Bank Regulator Mixed Messages?

August 16, 2011

Authored by: Robert Klingler

On August 16, 2011, the Financial Institutions and Consumer Credit subcommittee of the House Committee on Financial Services held a field hearing in Newnan, Georgia, with a stated topic of “Potential Mixed Messages: Is Guidance from Washington Being Implemented by Federal Bank Examiners?”

Representatives Shelley Moore Capito, Spencer Bachus, Lynn A. Westmoreland and David Scott each heard testimony from panels of federal banking regulators and Georgian bankers about the condition of banking in Georgia, including the effect that federal banking regulations, guidance, policies and actions have had on community banks.  Copies of the written testimony submitted, including that of the FDIC, OCC and Federal Reserve are now available on the Subcommittees website.

Although it is hard to draw any overall themes from the hearings (other than possibly that the issues involved aren’t easily addressed in this format), there were several good points made.

From the FDIC’s written testimony, addressing the challenges faced by Georgia banks:

As the Subcommittee has discussed in previous oversight hearings, the collapse of the U.S. housing market in 2007 led to a financial crisis and economic recession that has adversely affected banks and their borrowers in Georgia and nationwide.  Georgia’s economy was hit especially hard following years of strong economic growth characterized by rising real estate prices, abundant credit availability, and robust job creation.   Financial institutions, whose performance is closely linked to economic and real estate market conditions, have been significantly affected by a rise in the number of borrowers who are unable to make payments.

Gil Barker, the Deputy Comptroller for the Southern District, specifically addressed many concerns expressed by bankers in his written testimony, including statements of regulators criticizing loans to a particular industry, performing non-performing loans, criticizing loans merely because of a decline in collateral value, and the second guessing of independent appraisers.  While one can certainly question whether the interpretations provided by Mr. Barker line up with some of the actions of the on-site examiners, it is definitely a good read for anyone dealing with the OCC in the Southern District.

The loss share method of resolving closed institutions seems to have significant benefits over the FDIC retaining the assets for bulk sale, but there is significant disagreement as to whether the loss share agreements properly incent the acquiring bank with regard to working with borrowers to minimize losses.  The representatives seemed particularly attuned to the additional issues related to loan participations where the lead bank has gone through receivership.

The often excessively harsh language of examination reports, especially to the extent they don’t match up with the exit meetings of regulators was frequently mentioned.  It was also noted that the written reports, which ultimately form the official record, fail to acknowledge the bank’s history and any progress that the bank has obtained. We believe the harsh language is unnecessary in motivating banks to resolve their issues and the failure to acknowledge progress ultimately hurts the credibility of the regulators.  It was also pointed out that management ratings have frequently fallen from excellent to horrible without any change in the management or the board.

A common solution, to the apparent surprise of several on the banking panel, was that regulators, especially local regulators, need to be given more discretion and flexibility to assist institutions recover.