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At a community banking panel at this year's American Banker Regulatory Symposium, the consensus held that regulation can't be a one-size-fits-all practice.
September 20 -
Zions, in its attempt to spot fraud, was gathering much more data than its technology could handle. While searching for a needle in a haystack, it was just piling on more hay.
September 2
Problems in the loan classification system are preventing small and regional banks from making more loans — especially business loans, argues Harris Simmons, the chairman and chief executive of Zions Bancorp.
The requirements for classifying loans as substandard are fraught with contradictions that post-crisis regulation has amplified, Simmons said at the American Banker Regulatory Symposium on Tuesday.
"The regulatory environment today reminds me of the story of the cross-eyed javelin thrower who never won a tournament but kept everyone on the edge of their seats," he said.
"A renewed consideration needs to be given to old regulatory challenges," and "that's the classification system and how it might be constraining availability of credit, particularly to small business," he said.
Simmons told the story of his meeting with bank executives on Monday about a large business client that had not tapped its line of credit in 12 months. Federal regulators required the line to be classified as substandard because the client's $100 million in cash flow and its leverage was lower than what was stated before the crisis.
"We will be exiting the classified commitment," Simmons said. "And we've worked hard to exit many hundreds of millions of dollars in classified commitments."
Simmons argues that the regulators are using an inflexible loan classification system to judge banks' exposure to credit risk when substandard loans have varying degrees of risk of loss or default.
This concern is largely hurting regional banks like the $51 billion-asset Zions and community banks, Simmons said. The Salt Lake City, Utah, bank has about $6 billion of business loans ranging from $100,000 to $1 million, accounting for about 60% of the size of JPMorgan Chase and Co.'s comparable portfolio, he noted.
"We supply about a third as much of this credit as Bank of America and twice as much as Citigroup," Simmons said. "Generally, this holds true for most community banks."
Simmons suggests that the classification of commercial loans should also take into account the guarantees on the loan when looking at the borrower's ability to pay and probable loss.
Arguments "between institutions and their supervisor commonly arise when collateral and the facility's structure reduce the institution's risk of insured loss," he said. "There are transactions with significantly different levels of loss that receive the same rating."
There are also vast differences in the classification of commercial loans versus retail loans.
Simmons said about 69% of Zions' $2.7 billion of total classified assets at June 30 were commercial loans that were current on payments. However, if those were consumer loans, Simmons said, none of them would have been classified. And commercial loans remain substandard for a longer period of time even after payments are current, he said.
Simmons contends that commercial and consumer loans are evaluated differently because of the "sheer numbers" of small, retail loans that "don't have same detailed finance statements on individual borrowers" like that of larger commercial loans.
If consumer loans were treated similarly to business loans, banks' "classified loan volumes would rise significantly," he said. Clearly, "there are well-defining weaknesses."
"Do you agree the rules for classifying loans are outdated? What fix do you recommend?" Leave a comment below.
