The Senate Banking Subcommittee on Financial Institutions and Consumer Protection held a hearing on Wednesday titled "Enhancing Safety and Soundness: Lessons Learned and Opportunities for Continued Improvement." A number of witnesses delivered testimony on the topic, among them: Michael Foley, Senior Associate Director, Banking Supervision and Regulation Division, Board of Governors of the Federal Reserve Board (FRB); Christopher J. Spoth, Senior Deputy Director, Division of Risk Management Supervision for the Federal Deposit Insurance Corporation (FDIC); David Wilson, Deputy Comptroller for Credit and Market Risk, Office of the Comptroller of the Currency (OCC); Salvatore Marranca, chairman, president and CEO of Cattraugus County Bank in Little Valley, N.Y.; and Frank A. Suellentrop, chairman and president of Legacy Bank in Wichita, Kan. The Committee is led by Chairman Tim Johnson (D-SD) and Ranking Member Richard Shelby (R-AL)
"Community banks were generally not involved in the mortgage-related issues at the first stages of the financial crisis, but were impacted as the recession took hold," said Spoth of the FDIC. "Community banks tend to focus on local markets and loans for which local knowledge and personal service provide a competitive advantage, such as residential construction loans and other smaller commercial real estate projects. Construction and development (C&D) lending in areas that had experienced the steepest increase in home prices during the boom was hit first. Credit losses rose and subsequently spread across all loan types and rose as borrowers were caught in the recession and then slow recovery. At the same time, community banks' other sources of revenue used to offset credit losses from real estate portfolios was limited."
During the hearing, the ICBA called for Congress to enact legislation to address the overly stringent regulatory environment. ICBA Chairman Marranca explained that many bank examiners have overreacted to the recent financial crisis and are stunting small-business lending and the economic recovery on Main Street.
“The pendulum has swung too far in the direction of over-regulation,” said Marranca. “I’ve met with thousands of community bankers from every part of the country in recent years, and I can tell you there is an unmistakable trend toward arbitrary, micromanaged and unreasonably harsh examinations that are suffocating lending.”
Michael Foley of the Federal Reserve commented: "As liquidity strains developed at many banks during the crisis, we adjusted our focus to place greater emphasis on evaluating liquidity contingency funding plans at supervised community and regional banks. Liquidity pressures have eased considerably due to actions taken by the banking agencies during the crisis, recent legislative changes to increase the level of deposits insured by the Federal Deposit Insurance Corporation, and more stable market conditions."
Marranca, in his testimony on behalf of the ICBA, advocated several legislative measures designed to reduce undue regulatory burdens on community banks to promote the recovery. Marranca urged support of the Communities First Act (HR 1697), sponsored by Rep. Blaine Luetkemeyer (R-MO). Supported by the ICBA, HR 1697 would raise the threshold number of bank shareholders that triggers Securities & Exchange Commission (SEC) registration from 500 to 2,000 and extend the five-year net-operating-loss carryback provision to free up community bank capital, among other provisions to address onerous over-regulation and to encourage greater saving, investing and lending.
"The FDIC is interested in finding ways to eliminate unnecessary regulatory burden on community banks, whose balance sheets are much less complicated than those of the larger banks," said Spoth. "We continuously pursue methods to streamline our supervisory process through the use of technology and other means to reduce disruption associated with examination activity. While maintaining an effective examination process is paramount, we are sensitive to banks' business priorities and strive to be efficient in our work."
Marranca of the ICBA also encouraged passage of HR 1315 during his testimony. The bill, sponsored by Rep. Sean Duffy (R-WI), was drafted to enhance Financial Stability Oversight Council review of Consumer Financial Protection Bureau (CFPB) rules; called for regulators to effectively implement Dodd-Frank Act restrictions on the largest and riskiest financial institutions; and warned policymakers to carefully proceed with housing-finance reforms to avoid industry consolidation.
