“The Fed is committed to fair, consistent and informed examinations,” and it has a “robust appeals process” when banks disagree with examiners’ findings, Bernanke told an audience yesterday during a conference at the Federal Deposit Insurance Corp.’s Arlington headquarters.
Bernanke was addressing tensions that have been mounting between banks and regulators since the 2008 financial crisis. Bankers say agencies including the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency are applying regulatory standards too stringently and inconsistently.
For evidence, financial institutions point to the number of banks facing pressure from regulators to improve their financial positions. About a third of banks are now under either informal or formal regulatory orders, up from an average of about 3 percent to 4 percent during normal economic times, said Cam Fine, president of the Independent Community Bankers of America.
Bankers say they are sometimes forced to write down performing loans based on the value of collateral, without regard to whether the borrowers have adequate income or cash flow. Regulators are also requiring capital increases beyond regulatory mandates, according to the ICBA.
The bankers’ pushback has reached the ear of Congress. Republican and Democratic lawmakers in the House of Representatives have introduced legislation that would establish an ombudsman and would allow banks to appeal the results of their exams to an administrative law judge. Both roles would be established within the Federal Financial Institutions Examination Council, an interagency regulatory body.
The measure, the Financial Institutions Examination Fairness and Reform Act, also would require regulators to provide examination reports on a strict 60-day deadline and relax treatment of commercial loans, which are a significant part of the business now done by many small banks. Community banks, defined as those with less than $10 billion in assets, account for 21 percent of the U.S. banking industry and made 58 percent of outstanding bank loans to small businesses, according to the ICBA.
Regulators say the bill would hamper their ability to ensure that financial institutions are operating soundly. Bad economic conditions and poor business decisions are to blame for the banks’ predicament, they say.
A Local Disconnect
“The weak economy, together with loose lending standards in the past, has put pressure on the entire banking industry, including community banks,” Bernanke told the bankers yesterday. Supervisors, he said, “must insist on high standards for lending, risk management, and governance.”
Representative Shelley Moore Capito, a West Virginia Republican who co-authored the Fairness Act with New York Democrat Carolyn Maloney, said Washington-based regulators often seem more sympathetic than their regional examiners to the views of community bankers.
“Over the last year, we have heard a chorus of concern that there is a disconnect between what is said in Washington by federal regulators and what is carried out by the field examiners,” said Capito, who also spoke at yesterday’s FDIC conference.
Regulators say they are trying to fix that. FDIC Acting Chairman Martin Gruenberg told conference attendees yesterday that he had directed his staff to review examination procedures “to see if we can identify ways to improve our processes and communication while maintaining our supervisory standards.”
Community banks say that process can’t happen fast enough.
“The misplaced zeal and arbitrary demands of examiners are having a chilling effect on credit,” Noah Wilcox, president and chief executive of Grand Rapids State Bank in Grand Rapids, Minnesota, told members of Congress at a hearing this month. “The contraction in credit is having a direct, adverse impact on the economic recovery.”
Robert Fisher, president and chief executive of Tioga State Bank of Spencer, New York, said that one way community banks can cope with regulatory overreach is to change their charters. Banks with the FDIC as their primary regulator can move over to the Fed, though they should know that “the grass can sometimes seem greener” with another agency.
“Choice is always a good thing,” Fisher said in an interview. “The pendulum swings both ways and I think having a choice keeps the regulators from swinging too far.”
The Financial Institutions Examination Fairness and Reform Act is H.R. 3461.