregulation events
facilitated the consolidation of charters within bank holding
companies and also voluntary mergers across State lines.
Mr. Watt. And of course, I was here in 1994, so I am sure I
supported that change. So, an unintended consequence of that is
aggressive mergers, aggressive growth, and aggressive growth is
what led to a number of the bank failures during the economic
downturn. I want to pick up on that.
Tell us again what part of these failures and forced
consolidations resulted from larger banks acquiring or other
banking groups acquiring those failed banks' assets. What part
of that resulted, based on your study, from aggressive growth?
Mr. Brown. First, it was really the non-community banks,
the 558 charters in 2011 that did not meet our community
banking definition. They held $12 trillion in assets. They had
gained $6 trillion in those assets through direct acquisitions,
almost 2,500 acquisitions. So, they really grew their share of
industry assets to 86 percent through acquisitions and through
retail lending and consumer lending for the most part.
Community banks, on the other hand, tended to grow more
organically--
Mr. Watt. And which ones of those had been community banks
before that as opposed to the category that you just described?
Mr. Brown. I am not sure if I have that information at my
disposal. We probably could calculate it from the data that we
collected.
Mr. Watt. Mr. Evans, you referred to something called
``forward-looking'' rather than retrospective accounting. How
would that look? What kinds of things are the accounting
standards people are talking about that would allow us to be
more forward-looking in the accounting principles that are
applied?
Mr. Evans. Right. So, instead of estimated losses being
based on historical losses or losses that have been incurred to
date, you would consider current market conditions and other
factors--
Mr. Watt. How can an accountant do that? I guess I think of
accountants as being--they keep track of the numbers as they
are. What would be the theory on which an accounting standard
change would address that issue?
Mr. Evans. The accountant would be doing the auditing and
the attestation. This is what bankers would be doing who have
knowledge of what current conditions look like and what they
anticipate going forward. It would be embedded in the updated
standards that will allow them to do that.
Mr. Watt. So you are talking about the audit standards as
opposed to actual accounting standards then?
Mr. Evans. That is right.
[Mr. Evans submitted the following clarification for the
record: ``This is an update of current accounting standards.'']
Mr. Watt. My time is about to expire, so I will yield back.
Chairwoman Capito. Thank you.
Mr. Campbell for 5 minutes.
Mr. Campbell. Thank you, Madam Chairwoman.
I want to step back and do a little 20,000-foot kind of
view here. It seems to me, and I will ask you to comment on
this, that there are two problems facing community banks. One
is the squeeze on margins, which has to do with monetary
policy, which has nothing to do with any of you at that table
or any of us up at this dais.
And in recent testimony before this committee or
subcommittee, other subcommittees that are a part of this
overall committee, even those who advocate the current loose
monetary policy would agree with it and admit that there is a
tremendous pressure and squeeze on margins at the community
bank level because larger banks can borrow from the Fed under
the Treasury and make a spread that is completely without risk.
And that is limiting margins at the community bank level.
Then on the other end, we have this increase, although
unquantifiable, so it seems. But this increase in cost at the
community bank level due to regulatory restrictions.
So, if you look at that, if you have declining margins and
increasing costs, we see this reflected in very few new bank
charters and consolidations at the community bank level.
And so from where I sit I look and I say all right, we
actually have a current regulatory environment that is damaging
the very sector that we are supposed to be protecting, that is
causing there to be a shrinkage and, sure, maybe not failures
in the classical sense of failures, but a failure of the
overall sector because they just can't make it with increasing
regulatory costs and shrinking margins. Would any of you like
to comment on that?
Mr. Brown. The importance of net interest income to the
earnings of community banks is absolutely an accurate
assessment. We have looked at changes in their efficiency ratio
over time, that is, the ratio of their overhead expenses to
their revenues. And it has deteriorated over the last 15 years.
But more than 70 percent of that deterioration came about due
to a shrinking of net interest income. And only a small
portion, 20 percent, came from higher expenses. Those are
expenses of regulatory and non-regulatory. We can't separate
those out.
The community banks fund themselves through deposits. That
is a very good funding model during periods of normal interest
rates. High interest rates you can get some discounts there,
but during a period of low interest rates, it is not
necessarily the cheapest source of funds for them.
Mr. Campbell. Other comments? Mr. Rymer?
Mr. Rymer. Yes, sir. I would just like to point out that
there is some cyclicality to this. Prior to the crisis, there
was an extraordinarily large number of de novo banks, new banks
formed. Unfortunately, I think the crisis certainly has
dissuaded potential bank investors from investing in new banks
at this point in the cycle. But prior to the crisis,
particularly in Georgia and California, lots of new banks were
formed.
Mr. Campbell. Okay. So the monetary policy as we discussed
the shrinking margins is the two-thirds or three-quarters of
their problem. But the regulatory costs are still part of the
problem.
Do you all believe, and I only have a minute or so left,
that we can--I could rattle through, they are all in here, all
the different regulations that we have passed just in the last
10 or 15 years, many of which are overlapping or duplicative.
Do you all believe that we can relieve this regulatory--that
there is a way to pull this stuff back in order to give some
relief to this sector so that the regulation isn't forcing the
sector down without adding significantly to the failure risk?
Ms. Eberley. I might just say that what community bankers
have asked us to do is to help them in understanding the
regulatory environment and framework. So through our Community
Bank Initiative, there were a couple of very specific requests
that were made for us to help reduce burdens at community
banks.
One was to increase our outreach and training. Our
Director's College Program and other outreach was cited as
being very valuable to bankers. They use it to help train their
staff, make sure their directors understand their roles and
responsibilities. And they have asked us to expand those
opportunities where possible, including the ways that deliver
the programs. And so, we are working on that.
The second was to give them line of sight for the
regulations coming down the pike. So what is out there, what is
proposed, does it apply to them, how would it apply to them.
And we have developed a Web-based tool to bring all of that
together and help community bankers gain an understanding.
Mr. Campbell. Thank you. My time has expired.
Chairwoman Capito. Thank you.
Mrs. McCarthy for 5 minutes.
Mrs. McCarthy of New York. Thank you. And thank you for
having this hearing. I find it fascinating.
I want to follow through a little bit with what Mr. Miller
had started to talk to you about. We have been looking at the
GAO report and we know that many residential builders in this
are small businesses owners who rely on the community banks to
finance their acquisition, development, and construction
activities.
The financing options are tight and sometimes nonexistent
that we have seen, and I have seen it in my own area in New
York. But looking at the GAO report, commercial AD & C
financing combined with weak underwriting, insufficient
capital, and high concentration have proven to be risky and
have led to some bank failures. If the oversight and the
prudent management were in place, what, if anything, could make
commercial AD & C loans risky?
Ms. Eberley. What makes acquisition, development, and
construction loans risky is the length of time before the
project comes to completion and it is the risk of economic
changes during that time when the construction is taking place.
But you raised a couple of interesting points. Our
Inspector General conducted an evaluation and issued a report a
little bit earlier this year that covered institutions that did
have concentrations that exceeded the thresholds that are
included in our regulatory guidance, at which point we expect
heightened attention and risk management practices by
institutions.
And so, there were institutions that exceeded these
thresholds, but weathered the crisis in good shape. There were
other institutions that got into trouble, but managed their way
back out without failing. And the principles that you outlined
were the ones to which they actually adhered.
They had strong risk management practices in place. They
paid attention to market fundamentals, and when their market
appeared to be overheated, they pulled back. And they had
strong board governance around their credit administration
practices. So those were the things that made a difference for
institutions that were concentrated at high levels that made it
through the crisis okay.
Mrs. McCarthy of New York. From what I understand,
obviously with the commercial loans the banks took, which are
usually higher amounts of loans and there is a certain limit on
what banks would possibly put out there for what they might
consider a risky loan, that kind of left our smaller
residential builders with no place to go. Am I correct in
interpreting it that way?
Ms. Eberley. I am not sure I understand your question.
Mrs. McCarthy of New York. From what I understand, the bank
has a--if they are going under risk management and if they are
looking at how many loans they have out there and they have a
lot of commercial loans, which usually are large pieces of
property, more expensive to build. And if they start to go
under, as we saw going back a few years ago, there wasn't any
money left over for the small businesses.
That is what we are trying to look at, how we can make sure
our small businesses that are residential builders, that don't
need as much money as the commercial. And once they reach that
limit, there was nothing left for the small businesses to get.
Ms. Eberley. Again, I would just say that our guidance
doesn't set limits on commercial real estate lending or
acquisition, development, and construction lending. It sets
thresholds beyond which we expect institutions to have
heightened risk management practices.
So that means our expectations about how the banks are
going to manage that portfolio, we expect to see more due
diligence around it. We expect to see greater levels of
understanding of the marketplace fundamentals, monitoring of
the marketplace fundamentals, stress testing of the portfolio
to determine impacts on capital or borrowers, or changes in
interest rates or changes in economic fundamentals.
So, that is our expectation. We don't place limits on the
amount of lending an institution can do in a portfolio like
that.
Mrs. McCarthy of New York. I have a few more questions, but
I don't think I can get them answered in 46 seconds, so I yield
back. I will ask for written responses to my--
Ms. Eberley. Oh, certainly. Certainly.
Chairwoman Capito. Mr. McHenry for 5 minutes.
Mr. McHenry. Thank you. And I want to thank all of you for
your service to our government and to our people.
Now look, I have met with a lot of community bankers, as
most members of the committee have. And they tell me stories
about an inconsistent, overly stringent examination process;
that this is a hyperreaction by the FDIC to the crisis, an
overreaction, in their words. Now certainly, they are
regulating, but it is consistent with the FDIC study that we
are talking about today.
You have also reached out to various consultants and
contractors for these community banks. And I know the FDIC is
in an ongoing process of doing that. But I wanted to share with
you a couple highlights of criticisms of the FDIC that I have
which they don't receive:
``We have received examination criticisms that were
inconsistent with what prior examiners found, inconsistent with
what was found in prior examinations by the same examining
body, and inconsistent with guidance from our regulator. The
inconsistency of the examination has made it extremely
difficult for us to understand what is expected of us and to
comply with expectations of our examiners.''
Another one, ``My financial institution has not tried to
appeal a decision from our regulator. The appeals process does
not appear to us to be independent. The appeals process appears
to be similar to being bullied in elementary school and your
only appeal is to the bully's mother.''
``Typically, in the past, if the examiners found areas of
concerns they would identify the area of concern and make
suggestions on how to improve in these areas. Now minor
infractions are met with severe criticisms and/or penalties.''
Likewise another one, ``Our exam this past summer was a
dual exam. The exam included compliance, CRA, and fair lending.
The exam lasted 4 to 5 weeks, and the number of people ranged
from six to eight. We had an excellent rating prior to this
exam. The compliance examiners came in with unlimited budgets
and correspondingly unlimited time to search our files for
errors to prove exactly what?''
I had another banker say that your agency used to be one to
fix problems and to repair wounds, but that has changed to a
mindset of bayoneting the wounded. Now, I understand there is a
reaction to lax exams prior to the crisis. But this
overreaction leads me to ask one simple question.
I will begin with you, Ms. Eberley, because exam process is
certainly key to this. How are community banks expected to
exist under this hostile regulatory environment?
Ms. Eberley. I would start by saying that we expect our
examiners to examine banks in a fair and balanced manner, and
to remain professional throughout all of their dealings with
institutions. I take great pride in the professionalism of our
examination staff and I do believe that we have a number of
programs in place to ensure that we have consistency on a
nationwide basis.
We have a national training program for examiners and a
stringent commissioning process. We undertake internal reviews
of our examination program through each of our regional
offices. And we engage in extensive--
Mr. McHenry. So things are good?
Ms. Eberley. I would just tell you that we work very hard
to--
Mr. McHenry. No, I appreciate you working very hard. I
acknowledge that. And I certainly appreciate your service. But
these are the criticisms I am receiving and I am hearing. Are
they wrong?
Ms. Eberley. They have not come to me. I would ask that--
Mr. McHenry. Right. So they are going to come to the
regulator. They are going to come to, in these words, this
appeals process which they think doesn't work.
Let me just ask another question. At the November meeting
of the FDIC Advisory Committee on Community Banks, there was a
question on the ongoing examinations and reports and after-
examinations. Have you implemented any policies or procedures
to improve this process?
Ms. Eberley. We have undertaken a number of initiatives. We
did engage in training with our entire examination workforce in
2011, I believe, about the examination approach.
In terms of communication with institutions, we issued a
Supervisory Insights Journal article last year talking about
the risk management examination process and what bankers should
expect in terms of communication throughout the process. We
issued a financial institution letter in 2011 reminding bankers
about examination processes again, and the appeal programs.
We do encourage institutions to try to resolve issues while
the examination is open, with the examiners. But if that can't
be done, we can disagree professionally. And we encourage
bankers to talk to us. We don't know that there is a problem
unless there is a communication of the issue. And so they can
talk to the field supervisor, regional office management, and
me. I have a dedicated mailbox that is listed out in that
financial institution letter.
One of the things that we are going to do through the
Community Bank Initiative Project is institute an information
packet, essentially, for community banks that will be mailed
out to all of the community banks that we regulate, reminding
them about all of these processes and encouraging them to take
advantage of the process. I mean that with all sincerity that
we want to communicate. We want to know if there are issues.
And we want the opportunity to fix them if that is the case--
Chairwoman Capito. I am going to step in here, because the
gentleman's time has expired.
Ms. Eberley. I apologize.
Chairwoman Capito. And we will move on to the next
questioner, Mrs. Maloney.
Mrs. Maloney. I would like to thank Ranking Member Meeks
and Chairwoman Capito for calling this really important hearing
on the status of community banks in our financial system and
its service in our communities.
I am pleased to have joined Mr. Westmoreland in support of
his two studies, and in support of really looking at ways we
can help community banks. They are critical. And I would say
regional banks too. They are critical to our financial system,
and really unique in America.
In many of the foreign countries, they have very large
banks. They don't have community banks. And my first concern
was on the Basel III capital requirements.
Chairwoman Capito and I wrote a letter to the regulators,
Mr. Bernanke, Mr. Curry, and others, expressing our concern
that the requirements for international global banking, huge
banks, were the same for the community banks. Community banks
are not involved in global financing. And the requirements in
Basel III, according to many community banks in the district I
am privileged to represent, would force them to merge or
literally go out of existence.
So I am going to be reworking this letter. I would like
unanimous consent to place it into the record. Many Democrats
have come to me and asked to go on it. Since we already sent it
out, I think we should work on another, so that others can
express their concern. And so I ask--
Chairwoman Capito. Without objection, it is so ordered.
Mrs. Maloney. I also want to reference the chairwoman's
mention about how important community banks are to rural areas.
I would say they are just as important in urban areas. During
the financial downturn, when many of our extremely important
financial institutions that were larger were facing great
stress, the only service that was there for the community in
any type of loan and bank processing were regional and
community banks.
They would continue to do the mortgages. They would
continue to do the small loans. So they are absolutely critical
to our banking system, and to services in many areas.
Constituents would come to me and say, ``My rating is
perfect, I am making zillions of dollars, but I can't refinance
my home, I can't take out a mortgage. What do I do? I have been
to every major bank in New York.''
I would say, here is a list of community banks, regional
banks, try them. And they would be able to get the services
they needed. So I think that supporting them is very, very,
very, very important.
And in that vein, the chairwoman and I introduced a bill
last year that responded to some of the concerns that community
banks brought to our attention. And we are working on
reintroducing it over this break. I hope that our staffs can
meet with the FDIC.
The FDIC was not supportive of the bill. I am very
supportive of regulators. And I certainly want regulators to
support efforts that we have. And we need to do it in a
reasonable way.
But one of the areas was the appeal process where they feel
that their appeals are not listened to, they are not taken into
consideration. And often I feel a disconnect when I talk to
regulators, whom I respect. They say, we are there, we are
helping, we are doing everything.
And then you talk to community banks that because they are
in the community, you know what they are doing, you know them,
they know all the communities, just really know your customer.
They know your customers and the customers know them. And they
were saying that they did not feel that their appeals were
listened to or that they were treated fairly.
I feel that this is an area where we have to work together
to make it work better. We are unique in having the community
banking system. It is not the same in Europe. And that is why
Basel III is not sensitive to the community banks.
I personally think that community banks should be exempted
from the Basel III requirements or have a different standard
because they are not global competitors. They don't need to
have the same standard as a global competitor. They are not
global competitors. They are community banks helping
communities.
I just have great respect for them because they are there
for the communities I represent. And people tell me, thank God
for bank such and such, a little community bank that was there
to help them.
So, what my basic question is that I would like to submit
to the FDIC, and I see the panel is basically all FDIC
primarily, the bill that we did, and have your input on it.
Because I think that we do need to have some relief for the
community bankers. And my first question is on Basel III.
Chairwoman Capito. Your time has expired.
Mrs. Maloney. Okay.
Anyway, I will give you a copy of it and the letter and I
would love to see any comments that you have. But I think this
is a very important hearing. I want to thank the ranking
member; I know he pushed hard for it, and thank the chairwoman
for having it.
Chairwoman Capito. Thank you.
Mr. Fitzpatrick?
Mr. Fitzpatrick. Thank you, Madam Chairwoman.
I will actually follow up on that question and ask Mr.
Brown or Ms. Eberley, do you agree with the gentlelady's
assertion or question that community banks should be exempt
from Basel III?
Ms. Eberley. I would say that we received more than 2,500
comments from community banks about the Basel III and the
standardized approach capital rulemakings that we put out for a
notice of proposed rulemaking. We are in the process of
considering those and take very seriously the comments and
concerns that community banks have raised. It is not our intent
to have an unintended consequence on the community banking--
Mr. Fitzpatrick. So what are those comments indicating? And
what is your position on that question?
Ms. Eberley. We are in the rulemaking process, so we can't
talk about our position.
But the comments that have been raised fall into three
areas primarily. One has already been mentioned, and it is the
implications for mortgages. It is the risk weighting for
mortgages through the standardized approach. Another is the
treatment of trust preferred securities. And a third would be
the treatment of accumulated other comprehensive income, which
is a fancy way to say depreciation or appreciation on
securities.
So, those were the three primary issues that were raised.
We are taking all of the comments into account. We are reading
every comment letter and working with the other agencies as we
go through the process to come up with a final rule.
Mr. Fitzpatrick. Mr. Brown, you indicated in your written
testimony--I think you may have been quoting the FDIC community
banking study--that the surveys of the community bank
presidents indicated that it wasn't a cost of any single
regulation that was going to break the bank, but that it was a
cumulative cost of everything put together, which is exactly
what I am hearing from the community banks in my district in
Pennsylvania, especially around Bucks and Montgomery Counties.
They are saying that they have to hire compliance people
that they didn't have a couple of years ago, they need to train
their employees. They are now responsible for outside
consulting fees, bringing folks in, increased costs of both
internal and external auditing. And of course, all this is
taking away from their ability to make the loans and their
ability to have the capital to make those loans. It is a
distraction.
What is your plan over the course of the next year to
address those issues? And when might this subcommittee hear
back on that plan?
Mr. Brown. Our entire Community Banking Initiative is
designed to learn more about these issues. Those were some of
the things that we have learned thus far. And on the
supervisory side, to try to address them through some of the
technical assistance and other initiatives that Ms. Eberley has
described thus far.
Ms. Eberley, I don't know if you want to elaborate on some
of the steps in the Community Banking Initiative that we are
undertaking.
Ms. Eberley. The ones that I mentioned were bankers who did
ask us for more technical assistance. They expressed that they
valued the director's colleges that we put on. These are
training sessions that we offer through trade associations in
each of our regions for bank directors to participate in and
learn about emerging issues. We host teleconferences. We have
had workshops where we will focus on a specific topic like
allowance for loan and lease losses, and troubled debt
restructuring.
Those have received high praise. And we have been asked for
more and we have committed to do more. We are trying to look at
ways to make those offerings available more broadly, like a
Web-based offering so that it could be available on-demand, in
order to provide that kind of training so that institutions
don't have to rely on outside assistance to get that.
Mr. Fitzpatrick. Is there a specific work plan for this
year, for 2013, to address the cumulative impact of all those
regulations on community banks?
Ms. Eberley. The specific work plan that we have in place
is geared toward the technical assistance offerings, and we do
have a work plan, yes.
Mr. Fitzpatrick. I agree with what Mrs. Maloney indicated
that during those very difficult economic times this past
couple of years, it was community banks that were literally
holding the communities together. They were the ones that were
making the mortgage loans. They were the ones making the small
business loans.
What do the statistics show during those last couple of
years in a number of those small community banks, the charters
have gone out of business versus new startups? Are we seeing
more community banks go out of business and fewer starting up?
Ms. Eberley. We have seen that. And that is consistent with
the economic cycle. We saw it during the last crisis as well.
We are starting to hear discussions from consulting groups that
are representing groups of organizers that are interested in
chartering community institutions.
Mr. Fitzpatrick. What are you doing to encourage more
charters?
Ms. Eberley. To encourage more charters? We are open to
receiving applications for deposit insurance. It really is more
of an economic fundamental and we are waiting for groups to
come forward. We try to be supportive of the banking industry
through our Community Bank Initiative and our other outreach
efforts.
Chairwoman Capito. Thank you. The gentleman's time has
expired.
Mr. Scott for 5 minutes.
Mr. Scott. Thank you. Let me start, first of all, because
my colleague from Georgia, Congressman Lynn Westmoreland, and I
put forward a very important bill that I think you all are
aware of. Are you not? You are not aware of the bill we put
forward? I certainly hope that you will soon become aware of it
because you all are the source of this bill. I am surprised
that you do not know of our work, which begs the question as to
why community banks might be suffering unnecessarily.
Just to refresh your memory, Congressman Westmoreland and I
represent the State of Georgia. And Georgia has unfortunately
led this Nation in bank closures. Many of us feel that some of
those bank closures were not necessarily caused by the external
strong winds of the economy, but in many respects by not the
proper type of regulation, perhaps overaggressive regulations.
In other words, we wanted to find out why these banks
failed. And you all play a very important role in that. So you
can see why I am very disappointed that you all have no idea of
this law and this bill that we passed.
Let me refresh your memory just for a second to explain to
you what it is so you understand my very serious
disappointment. We introduced Public Law 112-88 to address the
concerns that our constituents in Georgia have that they are
facing not only more regulations, but more aggressive
enforcement, not being sensitive to those situations.
They have had increased costs unnecessarily. So we wanted
to take a look at it, and we directed the Office of Inspector
General of the FDIC--are you here?
Mr. Rymer. Yes, sir. I am right here.
Mr. Scott. All right. So this law affected you. And the
GAO, are you here? Okay. To thoroughly study, which obviously
you have not done, and report on a wide range of policies and
procedures used by the FDIC in its supervision of troubling and
failing institutions.
We specifically instructed you to address the following:
the effect of loss sharing agreements; the significance of
losses; the consistency of procedures used by examiners for
appraising collateral values; the factors examiners consider
when assessing capital adequacy; the success of FDIC field
examiners in implementing the FDIC guidelines for commercial
real estate workouts; the impact of cease-and-desist orders on
troubled institutions; the FDIC's procedure for evaluating
potential private investment in insured depository
institutions; and the impact of the FDIC's policy on private
investment in insured depository institutions.
This is serious. Our community banks deserve better. They
only control 14 percent of the total banking assets in this
country. But yet they account for 46 percent of all of the
small business loans, all of the farmer's loans.
So you can see why this is serious business to us in
Georgia. And we don't just sit here to pass these laws like
this that are directed towards you to respond to. And so I
certainly hope, with all due respect, that you will find the
time to look at the legislation that my colleague, Mr.
Westmoreland, and I worked so feverishly on, and to try to
examine.
I yield back, Madam Chairwoman.
Chairwoman Capito. The gentleman yields back.
I ask unanimous consent to insert into the record a letter
from the National Association of Federal Credit Unions. Without
objection, it is so ordered.
Mr. Westmoreland for 5 minutes.
Mr. Westmoreland. Thank you, Madam Chairwoman. And I want
to personally thank Mr. Edwards and his staff for the
accessibility that they have given me and my office to address
our constituents' questions and concerns. We haven't always
agreed, but we have had some great conversations. And I want to
thank him publicly for that.
Ms. Eberley, let me say that I got a call from one of my
community bankers who said he had been in the banking business
for 35 years. He is going through an examination. He said he
had never really had an examination like this that was more
nitpicking, with incompetent regulators. Yet, he did not want
to come forward because of fear of retaliation.
And so, I think that is something that you need to look at.
And the fact that this bank is finally making money, but it
said it seemed like the regulators wanted to look in the
rearview mirror rather than looking forward into what they had
done to actually begin making money in saving their bank. So--
Chairwoman Capito. Will the gentleman yield?
Mr. Westmoreland. I will.
Chairwoman Capito. I want to underscore what he is saying
because I think it is a very serious issue. And when I would
talk to banks, and as I understand it we cannot appeal to you
for an individual bank, we can only appeal in a policy way,
that is why we wrote our letter, or rather our bill. Many of
them would say they couldn't appeal because they were afraid of
retaliation. They feel that if they raise something, they are
going to be punished. And I think we have to get rid of that.
Anyway, I yield back.
Mr. Westmoreland. Yes, but--
Chairwoman Capito. Your point is a very important one.
Mr. Westmoreland. Reclaiming my time, I guess this would be
to Mr. Brown or anybody from the FDIC who wants to take it.
Coming from the State of Georgia, and even despite the crisis
that we have had, we are still one of the fastest-growing
States in the Nation. And to accommodate that growth, it is
important that we do have the financing in place to develop
real estate.
Leading up to the downturn, the community banks, as you
probably know, paid the largest amount of attention to being
able to lend so we could develop. But because a lot of these
real estate loans tanked, the economy tanked. They were having
to write down these loans immediately, and acquire more
capital, which was hard to do.
But the studies showed that the construction activity is
essential to economic activity, and I think Mr. Evans will
agree with this, in your community. It is certainly true in my
district. And the further research--you have to establish a
balance between the social benefits and the social costs of the
commercial real estate.
We are beginning to see the first signs of some new
construction activity in my district. And my fear is that the
examiners will not allow these community banks to participate
in this economic comeback that we are having in Georgia,
especially in my district. So, could you describe any new
guidance that you might have that you could provide to these
banks to help them, and to give us the assurance that they can
get back into this type of lending?
Ms. Eberley. I think that probably falls more in my camp.
We don't have any new guidance planned, but I would say that
the existing guidance that we issued throughout the crisis
stands. And we have encouraged institutions to make loans to
creditworthy borrowers.
We have issued a couple of different statements in that
regard, in addition to encouraging institutions to work out
credits with troubled borrowers. So, we keep repeating that. I
can reemphasize it with the staff in the Atlanta region, and I
am happy to do that, and in fact the staff nationwide. But that
is our policy.
Mr. Westmoreland. Thank you.
The other thing I hope that you all will look at is the
appraisal situation, because if you look at the loss share
banks and they get an appraisal, it is far lower than what a
non-loss share bank appraisal would get because that means that
loss share bank would get more reimbursement from the
government, which is really costing the taxpayers money.
And we have appraisal problems that go far beyond that,
though, in the fact that we are now having to use appraisers
from different parts of the State. As you know, real estate is
location, location, location. And if these appraisers aren't
familiar with the location and the benefits that it has, then
they really can't do a firm appraisal. So I hope that the FDIC
in total will look at the appraisal process and some of the
problems that are coming from it.
With that, I know I am over my time, and I yield back.
Chairwoman Capito. Thank you.
Mr. Green for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman. And I thank the
ranking member as well. I think this is a very timely hearing.
I thank the witnesses for appearing today. We all have
community banks in our districts, and sometimes we call them
neighborhood banks. They are referred to as small banks. We
have many names, and I am not sure that we all have the same
thing in mind when we use this terminology.
So let me, if I may, bring us to a more mundane question.
There are a lot of lofty ideals to be considered today, but
there is something as simple as, how do you define a community
bank so that I may understand that you and I are thinking of
the same institution when we use the terminology?
Mr. Brown, you have said that they have created a niche for
themselves. You indicated that they have a different business
model. So would you kindly give us your definition of a
community bank, as we have been discussing things today,
please?
Mr. Brown. Yes, Congressman. Previous studies have tended
to just rely on asset size as a definition of community banks.
We thought that did not quite capture their nature as
relationship lenders.
Mr. Green. Let me quickly intercede and ask this: In terms
of asset size, because that was one of the things I was going
to inquire about, what is the asset size of a community bank?
Mr. Brown. Many studies use an asset size of $1 billion and
below as the definition of a community bank. But we went beyond
that to look at their lending and deposit gathering activities,
and the scope of their geographic footprint to try to come up
with a better definition of a community bank.
Mr. Green. Could you give us a little bit more information
on it, please?
Mr. Brown. Yes. We excluded institutions that had no loans,
no core deposits, that were specialty banks or that had foreign
operations greater than 10 percent of assets. We then included
institutions that had loans to assets greater than a third of
the portfolio, core deposits greater than half the portfolio,
had fewer than 75 offices, no more than 2 large metropolitan
areas where they did business, and no more than 3 States where
they did business, and no single branch more than $5 billion.
So, these tend to look at the activities of the
institution, look at the geographic spread of the institution,
and try to capture its local nature and its relationship nature
through those attributes.
Mr. Green. Would anyone else like to comment on the
definition of a community bank? Or have you all agreed that
this is the definition that we should work from? Thank you. It
is nice to see that there is agreement on something today.
I will be meeting with community bankers. And I, like other
members of the subcommittee, hear quite regularly this notion
that we are inundated with paperwork; and I am simplifying what
they say. Permit me to ask you to tell me what I should ask
them when I talk to them, given that they will surely bring
this up.
I plan to have them take me through the bank, show me
whatever it is that they want me to see, because I want to
clearly hear and understand their side of this. When they come
into my office here in Washington, D.C., we have extensive
conversations. But I think it is time for me to go out and have
a firsthand look at community banking. And I have asked that
this be accorded me. And I have been told that this is
something that I can do. So, what should I ask? What should I
say to them pursuant to what the regulators think? Here is
something that I would like for you to explain to me.
Mr. Brown. In the roundtables conducted as part of the FDIC
Community Banking Initiative, we talked to the bankers about
their view of the future of the industry, its future viability
in their mind, its connection to small business lending, how
they view their niche in the financial industry, and also how
they view loan demand, how their customers are doing, and how
the state of their customers has changed over the course of the
recession.
In addition, we talked a lot about the regulatory side,
some of the concerns they had about regulation and about their
perception of the cost of regulation. Those are very important
issues.
Mr. Green. With the little time that I have left, about 29
seconds, what is the smallest bank that we have? How many
employees does the smallest bank have?
Ms. Eberley. I believe I am aware of a $4 million
institution and it has 4 employees, I believe was the number.
Mr. Green. Four. With four employees, is Basel III or let's
just say a small number of employees, is it difficult to
comprehend and work through these regulations when you have few
employees? Let's not use a number, but few?
Ms. Eberley. That is certainly what bankers have told us,
that it is the breadth of regulatory requirements and rules and
regulations that is very difficult for them to absorb. And they
have asked for our assistance.
Mr. Green. Do we have a means by which we can accord
assistance to these banks such that they know that there is a
space or place that they can tap into?
Ms. Eberley. Yes. We have established a Web tool to help
institutions manage rules and regulations that are coming down
the pike. And we have also committed to expanding our
educational offerings for community banks to assist with
training on existing rules and regulations.
Mr. Green. Thank you, Madam Chairwoman. I will yield back,
and simply say that I will probably have more questions after I
have talked to my community bankers. Thank you.
Chairwoman Capito. Thank you.
Mr. Duffy for 5 minutes.
Mr. Duffy. Thank you, Madam Chairwoman.
I would join Mr. Green, Ranking Member Meeks, Mrs. Maloney,
and Mr. Fitzpatrick in piling on my concern with Basel III. I,
too, hear constantly from my community banks what impact this
potential rule will have on them. And I guess first off, do we
have a timeline of when we think the rule is going to come out?
Ms. Eberley. We are working diligently with the other
regulators to finalize the process as soon as possible. We know
what the uncertainty of delays means to institutions.
Mr. Duffy. Do you have anything more specific than, ``We
are working on it?''
Ms. Eberley. I do not.
Mr. Duffy. Fair enough. And I know you are not going to
comment on the rule. I think it was Mr. Fitzpatrick who talked
about exempting our community banks, which I think is
reasonable. But if it is not an exemption, maybe a tiered
structure would at least be considered for smaller community
banks.
Just one other point: if you look at the conversation we
are having today, the difficulty of our community banks with
the burdensome regulations that are being piled upon them, and
we look forward to Basel III and QM, the burden isn't getting
lighter. It is getting heavier. And so hopefully, you will all
take that into consideration as we try to make sure we have a
structure in place that allows a healthy and vibrant community
bank structure across the country. So, I didn't want to pile
on, but I guess I did.
I want to quickly move over to new charters. I know it was
touched on, I think by the chairwoman. But listen, we haven't
had any new charters in 2012, right? In 2011, we had three, and
in 2010, we had nine.
So as we move away from the financial crisis, we did have a
bottom and then it started to recover. We actually have
continually gone down since the crisis. Is there an explanation
for why that is taking place, why we haven't bottomed out and
come up since the crisis?
Ms. Eberley. I would say that the industry lags the
economy, in terms of its overall condition and performance. And
so I think that is what you are seeing is that we have hit
zero. And we would anticipate that we would move up from here.
As the industry is starting to improve, we would expect to see
additional activity or new activity.
Mr. Duffy. And if you look at the recession in the early
1990s, we never bottomed out--never came to zero. Maybe there
is a difference between a recession and a financial crisis. Is
that the answer?
Mr. Brown. Yes. Just that the new charters have always been
highly cyclical. This has been a particularly severe cycle with
regard to the effect on the financial industry and their
customers. And so, I think that explains some of the severity
of the cycle.
There were nearly 5,000 new charters for the industry
during the period of our study, and we anticipate that
chartering activity will pick up with the economy and with the
recovery of the industry.
Mr. Duffy. So do you think it is more the cycle in a crisis
as opposed to the new rules and regulations that have come from
Dodd-Frank and others?
Mr. Brown. Our experience through history is that it has
been highly cyclical. So, we would anticipate a rebound.
Mr. Duffy. But is it this cyclical in the sense that when
we are 4 years, 3 years from the crisis we have not started to
recover and come up, we are actually still going down?
Mr. Brown. As was indicated, the performance of the
industry tends to lag the recovery of the economy. The recovery
of the economy itself has been somewhat muted, again, going to
the severity of the financial crisis.
Mr. Duffy. Okay. And I wanted to give a few minutes or a
minute-and-a-half back to the gentleman from Georgia. So I
would yield my time to him.
Mr. Westmoreland. Thank you for yielding. Let me say that I
think Basel III would be the last nail in the coffin for a lot
of our community banks. So I hope you will take that into
consideration.
Mr. Evans, in your report you noticed what I have been
saying for a while, that some of the acquiring banks had driven
down the real estate values by selling at depressed prices. Do
you see that the FDIC can handle what I am anticipating is a
second wave of this, when these loss share agreements expire?
If they are not extended for some point in time, there is going
to be another selloff, which will depress the markets even
more, which would cause even more community banks to fail.
Mr. Evans. Thank you. We did hear from one bank who
expressed those issues. We also, I should point out, heard from
other acquiring banks who said the loss share agreements gave
them time to work out loans. And so, I think the verdict is
still out; more work needs to be done to try to figure this
out. Certainly given what we have heard, it is something that
you might want to consider looking into in greater depth.
Mr. Westmoreland. I yield back.
Chairwoman Capito. Thank you.
I would like to welcome to the subcommittee a new member,
and recognize him for questioning, Mr. Heck from Washington.
Mr. Heck. Thank you, Madam Chairwoman, very much.
I believe this question is most appropriately directed at
Mr. Edwards. Sir, could you, as succinctly and clearly as
possible describe for us, help us better understand the
division in decision-making responsibility and authority when
it comes to the acquisition of a failing bank, between
headquarters and regional offices?
As you might imagine, that question stems from
circumstances in the congressional district I have the honor to
represent, where the decision-making process kind of went on
and on. And losses mounted. And when finally it came down and
it was never clear where the decisions were being made, the
evidently self-qualified local investors took a walk on the 70
stipulated new conditions. So, help us describe that division
if you would please, sir.
Mr. Edwards. Sure. And I will ask Doreen to pipe in as
well. So, when somebody is trying to be qualified to bid on a
failing bank, they have to go through the Division of Risk
Management Supervision and get approved to bid. I will let
Doreen describe how that works.
But essentially, they have to be in good financial shape
and they have to be deemed to be qualified to take that failing
bank over and be successful. Otherwise, we wouldn't want that
transaction to go forward.
Doreen, do you want to add to that?
Mr. Heck. And that is done at headquarters?
Ms. Eberley. No. The process is handled in the region.
Essentially for an institution to be on the bid list for a
failing bank transaction, we have to be able to know ahead of
time that we can resolve the statutory factors that would be
required to be considered for a merger transaction--
Mr. Heck. So the regional offices are the ones who make the
decisions, not here?
Ms. Eberley. The regional--
Mr. Heck. Is that correct?
Ms. Eberley. Right. The regional office--
Mr. Heck. Including the formulation of new conditions or
conditions, is that made at the general office?
Ms. Eberley. Yes. For an institution to become listed on
the bid list and be able to participate in a failing bank
transaction, that happens at the region. So, other transactions
occur as well on an open bank basis. And those considerations
may involve the Washington office on a parallel basis in
considering things like change of control of an institution
that is open and troubled before failure.
Mr. Heck. So there is a division of responsibility?
Ms. Eberley. For certain transactions, yes. That is an open
bank transaction for a recapitalization of an institution
through a change of control.
Mr. Heck. And then that decision is made here?
Ms. Eberley. It is not made here. There is discussion back
and forth. There is consultation.
Mr. Heck. Between corporate headquarters, as it were, and
the regional bank?
Ms. Eberley. Yes.
Mr. Heck. I see. I don't know to whom I should ask this
question, but I am trying to put myself in the shoes of a
community banker who is running a pretty well-run shop and is
looking at admittedly the fairly low cost of money right now
that he or she has to pay to depositors, and looking forward at
the prospect, which seems to me to be inevitable that interest
rates will rise again.
And I am wondering if you agree that, in and of itself, was
an inherent impediment to aggressive loaning for what would
otherwise be qualified borrowers insofar as the amount of money
you lock in long-term and low-cost returns, confronts a
changing interest rate environment you may be stuck. And I
guess as a part of that question it makes me wonder when you
evaluate bank portfolios, what is your forecast, what is your
outlook for the interest rate environment?
Mr. Brown, I thought I should ask that question of you,
upon reconsideration. Thank you.
Mr. Brown. First of all, our historical experience has been
that lending tends to expand somewhat during periods of rising
interest rates. That is the part of the economic cycle when the
economy is expanding and the monetary authority feels it is
okay to raise interest rates from the recession lows.
Mr. Heck. Excuse me, sir. Do you not agree, then, that it
would be an impediment to more lending? We had a lot of
discussion here about not being able to get as many dollars out
there circulating as possible. But if you are confronting
increasing interest rates, how much today do you want to put on
your books that is low return?
Mr. Brown. Historically, lending has increased more in
periods of rising interest rates. Periods of very low interest
rates have been associated with less vibrant economies, slow
growth like we have seen recently. And a lot of the bankers we
have talked to in the roundtables and other venues have cited a
lack of loan demand in the current environment, that
entrepreneurs are not eager to expand their operations.
Chairwoman Capito. The gentleman's time has expired.
Mr. Heck. Thank you.
Chairwoman Capito. Thank you.
And I would like to welcome a new member to our committee,
and a new Member to Congress, Mr. Pittenger from North
Carolina. Welcome.
Mr. Pittenger. Thank you, Madam Chairwoman. Thank you for
calling this important hearing. And I thank the witnesses for
being here with us today and responding to our questions.
I would like to follow up on Mr. Duffy's questioning and
also Mr. Westmoreland and others. I served on a community bank
board for about 14 years, from the early 1990s until the mid-
2000s. It was an exciting time. It was a great time for
investors to invest in community banks. It was a great time of
growth. And our community banks played a significant role in
our region.
I live in the Charlotte, North Carolina, area. And our bank
grew. We ended up selling to a regional bank. We had our
typical requirements, CRA and loan loss reserve issues that we
were accountable to. We had the audits that came in. We got a
clean bill of health most all the time. It was a good
environment. It was very positive, and frankly, it was a great
learning curve for me.
But today, of course, the environment has changed, and the
impediments are out there in a greater way. I met with seven of
our community bank presidents a couple of weeks ago, and they
expressed to me just more of an oppressive atmosphere, totally
different than what I had the privilege of being involved in
during those 14 years. And clearly, Basel III was a major
concern, just the high regulatory effect and the cost of
compliance, the attention that is given to it.
The concerns are getting capital. And the difficulty there
where some banks were forced to look for private equity. And as
such, the only exit for private equity is to sell a bank and
consolidate more, which is worse for the market, and worse for
competition.
So, all this leads us to believe that the need for relief
today, to create that same environment that we had back during
those positive years and to recognize that perhaps what we are
doing today through the regulations is creating more difficulty
and impediments than protection. And maybe the pendulum just
swung way too far and maybe if we can come back.
I speak on their behalf, and frankly, on the behalf of
communities all over the country that there would be very
serious consideration to giving relief to these community
banks, which in our region I--we probably had six community
banks that grew and now they are all have consolidated or sold
out. It is pretty sad. But I believe we can see this again if
we have some thoughtful, prudent reevaluation of the
requirements they are having to live under today.
If you would like to comment, I would be glad to hear from
you.
Mr. Brown. I think the topics that you raised obviously are
of concern. They have been raised as concerns to us in our
interactions with the bankers.
I would point out that in terms of the evolution of the
industry, the industry's financial condition and performance is
improving, and that includes small institutions. And the return
on assets has increased for each of the last 3 years, and the
return on equity.
Non-current loans have gone down. This repairing of the
balance sheet and the earnings capacity of small banks has
proceeded slower than the economic recovery, perhaps also
slower than the larger banks in terms of their recovery. But it
is taking place. And I think that you also mentioned access to
capital.
We found that just under half of all of the additions to
capital during our study period relate to retained earnings.
And of course, that requires a healthy level of earnings to
gain that capital. So, the restoration of that earning capacity
is very important for access to capital for the industry. That
is what our study--
Mr. Pittenger. Sir, I would just say to you that I think it
is a compelling statement that there are no new charters. So it
is a much different climate today. And that is reflected in the
absence of those who want to get back and engaged in this
business as they were before.
I yield back my time. Thank you.
Chairwoman Capito. The gentleman yields back.
Mr. Posey for 5 minutes.
Mr. Posey. Thank you, Madam Chairwoman.
Mr. Rymer, on Page 59 of your report you note that the
historical cost was proving to be poor measurement approach in
inflationary markets. Is it fair to say that the impaired
accounting and fair value accounting is a poor measurement in
bubble markets? As briefly as possible, please.
Mr. Rymer. Yes, sir. In terms of fair value accounting
related to bank portfolios, we didn't find that fair value
accounting was--
Mr. Posey. Can you just answer my question? You agree with
me or you don't agree with me?
Mr. Rymer. Sorry. If you could repeat it, sir; I have a
little bit of a hearing problem.
Mr. Posey. Is it fair to say that the impairment accounting
and fair value accounting is a poor measurement in bubble
markets?
Mr. Rymer. Public markets?
Mr. Posey. In bubble, B-U-B-B-L-E markets.
Mr. Rymer. I don't think you can apply fair value
accounting to bank lending. It doesn't fly.
Mr. Posey. Very good. Thank you.
A question for each of you, just a yes or no if you would,
do you think it is possible through overregulation to bankrupt
or make insolvent lending institutions? Let's start with Mr.
Brown.
Mr. Brown. That has not been the experience of the study.
Mr. Posey. Is that a ``yes?''
Mr. Brown. I think that would be a ``no.''
Mr. Posey. A ``no.'' So it is impossible to overregulate a
business out of business. Okay. Thank you.
Yes, ma'am? Please speak up. I can't hear you up here.
Ms. Eberley. The question was, is it possible to
overregulate a business out of business?
Mr. Posey. Yes.
Ms. Eberley. I--
Mr. Posey. It is a tough question. I understand that.
Especially for people who work for the government. No insult
intended. So, you don't know whether it is possible to
overregulate anybody out of business or not. Okay.
Mr. Edwards, how about you?
Mr. Edwards. Is it theoretically possible? I would concede
it is theoretically possible. In my experience, have I seen
that? No, I have not.
Mr. Posey. Okay.
Mr. Rymer?
Mr. Rymer. I would agree with Mr. Edwards. I think
theoretically, it is certainly possible.
Mr. Posey. Okay.
Mr. Evans. I agree as well. Theoretically, it is possible.
It is possible to overregulate a business.
Mr. Posey. Do you think it would be possible if regulators
put 55 percent of a bank's loans on nonaccrual? Let's start
with you, Mr. Brown.
Mr. Brown. If they put 55 percent of loans on nonaccrual--
Mr. Posey. Wrongfully.
Mr. Brown. Wrongfully?
Mr. Posey. Yes.
Mr. Brown. Then what is the question? I'm sorry.
Mr. Posey. Do you think they could put a bank out of
business like that?
Mr. Brown. It is possible a bank could go out of business
if it had 55 percent of loans on nonaccrual.
Mr. Posey. Okay. But the last time you said it wasn't
possible to overregulate them out of business. But you think if
they did that, it would be possible.
Mr. Brown. If they had 55 percent of loans on nonaccrual,
it is possible they could be.
Mr. Posey. Okay.
Ms. Eberley. I don't think regulators could inappropriately
put loans on nonaccrual.
Mr. Posey. I can't--you are going to have to speak into the
microphone, please.
Ms. Eberley. I don't think that a regulator could
inappropriately place a loan on nonaccrual. So I don't believe
that would cause an institution to inappropriately go out of
business. I think that if loans need to be on nonaccrual, they
should be on nonaccrual, and the accounting guidance is fairly
clear. It is clear that institutions--
Mr. Posey. Okay--
Ms. Eberley. --nonperforming loans.
Mr. Posey. You said, ``no.'' That is good.
Mr. Edwards?
Mr. Edwards. Yes. I have to agree with Ms. Eberley that it
is hard for me to understand a circumstance where the
regulators would--
Mr. Posey. Okay. That is good.
Mr. Rymer?
Mr. Rymer. First of all, it is the bank's responsibility
initially to make the nonaccrual judgments. It is not the
regulator's responsibility.
Mr. Posey. All right. So is that a yes or a no?
Mr. Rymer. If--
Mr. Posey. Just yes or no, just really simple.
Mr. Rymer. I would say from the work that we did, I did not
see such a circumstance.
Mr. Posey. Never mind. Thank you.
Yes, sir, at the end?
Mr. Evans. Nonperforming loans would be a significant
driver of bank failures. And that is what we found in our
report. But the classification issue, I will pass on that.
Mr. Posey. For Ms. Eberley's benefit, I know of an instance
where regulators took a first mortgage with--on a hotel
actually, about a 30 percent loan-to-value ratio, about 7 years
mature, never been a day late. And the regulator said, we don't
think in this market they should be able to make their payment.
They have never been 1 second late in the history of the loan,
a well-secured loan.
Some people think it might be entirely appropriate to put
that on nonaccrual. And some people trying to use a little bit
of commonsense think it would be highly inappropriate.
Mr. Rymer, let's see, Mr. Evans, from your research do you
believe impairment accounting as applied in the examination
process fuels the various spiral of negative balance sheet
pressures, leading to more failures and write downs?
Mr. Rymer. Our study did cite some issues.
Mr. Posey. Okay. That was a ``no.'' That is good enough
because I have a lot of ground I would like to cover, and I am
running out of time.
Mr. Rymer. --regulatory issues.
Mr. Posey. I am out of time.
Chairwoman Capito. You are out of time, sorry.
Mr. Posey. Thank you, Madam Chairwoman. I would sure love a
lightning round if we had 2 minutes left.
Chairwoman Capito. Thank you.
Mr. Barr, I would like to welcome you to the committee, and
I recognize you for 5 minutes for questioning.
Mr. Barr. Thank you, Madam Chairwoman.
Ladies and gentlemen, a president of a small community bank
in Central and Eastern Kentucky told me that it used to be that
his bank made a business decision about whether to make a loan
to a borrower and what the terms of that loan would be. Today,
that same banker tells me that the government makes that
decision for them. With that troubling anecdote in mind, I want
to focus my questions on the costs imposed by regulations and
the costs imposed by increasingly aggressive enforcement by
supervisory agencies like the FDIC.
First of all, just a quick yes or no answer from Mr. Brown,
Ms. Eberley, and Mr. Edwards. Do you think it is important to
perform cost-benefit analysis as a predicate to promulgating
rules and regulations?
Mr. Brown. Yes, and that is our practice.
Ms. Eberley. I agree.
Mr. Edwards. Yes, I concur with that. Yes.
Mr. Barr. Okay. And Mr. Brown, you testified earlier that
you solicit input from industry regarding regulatory costs
through informal practices and also in the notice of comment
process. Ms. Eberley, you noted that your agency was engaged in
technical assistance, Web seminars, training sessions for bank
directors, workshops. And I applaud the agency for taking those
actions.
But the FDIC study that you all refer to in your testimony,
Mr. Brown specifically, you indicated that most interview
participants stated that no single regulation or practice had a
significant impact on the institution, but that the cumulative
effects of all regulatory requirements have built up over time.
Several other members on this panel have mentioned that
earlier today, that increased staff is something that you are
observing compliance staff in these community banks. But that
it is so time- consuming, so costly, and so interwoven into the
operations that it would be too difficult to break out these
specific costs. With that testimony in mind, how can the
analysis be done, the cost-benefit analysis be done properly if
you acknowledge that the true costs associated with regulatory
compliance cannot be captured?
Mr. Brown. I think the difficulties in making a precise
quantification of the costs and the benefits of specific
regulations is something that has been noted by the GAO and
other sources. We are very mindful of the balance between
wanting to get information on the costs, regulatory cost, but
also imposing the burden of additional regulatory reporting on
the industry, which in itself can be a burden.
So we maintain that balance. That is why we rely on input
from the industry, especially during the rulemaking process, to
try to get better information. We think that industry is in the
best position to understand their cost structure.
Mr. Barr. Given that compliance costs are increasing, and
the study corroborates that and you acknowledge that increasing
compliance staff is something that is happening in the
industry, that the fastest growing area of banks is not in loan
officers or in lending, but in compliance staff. How is the
FDIC tracking, if at all, the increased compliance costs,
increased costs of employing compliance officers as part of, as
you acknowledge, your important cost-benefit analysis?
Mr. Brown. I don't believe the responses indicated that
compliance costs were the fastest growing cost element of those
institutions. They had indicated that it had increased over a
long period of time in response to a large number of regulatory
changes over time. But there was no indication that it was the
fastest growing area.
Mr. Barr. Okay. On top of compliance costs, I also want to
just briefly explore the issue of regulatory clarity. And the
example that I will cite to you is a compliance officer in a
very reputable and growing community bank in Central Kentucky
who tells me that her most pressing concern is the mixed
signals that she receives from regulators.
Specifically, on the one hand, they are told that they need
to be prudent and responsible with their loans in order to
ensure safety and soundness. That comes from you all typically.
Yet on the other hand, the Community Reinvestment Act wants
banks to reach out to riskier, low-income borrowers who don't
meet creditworthy borrowing criteria.
So the question is, is the FDIC sensitive to this concern?
And what is the FDIC doing to address the contradictory
mandates imposed on community banks from safety and soundness
examinations on the one hand and CRA audits on the other?
Ms. Eberley. The consumer protection examinations are not
under my purview, but I do know that we don't believe that the
Community Reinvestment Act requires institutions or directs
institutions to make loans that are not creditworthy. So I
would disagree with the stipulation that there is--
Mr. Barr. What would you say to that particular compliance
officer who doesn't understand the government's direction to
the bank?
Ms. Eberley. We need to have a discussion with the banker.
And they need to seek clarity, and I would encourage them to
seek clarity from their supervisor, from their field
supervisor, from their regional office. Both the consumer
protection function and the safety and soundness function
report up to one regional director in the field. For Kentucky,
that is Anthony Lowe out of our Chicago office.
Mr. Barr. I would just--my time is up. But I would just
like to encourage the FDIC to take that concern very seriously,
that there is a serious lack of clarity on the part of well-
meaning, well-intentioned compliance officers in these
community banks. And your sensitivity to that would be
appreciated.
Chairwoman Capito. Thank you.
Mr. Pearce for 5 minutes.
Mr. Pearce. Thank you, Madam Chairwoman.
Just following up on Mr. Posey's statements, and then the
discussion of whether it was theoretically possible for the
government to regulate out of business. Now I am taking a
broader view than just the banking industry. But I would direct
you to my State, where we used to have 123 timber mills. And
because of one regulation, all but one are shut down today, and
23,000 farmers in the San Joaquin Valley all gone because of
one regulation.
The banks in the area, by the way, became unstable.
Suicides rose to an all-time high for any place in the country
because of one regulation. So, when you are unable to find in
your own experience, come on to New Mexico. Come out to the
West and we will show you a lot of areas that have been
regulated out of existence.
Following up on what Mr. McHenry was talking about, I
suspect that he may have been listening in on the meetings with
our bankers. I hear the same complaints there, that in the
past, regulators came in and they were interested in safety and
soundness. And today, they come in and they are 90 percent
compliance.
And so, Mr. Brown, you had said earlier in your testimony
that safety and soundness, that was your charter. Do you have
any idea on the budget for safety and soundness versus the
budget for compliance, and the number of hours spent yearly in
compliance versus safety and soundness? Does anyone on the
panel have that?
Mr. Brown. Congressman, I don't believe we have those
numbers--
Mr. Pearce. I would like to get them.
Mr. Brown. We can certainly get back to you on that.
Mr. Pearce. Now, keep in mind that every time I ask
questions like this, we have a lower rate of getting back to me
than the U.S. Postal Service. So I would really appreciate if
you would follow up on that.
Now, Ms. Eberley, you were talking about how you have deep
interest in making sure that there is not any hostile
environment. Do you have a--last weekend, I was going to check
into the Hampton for coming up, and I was able to go online and
I was able to get five stars or three stars. This hotel, this
one at this place rated three stars, four stars, five stars.
And then, I could get comments from people who had stayed
there.
Do you have anything like that for your process for your
examiners so that bankers anonymously--because you heard the
hostility, no they are not going to come to you. They are
scared out of their minds. They are afraid that you are going
to take them over and that you are going to do something. And I
think that they have a valid reason, looking at the 123 mills
that used to be in New Mexico and they are gone.
So, do you have a process for feedback where you can rate--
or where your people get rated five stars, four stars or three
stars? Do you have anything like that?
Ms. Eberley. We do have an examination survey process. So
at the end of every examination when we mail out the report of
examination, we mail a survey to the institution and ask them
to complete it. I think the scale is 1 to 10--
Mr. Pearce. And it talks about the individual regulators
themselves?
Ms. Eberley. Yes--
Mr. Pearce. The individual regulators.
Ms. Eberley. The--
Mr. Pearce. And what percent of those do you get back?
Ms. Eberley. Pardon me?
Mr. Pearce. What percent of those do you get back?
Ms. Eberley. I don't know the exact percentage, but we get
a fairly good number, and--
Mr. Pearce. Pretty good number?
Ms. Eberley. Yes. And they go to our Division of Insurance
and Receivership, so they don't--I am sorry, Insurance and
Research. They don't come to my division. So that division
compiles the information for me and gives it to me on an
aggregate basis with trends by region so that I can see what
the results are.
Mr. Pearce. Do you make that information available to the
banks so that they know when someone is coming in what sort of
examination that the last people received?
Ms. Eberley. No, it is not made available today.
Mr. Pearce. I keep in mind that I can get that, paid $2.99
online for some program last night and I am able to get that
information for $2.99. Yet you all control the banking industry
of the world and they are sitting out there alarmed at what you
are doing.
In New Mexico, we don't get many floods. We get 9 inches of
rain a year. And yet, the flood insurance is a piece that is
hammered down in New Mexico and people--the bankers express
alarm about that.
Now, in a recent compliance review, one of the banks got a
$15,000 fine because the names did not match exactly the IRS
names. Can't you--again, on that $2.99 program I filled out
last night, if I didn't fill it out correctly, it just wouldn't
accept it. Can't you give a bank something where if they don't
fill it out correctly--why did you stick somebody $15,000 for
not--there were less than 100 of those names.
Ms. Eberley. So was this on their HMDA?
Mr. Pearce. It is on the loans and--
Ms. Eberley. Yes. So probably the--
Mr. Pearce. And it didn't match the IRS?
Ms. Eberley. Right.
Mr. Pearce. Those used to be letters. And you sent them a
letter of concern. And now, you are sticking people with fines
that are very tough for small institutions, trailer houses. You
are making it tough to lend money on trailer houses and on--I
will be finished in just a second, Madam Chairwoman, you are
very patient.
New Mexico is 47 per capita income. If you can't lend for
trailer houses and if you can't lend for consumer stuff, what
purpose is there in New Mexico? That is us. We are at the
bottom of the heap. You guys are making it very tough for New
Mexico to get access to loans.
Thank you, Madam Chairwoman.
Chairwoman Capito. The gentleman yields back.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
The hearing is adjourned.
[Whereupon, at 12:11 p.m., the hearing was adjourned.]
A P P E N D I X
March 20, 2013
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