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"Congressmen Urge 'Measured Approach' in Bank Examinations"
George A. LeMaistre, Jr.
Jones Walker Banking & Financial Services E*Lert
November 4, 2009

In a letter sent last week to the heads of the five federal financial institution regulatory agencies, the Chairman of the House Financial Services Committee and a Democratic member of the committee called upon the regulators to ensure that agency examiners in the field "apply a measured approach to examinations" and exercise care to refrain from "unnecessarily aggressive decisions" that have the effect of restricting community-bank lending, just when bank customers' access to credit is needed to stimulate the economy.

Chairman Barney Frank and Idaho Representative Walt Minnick pointed out that while "the vast majority of problem sub-prime loans were originated by non-bank lenders," now "it is the already highly regulated traditional depository banks that are feeling the greatest regulatory pressure as a result of the current economic crisis."  The agencies' "overzealous regulatory actions" are discouraging or preventing efforts by bankers who seek "to respond to the calls from Congress to increase lending to stimulate the economy and to work with troubled borrowers on foreclosure mitigation."

While acknowledging that failures in the regulatory process were a major contributor to the collapse of the economy, the congressmen said that for the bank regulatory agencies now to engage in rigorous enforcement is a wholly inappropriate response, because the regulatory failures that led to the meltdown "were largely within the non-bank lending market and Wall Street banks."

The letter cites four examples of areas of excessive regulatory stringency that the congressmen said had been brought to their attention by constituents:

  1. Agencies too often are requiring institutions to maintain levels of Tier One Capital and Total Risk-Based Capital that are significantly above the levels required by applicable agency regulations, and banks are finding it necessary to restrict their lending in order to achieve and maintain such capital levels.
  2. In evaluating the overall condition of institutions, examiners are emphasizing asset quality almost to the complete exclusion of other relevant factors such as capital, earnings, and liquidity, to the extent that, if examiners find that an institution's asset quality is inadequate, then "all the other components are also unsatisfactory."
  3. As a result of the widespread collapse of real estate markets, which results in few transactions occurring—and those only at "fire-sale" prices—examiners are requiring that the carrying values of loans, other assets, and Other Real Estate Owned, as shown on the books of the banks, be written down to artificially low values that fail to take into account reasonable expectations of market recoveries, and that therefore make the banks' capital problems "artificially and unnecessarily worse."
  4. Examiners are being unreasonably critical of the liquidity levels of institutions that make use of short-term borrowings from sources such as the Federal Reserve, the Federal Home Loan Banks, or through CDARS reciprocal certificates of deposit.  As a result, many institutions, in order to curtail such borrowings and thereby avoid these criticisms, must restrict their lending.

The letter also acknowledges that "our regulators need to uphold proper safety and soundness standards in this difficult economy," but urges that the agency heads "take the long view, [and] use their wisdom and experience to guide their field staff toward a more appropriate application of the core principles of safety and soundness regulation in order to enable our banks to assist fully in our economic recovery."