WASHINGTON – Although lawmakers have taken regulators to the wood shed several times over the past year for cracking down too hard on healthy small banks, the situation is clearly not getting any better.
That much was obvious Wednesday at a Senate Banking subcommittee hearing, where bankers said that despite pledges by top agency officials to ensure examiners do not overreact to problems, that is exactly what is taking place.
“The word that comes to my mind … is the ‘disconnect’ between Washington and the examiner in the field,” said Salvatore Marranca, the president and chief executive officer of $182 million-asset Cattaraugus County Bank in Little Valley, N.Y., and the chairman of the Independent Community Bankers of America. “The examiner in the field has a difficult job. … But generally speaking, there is no compromise. There is no discussion. … The way it used to be in the examination field was on a more cooperative basis and working together with the banker.”
Frank Suellentrop, the president and chairman of $250 million-asset Legacy Bank in Colwich, Kan., said examiners have become preoccupied with being blamed for letting an institution deteriorate.
“They’re not interested in having a problem bank or failure on their watch. … They have a significant interest in protecting their reputation,” he said. “We’re not suggesting they should not be thorough. We just ask that they’re equitable.”
The dilemma continues to vex lawmakers, who on the one hand hear pledges from regulators to ensure examiners are not being overzealous, and an unrelenting chorus of bankers on the other side saying nothing has changed.
Regulators “all indicate to me that they have made special consideration for community banks,” said Sen. Jerry Moran, R-Kan. “It never seems to me in my conversations with my bankers that there is any consequence to that constant effort that is claimed by the regulators to avoid overregulation.”
Officials from the banking agencies insisted on Wednesday they are on top of the issue.
“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 Christopher Spoth, a senior deputy director in the Federal Deposit Insurance Corp.’s division of risk management supervision. “We continuously pursue methods to streamline our supervisory process through the use of technology and other means to reduce disruption associated with examination activity.”
Michael Foley, a senior associate director for supervision at the Federal Reserve Board, agreed that supervision “should be … scaled to the size and complexity of the supervised firm.
“The largest, most complex banks will incur costs to comply with the requirements of the Dodd-Frank Act,” he said. “Smaller institutions, while still expected to adequately measure, monitor and control risk in their organizations, will not necessarily need to incur additional costs, assuming existing risk management structures are sufficiently robust.”
During the hearing, Spoth said that the added requirements of Dodd-Frank had hit large banks the hardest.
“With respect to Dodd-Frank, the burden falls as it should on the largest financial institutions,” he said.
But Sen. Bob Corker, R-Tenn., denied that was true.
“The fact is that’s not the case. The big just get bigger when we regulate the way we have,” he said. “What’s happening with community banks is their back offices are much, much, much larger … to deal with all of the things that are in Dodd-Frank. Your statement is categorically untrue. Larger institutions have the ability to absorb regulations in a much more efficient way.”
He was backed by Marranca, who said while large banks have the resources to handle extra rules, his institution has to scramble whenever there is a new requirement.
“Every time I get that regulation, I look into my office for Sue or Mary or Bob to try and figure out how we are going to do this,” he said.
But Sen. Sherrod Brown, D-Ohio, chairman of the financial institutions subcommittee, which held the hearing, cautioned that sympathy for the plight of smaller banks should not justify lighter standards across the board.
“It seems that some in this town … have been lobbying the press and the agencies, using your situation to weaken the rules on some of the big banks,” he said. “I don’t want that ever to be conflated. While virtually all of us here want to see the regulatory burden lifted from community banks, … we don’t want to see that as an excuse to weaken rules and further deregulation and weaken the Dodd-Frank implementation for the big banks.”
The panel also raised concern about a proposal released by regulators that would designate certain loans as “qualifying residential mortgages,” provided they hit strict underwriting requirements, including a 20% downpayment and debt-to-income limitations.
While Congress included the special mortgage category – which provides an exemption from 5% credit risk retention for securitizers – in Dodd-Frank, lawmakers have universally criticized the regulators’ high down payment requirements.
“Currently, there is a discussion of a very sizeable down payment requirement, which has been of great concern to me,” said Sen. Jeff Merkley, D-Ore.
Brown asked the bankers who testified how they would feel about a lower down payment requirement.
“Would any requirement make sense? I understand 20% can be harsh when you know your customers well. … If there were a 5% or 10% requirement, would community banks object to that?” he said.
Marranca signaled support for the lower threshold.
“It makes a lot of sense to me, Senator. I’m a strong proponent of: You have to have some skin in the game,” he said.
