[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
EXPLORING THE BALANCE BETWEEN
INCREASED CREDIT AVAILABILITY
AND PRUDENT LENDING STANDARDS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
MARCH 25, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-21
U.S. GOVERNMENT PRINTING OFFICE
48-874 WASHINGTON : 2009
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20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
March 25, 2009............................................... 1
Appendix:
March 25, 2009............................................... 57
WITNESSES
Wednesday, March 25, 2009
Berg, Richard S., President and Chief Executive Officer,
Performance Trust Capital Partners, LLC........................ 54
Duke, Hon. Elizabeth A., Governor, Board of Governors of the
Federal Reserve System......................................... 5
Gruenberg, Hon. Martin J., Vice Chairman, Federal Deposit
Insurance Corporation (FDIC)................................... 7
Hunkler, Bradley J., Vice President and Controller, Western &
Southern Financial Group, on behalf of the Financial Services
Roundtable..................................................... 47
Kroeker, James L., Acting Chief Accountant, Securities and
Exchange Commission............................................ 12
Long, Timothy W., Senior Deputy Comptroller, Bank Supervision
Policy, and Chief National Bank Examiner, Office of the
Comptroller of the Currency (OCC).............................. 10
Menzies, R. Michael S., Sr., President and Chief Executive
Officer, Easton Bank and Trust Company, on behalf of the
Independent Community Bankers of America (ICBA)................ 49
Polakoff, Scott M., Acting Director, Office of Thrift Supervision
(OTS).......................................................... 8
Truckenbrodt, Randall, American Equipment Rentals, on behalf of
the National Federation of Independent Business................ 51
Wilson, Stephen, Chairman of the Board and Chief Executive
Officer, LCNB Corporation and LCNB National Bank, on behalf of
the American Bankers Association (ABA)......................... 45
APPENDIX
Prepared statements:
Bachmann, Hon. Michele....................................... 58
Hinojosa, Hon. Ruben......................................... 59
Peters, Hon. Gary C.......................................... 62
Berg, Richard S.............................................. 63
Duke, Hon. Elizabeth A....................................... 82
Gruenberg, Hon. Martin J..................................... 97
Hunkler, Bradley J........................................... 112
Kroeker, James L............................................. 125
Long, Timothy W.............................................. 132
Menzies, R. Michael S., Sr................................... 151
Polakoff, Scott M............................................ 163
Truckenbrodt, Randall........................................ 172
Wilson, Stephen.............................................. 176
Additional Material Submitted for the Record
Frank, Hon. Barney:
Letter from the National Bankers Association................. 193
Bachus, Hon. Spencer:
Letter to Hon. John C. Dugan from Hon. John J. Duncan, Jr.,
dated December 29, 2008.................................... 195
Letter from Hon. John J. Duncan, Jr., dated March 23, 2009... 197
Gruenberg, Hon. Martin J.:
Responses to questions submitted by Hon. Alan Grayson........ 198
Responses to questions submitted by Hon. Erik Paulsen........ 205
Duke, Hon. Elizabeth A.:
Letter providing further clarification to Hon. Bill Posey.... 206
EXPLORING THE BALANCE BETWEEN
INCREASED CREDIT AVAILABILITY
AND PRUDENT LENDING STANDARDS
----------
Wednesday, March 25, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:05 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Gutierrez, Watt,
Sherman, Moore of Kansas, Baca, Scott, Green, Cleaver, Ellison,
Klein, Wilson, Perlmutter, Foster, Speier, Driehaus, Kosmas,
Himes; Bachus, Castle, Manzullo, Jones, Biggert, Neugebauer,
Bachmann, Marchant, Posey, Paulsen, and Lance.
The Chairman. The hearing will come to order.
Members of this committee, as well as other Members of
Congress, have been urging people in the banking system to
increase the volume of loans. We hear from some of our
constituents that they are not able to get loans that they
think would be very helpful economically. And as obvious as we
have said, the economy doesn't recover until the credit system
does.
Essentially, we have had a situation in which borrowers
have complained about some of the banks. Banks have in turn
complained about the regulators and we are here in one room
sequentially. I would hope that our friends on the regulatory
panel will be able to stay themselves, or through staff, hear
what some of the bankers have said. And I assume they have read
the testimony.
You know, I don't think there's a matter of ill will. I
call it the ``mixed message'' hearing, because I think it is.
We do tell the regulators two things: one, tell people to make
loans; and, two, tell people not to make loans. Now, they're
not supposed to be the same loans, but there is this tension
here. And it's a particularly exacerbated tension now, because
I think in normal times, the role of regulators is to make sure
that bad loans aren't made or to minimize the likelihood. But,
we're not in a normal time now. We're in a time where there is
a clear problem making good loans. So it is important that the
ongoing important safety and soundness is the role of the
regulators, and diminishing the number of imprudent loans
coexists with the importance of making sure that loans are made
that should be made.
Now, part of the mixed message issue--and that is why Mr.
Kroeker is here from the SEC--has to do with the effect of
mark-to-market accounting. We do not want to be post-cyclical,
but we also have that potential with regard, for instance, to
assessments at the FDIC. Now, some of that is inevitable. If
more banks fail, then the assessments go up. But if the
assessments go up, some of the banks, small banks, have less
ability to lend.
It would be nice if we could simply abolish one or the
other of the conflicting objectives. We can't. They are both
important. So what we then have to do is to make sure they are
done in coordination with each other, and in particular with
regard to the question of lending standards, that we avoid the
potential of there being compartmentalization, in which some
parts of the agencies are urging people to lend, and other
parts are urging them not to. We need to make sure that the
same people are aware of the importance of both of those.
We had a hearing in general on mark-to-market. It is of
particular relevance, obviously, to banks, particularly to
banks that are holding securities long-term. We had a special
problem brought to our attention regarding mark-to-market with
a couple of the Federal Home Loan Bank regents. So we want to
be able to address that as well, and as I said, the purpose
here is to make sure that we can increase loans in an
atmosphere of security and soundness. And, I think, most
importantly, demonstrate that those two objectives are not in
fact in conflict, but that they go together, that we are
capable of a sound banking system that produces an appropriate
flow of credit without endangering the safety of the system.
The Chairman. The gentleman from Alabama.
Mr. Bachus. Thank you. I am going to yield to the gentleman
from Delaware.
The Chairman. The gentleman from Delaware is recognized for
1\1/2\ minutes.
Mr. Castle. Thank you, Mr. Chairman, and thank you for your
opening statement, with which I agree. And, I agree that we
need to be careful about giving mixed messages, especially to
our smaller banks.
I recently heard, in fact it was yesterday, from a bank in
my State which has heard firsthand from leaders at the Federal
Reserve encouraging them to continue lending, but they
indicated in real practice as regulators come around, they are
actually being discouraged from doing so for capital reasons,
or whatever it may be.
I am particularly interested in helping banks in my State--
I am from Delaware--get the word out that they are open for
business and able to lend to responsible borrowers. I think a
lot of this issue is local. We need to handle it that way. We
need to be extremely careful in our efforts here in assisting
these institutions on one hand, and then putting restrictions
on their ability to conduct their business with the other hand.
And I think that applies to some of the things we are doing in
Congress as well, I might add.
Ultimately, I believe that this committee, Congress, and
the Administration share the goal of doing everything possible
to restore economic health, and this cannot be done without our
financial institutions. We are all in this together, and I
think we need to work on it. I yield back the balance of my
time.
The Chairman. Next, I would take the gentleman from
Florida, Mr. Posey, for 1\1/2\ minutes.
Mr. Posey. Thank you very much, Mr. Chairman. And if you
don't mind, I would just like to echo a little bit of your
comments that you made when you opened. Many borrowers are
having their credit severely restricted, not because of any
past history they had or failure to repay it, and you know,
really obvious apparent or greatly increased risk, we would see
to the lender. We are talking about, you know, auto dealers
throughout the country.
We are talking about the attractions industry, which is
very important in our part of the country. We are talking about
people's personal lines of credit, not just business models
that rely on these business loans, but personal lines of credit
being apparently arbitrarily reduced that are putting people in
an unintended lurch. And I understand there is an uncertainty
in the market until we get this thing road-mapped out. And
there is a way to measure and put accountability into recovery
program.
But, I hope in your remarks as you address here today that
you will address these issues and what you think needs to be
done to loosen that credit up. I have heard the numbers, that
sitting on an extra $800 billion, a lot of bail-out money has
not been used. It's sitting there, and I can understand that if
I was on the sidelines and I was uncertain as to how I might be
injured in this policy or by this policy, I might be just a
little bit reluctant to be any less liquid than absolutely
necessary. But, nonetheless, it's incumbent on us as the
chairman mentioned, to do something to loosen that market up,
because it exacerbates the problem.
It doesn't help the economy. It doesn't help the problem;
and, ultimately, it doesn't help the bankers. I mean, I know
you don't make any money if you're not using it to make money.
And so that goes for our businesses and our families back home.
So I would appreciate it if when you make your presentations,
you would each be kind of enough to touch on that so we don't
need to ask for written responses from you later.
Thank you.
The Chairman. The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman.
Mr. Chairman, I think my major concern is the same as Mr.
Castle and others have expressed, and that I have heard from
many constituents who are current on their loans but have had
their lines of credit cut or their fees increased, or their
interest rates.
Today's hearing, I hope, will help us understand why this
is happening. Their bankers are on occasion saying that the
regulators are encouraging them to pull these loans back. In
one instance I have heard of a businessman in Tuscaloosa,
Alabama, who had never defaulted on a loan, and had done
business with a bank for 30 years. He was not behind on any of
his payments, yet he was told that he was going to have to
reduce his line of credit by either 10 or 20 percent.
We hear this almost on a weekly basis. These people have
not defaulted, and what that does is it causes further
disruption, because they have to go out some time and liquidate
properties or assets at a loss. And there is actually a growing
anger from these same people; and, this is Main Street, that
they see our Federal Government spending billions and hundreds
of billions of dollars through the Fed and the Treasury to bail
out or intervene on behalf of some of our too-large-to-fail
institutions.
And this really, I think, makes a lot of us angry and
frustrated, that at the same time as we see our government and
our Federal agencies intervening to prop up some of our too-
big-to-fail institutions, because we are told there is a
systemic threat to our economy--their having bank loans who are
current or lines of credit who are current, or even interest
rates increased when they are current--and they are not
failing. And, let me tell you there is a systemic risk, because
that is occurring every day across America in almost every
town.
There is also a growing perception, I think much of it
justified, that the larger institutions are being favored over
the smaller institutions. Chairman Frank and I were some of the
first who proposed the capital injections. At the time we did
that, we said we wanted it to go to healthy institutions. We
wanted the focus to be on rewarding those institutions that had
not endangered the economy, were not at risk.
We wanted our healthy institutions to participate, not just
failing institutions or institutions that were having extreme
liquidity problems. The capital injection program, I think, has
been tremendously biased against our smaller institutions. At
the same time we are giving money to AIG, or giving money to a
large institution because it's having solvency problems, we are
telling our smaller institutions that they are not stable
enough to receive money.
Now, the large institutions get it because they are
failing. The smaller institutions, which are better off and
sometimes are being told that they cannot get the money, or
small institutions which are not failing are still waiting in
line. We started with the largest institutions and we are still
moving down. And what I am hearing is that some of that money
is still being kept back, because it may be needed on an ad hoc
basis to save some large institution. When it seems to me like
the regulators are finding reasons to say no to our smaller
institutions and our regional banks, I believe it is time for
the Federal regulators to turn a lot of their attention to
helping our regional or small institutions when 95 percent of
the effort is made on a few, too-big-to-fail institutions and
also mark-to-market. I am very interested in that.
That doesn't require government funding or government
intervention. I hear every day from small, medium-sized, and
large banks, and even executives of large insurance companies,
the biggest insurance companies in this country, that it is a
problem. And I hope the regulators will continue to work with
us and the SEC to get FASB to give the relief that all of us
have recommended to them.
Thank you.
The Chairman. Thank you.
And, like you said, they had one particular issue. Several
of us were in Massachusetts on Monday on a similar-type
hearing. We heard about it a couple of nights ago. It is in
Massachusetts, New York, and some other places. We have the
mutual savings bank form; and, to date, there is not even a
term sheet for them to be able to get funding. And if you have
seen this morning's ``Washington Post,'' Business Section,
there is a picture of me showing something to Secretary
Geithner. It is a memo saying that it really is important that
the term sheet be out from mutual savings banks, and we believe
that will be happening soon.
With that, we will proceed now with our panel, and we will
begin with a frequent and always welcome witness who has always
been very cooperative, and someone who brings her own private
banking experience to her current position as a member of the
Board of Governors of the Federal Reserve. And I think for fans
of ``Doonesbury,'' it's always interesting when we introduce
Governor Duke.
[laughter]
STATEMENT OF THE HONORABLE ELIZABETH A. DUKE, GOVERNOR, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Duke. Thank you, Mr. Chairman.
Chairman Frank, Ranking Member Bachus, and members of the
committee, I am pleased to be here today to discuss several
issues related to the state of the banking system. As you are
all well aware, the Federal Reserve is taking significant steps
to improve financial market conditions and has worked with the
Treasury and other bank and thrift supervisors to address
issues at U.S. banking organizations.
We remain attentive to the need for banks to remain in
sound financial condition, while at the same time to continue
lending prudently to creditworthy borrowers. Indeed, the
shutdown of most securitization markets and the evaporation of
many types of non-bank credit make it that much important right
now for the U.S. banking system to be able to carry out the
credit intermediation function.
Recent data confirm severe strains on parts of the U.S.
banking system. During 2008, profitability measures at U.S.
commercial banks and bank holding companies deteriorated
dramatically. Indeed, commercial banks posted a substantial,
aggregate loss for the fourth quarter of 2008, the first time
this has happened since the late 1980's. This loss in large
part reflected write-downs on trading assets, high goodwill
impairment charges, and, most significantly, increased loan
loss provisions.
With respect to overall credit conditions, past experience
has shown that borrowing by households and nonfinancial
businesses has tended to slow during economic downturns.
However, in the current case, the slow down in private sector
debt growth during the past year has been much more pronounced
than in previous downturns, not just for high mortgage debt,
but also consumer debt and debt of the business sector.
In terms of direct lending by banks, Federal Reserve data
show that total bank loans and leases increased modestly in
2008 below the higher pace of growth seen in both 2006 and
2007. Additionally, the Federal Reserve Senior Loan Officer
Opinion Survey on Banking Practices has shown that banks have
been tightening lending standards over the past 18 months.
The most recent survey data also show the demand for loans
for businesses and households continue to weaken on balance.
Despite the numerous changes to the financial landscape during
the past half-century, such as the large increase in the flow
of credit coming from non-bank sources, banks remain vital
financial intermediaries. In addition to direct lending, banks
supply credit indirectly by providing back-up liquidity and
credit support to other financial institutions and conduits
that also intermediate credit flows.
In terms of direct bank lending, much of the increase last
year likely reflected households and businesses drawing down
existing lines of credit rather than extensions of loans to new
customers. Some of these draw-downs by households and
businesses were precipitated by the freeze-up of the
securitization markets.
The Federal Reserve has responded forcefully to the
financial and economic crisis on many fronts. In addition to
monetary policy easing, the Federal Reserve has initiated a
number of lending programs to revive financial markets and to
help banks play their important role as financial
intermediaries. Among these initiatives are the purchase of
large amounts of agency debt and mortgage-backed securities;
plans to purchase long-term Treasury securities; other efforts
including the Term Asset-backed Securities Loan Facility known
as TALF to facilitate the extension of credit to households and
small businesses; and, the Federal Reserve's planned
involvement in the Treasury's Public-Private Partnership
Investment Program, announced on Monday.
The Federal Reserve has also been active on the supervisory
front to bring about improvements in banks' risk-management
practices. Liquidity and capital have been given special
attention. That said, we do realize that there must be an
appropriate balance between our supervisory actions and the
promotion of credit availability to assist in the economic
recovery. The Federal Reserve has long-standing policies and
procedures in place to help maintain such a balance. We have
also reiterated this message of balance in recent interagency
statements.
We have directed our examiners to be mindful of the
procyclical effects of excessive credit tightening and to
encourage banks to make economically viable loans, provided
that such lending is based on realistic asset valuations and a
balanced assessment of borrowers' repayment capacities.
The U.S. banking industry is facing serious challenges. The
Federal Reserve, working with other banking agencies, has acted
and will continue to act to ensure that the banking system
remains safe and sound and is able to meet the credit needs of
our economy.
The challenge for regulators and other authorities is to
support prudent bank intermediation that helps restore the
health of the financial system and the economy as a whole. As
we have communicated, we want banks to deploy capital and
liquidity to make credit available, but in a responsible way
that avoids past mistakes and does not create new ones.
Accordingly, we thank the committee for holding this
hearing to help clarify the U.S. banking agencies' message that
both safety and soundness and credit availability are important
in the current environment.
I look forward to your questions.
[The prepared statement of Governor Duke can be found on
page 82 of the appendix.]
The Chairman. Thank you.
Mr. Gruenberg.
STATEMENT OF THE HONORABLE MARTIN J. GRUENBERG, VICE CHAIRMAN,
FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)
Mr. Gruenberg. Thank you, Mr. Chairman.
Thank you for the opportunity to testify on behalf of the
FDIC on the balance between increased credit availability and
prudent lending standards.
The FDIC is very aware of the challenges faced by financial
institutions and their customers during these difficult
economic times. Bankers and examiners know that prudent,
responsible lending is good business and benefits everyone.
Adverse credit conditions brought on by an ailing economy and
stressed balance sheets, however, have created a difficult
environment for both borrowers and lenders. Resolving the
current economic crisis will depend heavily on creditworthy
borrowers, both consumer and business, having access to
lending.
In response to these challenging circumstances, banks are
clearly taking more care in evaluating applications for credit.
While this more prudent approach to underwriting is
appropriate, it should not mean that creditworthy borrowers are
denied loans. As bank supervisors, we have a responsibility to
assure our institutions, regularly and clearly, that soundly
structured and underwritten loans are encouraged.
While aggregate lending activity for FDIC-insured
institutions fell in the fourth quarter of 2008, this decline
was driven mostly by the largest banks, which reported a 3.4
percent fall in loan balances. In contrast, lending activity at
community banks with assets under $1 billion actually increased
by 1.5 percent.
Community banks are playing an important role in the
current stressful environment and appear to be benefiting from
their reliance on traditional core deposit funding and
relationship lending. Some have questioned whether bank
supervisors are contributing to adverse credit conditions by
overreacting to current problems in the economy and
discouraging banks from making good loans.
The FDIC understands the critical role that credit
availability plays in the national economy and we balance these
considerations with prudential safety and soundness
requirements. Over the past year, through guidance, the
examination process and other means, we have sought to
encourage banks to maintain the availability of credit. We have
also trained our examiners on how to properly apply this
guidance at the institutions we supervise and how to conduct
examinations and communicate their findings to bank management
without infringing on bank management's day-to-day
decisionmaking and relationships with customers.
The FDIC has taken a number of recent actions specifically
designed to address concerns about credit availability. On
November 12th of last year, we joined with the other Federal
banking agencies in issuing the ``Interagency Statement on
Meeting the Needs of Creditworthy Borrowers.'' The statement
encourages banks to continue making loans in their markets,
work with borrowers who may be encountering difficulties, and
pursue initiatives such as loan modifications to prevent
unnecessary foreclosures.
Recently, the FDIC hosted a roundtable discussion with
banking industry representatives and Federal and State bank
regulators focusing on how they can work together to improve
credit availability. One of the important points that came out
of the session was the need for ongoing dialogue between these
groups as they work toward a solution to the current financial
crisis. Toward this end, FDIC Chairman Bair announced last week
that the FDIC is creating a new, senior level office to expand
community bank outreach, and plans to establish an advisory
committee to address the unique concerns of this segment of the
banking community.
On January 12th of this year, the FDIC issued a Financial
Institution Letter advising insured institutions that they
should track the use of their capital injections, liquidity
support, and/or financing guarantees obtained through recent
financial stability programs as part of a process for
determining how these Federal programs improve the stability of
the institution and contribute to lending to the community.
Internally at the FDIC, we have issued guidance to our
examiners for evaluating participating banks' use of funds
received through the TARP Capital Purchase Program and the
Temporary Liquidity Guarantee Program. Examination guidelines
for the new Public/Private Investment Fund will be forthcoming.
Banks should be encouraged to make good loans, work with
borrowers who are experiencing difficulties whenever possible,
avoid unnecessary foreclosures, and continue to ensure that the
credit needs of their communities are fulfilled. In concert
with other agencies, the FDIC is employing a range of
strategies to ensure that credit continues to flow on sound
terms to creditworthy borrowers.
Thank you for the opportunity to testify. I would be happy
to answer any questions.
[The prepared statement of Vice Chairman Gruenberg can be
found on page 97 of the appendix.]
The Chairman. Next, Mr. Polakoff.
STATEMENT OF SCOTT M. POLAKOFF, ACTING DIRECTOR, OFFICE OF
THRIFT SUPERVISION (OTS)
Mr. Polakoff. Good morning, Chairman Frank, Ranking Member
Bachus, and members of the committee.
Thank you for the opportunity to testify on behalf of OTS
on finding the right balance between ensuring safety and
soundness of U.S. financial institutions and ensuring that
adequate credit is available to creditworthy consumers and
businesses.
Available credit and prudent lending are both critical to
our Nation and its economic wellbeing. Neither one can be
sacrificed at the expense of the other, so striking the proper
balance is key. I understand why executives of financial
institutions feel they are receiving mixed messages from
regulators.
We want our regulated institutions to lend, but we want
them to lend in a safe and sound manner.
I would like to make three points about why lending has
declined: number one, the need for prudent underwriting. During
the recent housing boom, credit was extended to too many
borrowers who lacked the ability to repay their loans. For home
mortgages, some consumers received loans based on introductory
teaser rates, unfounded expectations that home prices would
continue to skyrocket, inflated income figures, or other
underwriting practices that were not as prudent as they should
have been. Given this recent history, some tightening in credit
is expected and needed.
Number two, the need for additional capital and loan loss
reserves. Financial institutions are adding to their loan loss
reserves and augmenting capital to ensure an acceptable risk
profile. These actions strain an institution's ability to lend,
but they are necessary due to a deterioration in asset quality
and increases in delinquencies and charge-offs for mortgages,
credit cards, and other types of lending.
Number three, declines in consumer confidence and demand
for loans. Because of the recession, many consumers are
reluctant to borrow for homes, cars, or other major purchases.
In large part, they are hesitant to spend money on anything
beyond daily necessities. Also, rising job losses are making
some would-be borrowers unable to qualify for loans.
Steep slides in the stock market have reduced many
consumers' ability to make downpayments for home loans and
drain consumers' financial strength. Dropping home prices are
cutting into home equity. In reaction to their declining
financial net worth, many consumers are trying to shore-up
their finances by spending less and saving more. Given these
forces, the challenges ensuring that the pendulum does not
swing too far by restricting credit availability to an
unhealthy level, I would like to offer four suggestions for
easing the credit crunch:
Number one: Prioritize Federal assistance. Government
programs such as TARP could prioritize assistance for
institutions that show a willingness to be active lenders. The
OTS is already collecting information from thrifts applying for
TARP money on how they plan to use the funds. As you know, the
OTS makes TARP recommendations to the Treasury Department. The
Treasury makes the final decision.
Number two: Explore ways to meet institutions' liquidity
needs. Credit availability is key to the lending operations of
banks and thrifts. The Federal Government has already taken
significant steps to bolster liquidity through programs such as
the Capital Purchase Program under TARP, the Commercial Paper
Funding Facility, the Temporary Liquidity Guarantee Program,
and the Term Asset-backed Securities Loan Facility.
Number three: Use the power of supervisory guidance. For
OTS-regulated thrifts, total loan originations and purchases
declined about 11 percent from 2007 to 2008. However, several
categories of loans, such as consumer and commercial business
loans, and non-residential and multi-family mortgages increased
during this period. The OTS and the other Federal banking
regulators issued an ``Inter-agency Statement on Meeting the
Needs of Creditworthy Borrowers'' in November 2008. It may be
too soon to judge the effectiveness of the statement.
And, number four: Employ countercyclical regulation.
Regulators should consider issuing requirements that are
countercyclical, such as lowering loan to value ratios during
economic upswings. Conversely, in difficult economic times,
when home prices are not appreciating, regulators could permit
loan to value ratios to rise, thereby making home loans
available.
Also, regulators could require financial institutions to
build their capital and loan lost reserve during good economic
times, making them better positioned to make resources
available for lending when times are tough.
Thank you, Mr. Chairman. I look forward to answering your
questions.
[The prepared statement of Mr. Polakoff can be found on
page 163 of the appendix.]
The Chairman. Mr. Long?
STATEMENT OF TIMOTHY W. LONG, SENIOR DEPUTY COMPTROLLER, BANK
SUPERVISION POLICY, AND CHIEF NATIONAL BANK EXAMINER, OFFICE OF
THE COMPTROLLER OF THE CURRENCY (OCC)
Mr. Long. Chairman Frank, Ranking Member Bachus and members
of the committee, my name is Tim Long. I am the Senior Deputy
Comptroller for Bank Supervision Policy at the OCC. I
appreciate this opportunity to discuss the OCC's role in
ensuring banks remain safe and sound, while at the same time
meet the credit needs of their communities and customers.
The last few months have underscored the importance of
credit availability and prudent lending to our Nation's
economy. Recent actions to provide facilities and programs to
help banks strengthen their balance sheets and restore
liquidity to various credit segments are important steps in
restoring our banking system and we support these initiatives.
Nonetheless, the current economic environment poses
significant challenges to banks and their loan customers that
we and bankers must address. As a bank examiner for nearly 30
years, I have experienced firsthand the importance of the
dynamics between bankers and examiners during periods of market
and credit stress. One of the most important lessons I have
learned is the need to effectively communicate with bankers
about the problems facing their institutions and how we expect
them to confront those problems without exacerbating the
situation.
Delay or denial about conditions by bankers or regulators
is not an effective strategy. It only makes things worse.
Against that backdrop, here are some facts that bankers and
regulators are facing today: First, asset quality in many bank
loan portfolios is deteriorating. Non-performing loan levels
are increasing. Borrowers who could afford a loan when the
economy is expanding are now having problems repaying their
loans. Increased levels of non-performing loans will likely
persist for some time before they work through the banking
system.
Second, bankers have appropriately become more selective in
their underwriting criteria for some types of loans. Where
markets are over-lent or borrowers overleveraged, this is both
prudent and appropriate.
Third, loan demand and loan growth have slowed. This is
normal in a recession. Consumers cut back on spending;
businesses cut back on capital expenditures. What is profoundly
different in this cycle has been the complete shut-down of the
securitization markets. Restoring these markets is a critical
part of stabilizing and revitalizing our financial system.
Despite these obstacles, bankers are making loans to
creditworthy borrowers. The bankers I talk with are committed
to meeting the credit needs of their communities, and they
recognize the critical role they play in the wellbeing of our
economy.
Simply put, banks have to lend money to make money. The
OCC's mission is to ensure that national banks meet these needs
in a safe and sound manner. This requires a balance: supervise
too lightly, and some banks will make unsafe loans that can
ultimately cause them to fail; supervise too strictly, and some
banks will become too conservative and not make loans to
creditworthy borrowers.
We strive to get this balance right through strong and
consistent supervision. In the 1980's, we waited too long to
warn the industry about excesses building up in the system
which resulted in bankers and regulators slamming on the brakes
once the economy turned down. Because of this lesson, we have
taken a series of actions starting as early as 2003 to alert
bankers to the risks we were seeing and to direct them when
needed to take corrective actions.
Today, our message to bankers is straightforward. Make
loans that you believe will be repaid, don't make loans that
are unlikely to be repaid, and work constructively with
borrowers who may be facing difficulties with their
obligations, but recognize repayment problems and loans when
you see them.
Contrary to some press reports, our examiners are not
telling bankers which loans to approve and which to deny.
Rather, our message to examiners is this: Take a balanced
approach in your supervision. Communicate concerns and
expectations clearly and consistently. Provide bankers a
reasonable time to document and correct credit risk management
weaknesses, but don't hesitate to require corrective action
when needed.
It is important to keep in mind that it is normal for our
banks to experience an increase in problem loan levels during
economic downturns. This should not preclude bankers from
working with borrowers to restructure or modify loans so
foreclosure is avoidable wherever possible.
When a workout is not feasible, and the bank is unlikely to
be repaid, examiners will direct bankers to have adequate
reserves and capital to absorb their loan losses. Finally, the
reality is that some community banks are so overextended in
relation to capital and reserves, the management needs to
reduce the bank's exposures and concentrations to ensure the
long-term viability of the bank. In all of these cases, our
goal is to work constructively with bankers so that they can
have the financial strength to meet the credit needs of their
communities and borrowers.
Thank you, and I will be happy to answer any questions.
[The prepared statement of Mr. Long can be found on page
132 of the appendix.]
The Chairman. Next, Mr. Kroeker, thank you for coming back;
probably to repeat yourself and answer the same questions, but
we appreciate it.
STATEMENT OF JAMES L. KROEKER, ACTING CHIEF ACCOUNTANT, U.S.
SECURITIES AND EXCHANGE COMMISSION
Mr. Kroeker. Thank you.
Chairman Frank, Ranking Member Bachus, and members of the
committee, I am Jim Kroeker, acting Chief Accountant in the
Office of the Chief Accountant, which advises the Commission on
accounting and auditing matters.
I am pleased to testify today on behalf of the Commission.
There could be no doubt about the urgency of these issues as we
work in the public interest to address the global economic
crisis. Two weeks ago, I had the privilege of testifying in
front of Chairman Kanjorski and Ranking Member Garrett, and
other members of this committee's Capital Markets Subcommittee.
Many of the members of the full committee also attended
that very constructive and productive meeting herein. A good
number of items that are the subject of your invitation today
are best addressed by my knowledgeable fellow regulators with
me at the table; however, I did wish to highlight a few items
in my written testimony. First, the objective of financial
reporting and its interaction with banking capital; and,
second, to provide an update on the efforts to improve fair
value accounting.
As to the first, we reaffirmed in our study to you on mark-
to-market accounting that the primary objective of general
purpose financial reporting should be and is to provide
information that is useful to investors and creditors. Well,
this appears to be a fundamental principal. It is also
important to reflect on why this has been the wise and
longstanding practice and policy of Federal securities laws
since their inception 75 years ago.
First, investors generally can and do make decisions on a
current basis, necessitating relevant and reliable information
about financial values and their prospects. Second, investors
generally do not have the ability to otherwise obtain
information in a format specific to their own use. Therefore,
in evaluating investment decisions, investors are dependent
upon financial reporting provided by management.
The securities law provides for this public good through
the general purpose financial reporting that has long been
considered a benefit to the economy and society. However, once
this information is provided, users of this information can
then process it as they deem fit for their own specific needs.
For example, a credit investor may place less emphasis on
short-term volatility than an equity investor needing to make
an investment decision in the near future.
Likewise, bank regulators have the similar ability to take
GAAP-reported financial information and adjust it for
determining how best to establish capital requirements for
safety and soundness purposes. And they have done so where it's
been deemed appropriate in the past.
For example, unrealized gains and losses on debt securities
held as available for sale, which are included in GAAP-based
equity, generally do not impact regulatory capital. I give
several additional examples in my written testimony.
That being said, our study to you on mark-to-market
accounting included recommendations to include but not suspend
fair value accounting for financial reporting purposes.
Consistent with our own efforts and what we heard from and what
was reinforced by the members of this committee, the FASB has
acted diligently to use their expertise as an independent
standard setter to respond with two sets of proposed
amendments.
The amendments were proposed on March 17th, with a 15-day
comment period. They are expected to be finalized in early
April and effective for first quarter financial reporting.
First quarter reporting would represent a timely response to
two of our studies' most significant recommendations, and we
are encouraged that the FASB has taken advantage of this
opportunity to act.
The first set of amendments would provide additional
guidance on the measure of securities in illiquid markets,
while the second would revise the accounting for what is
referred to as other than temporary security impairments. These
proposals are now an important public comment period, and I
encourage every one affected to carefully consider them and
whether they address the most pressing practice issues, while
also maintaining and enhancing information available to
investors.
This has been and remains my number one priority. We have
been proactively reaching out to investor groups, to the
accounting profession, fellow regulators, and to industries
most affected by the FASB's proposed amendments. And, of
course, we are, as always, in constant contact with the FASB,
whom I understand are also engaged in active dialogue with
impacted market participants.
Thank you for the opportunity to appear here today, and I
would be pleased to respond to any questions.
[The prepared statement of Mr. Kroeker can be found on page
125 of the appendix.]
The Chairman. I will begin with Mr. Gruenberg.
The assessment question is one, obviously, we are focused
on. I hope I can reassure people to some extent. My
understanding from the Chair, Ms. Bair, and with the
concurrence I know of the Board, is if the Congress provides
adequate additional lending authority so that the FDIC will be
well-positioned in the case of any unforeseen, potential
negatives, that the special assessment could be reduced from
the proposed 20 cents. Is that accurate?
Mr. Gruenberg. Yes, Mr. Chairman.
The Chairman. Well, do we know what levels we are talking
about?
Mr. Gruenberg. We certainly can reduce them, we think
perhaps down to 10 basis points.
The Chairman. Secondly, then, and that's very reassuring,
the other question about the assessments that comes
particularly from some of the community banks is whether or not
some risk-based factor should be included. Now, obviously, to
the extent that we are increasing deposit insurance, which I
hope we will do permanently, and I want to say now there has
been some suggestion that the Senate wanted to increase the
deposit insurance temporarily, I think that it is disruptive
for planning. We ought to make it permanent. And I think
everyone understands that requires some increase in insurance
as you are getting insured for more.
But, to the extent that we are talking about dealing with
some of the problems that came from the financial crisis, what
is the current thinking of the FDIC on some kind of variation
of the assessment with the risk factor taken in?
Mr. Gruenberg. Mr. Chairman, we do currently charge
premiums on a risk basis. We are looking for ways, if possible,
to respond, particularly to the community bank concerns. In the
interim final rule that we issued on the special assessment, we
actually asked for public comment on the possibility of
imposing assessments based on the assets of the institution
rather than the deposits of the institution. That would have a
consequence of shifting some of the burden toward the larger
institutions. We asked for comment on that.
The Chairman. Let me go now to Mr. Gruenberg and to Mr.
Polakoff and Mr. Long, in particular, and maybe Governor Duke.
We have testimony that is going to come later, and
sometimes I think we should reverse the order, but let me quote
now from the American Banker's Association representative, Mr.
Wilson, on page 5, subhead, ``In the face of a weak economy, it
is critical that the regulators not make things worse by
applying overly conservative standards.'' And, he says at the
bottom of page five, ``We continue to hear from bankers around
the country--and those particularly in areas where the economy
is considerably stressed--that field examiners are being
excessively hard on even the strongest banks in the area.''
From the community bankers, on page 3 of the testimony of
Mr. Menzies, bottom of the page: ``Community bankers are saying
that the field examiners are overzealous and unduly
overreaching and are, in some cases, second guessing bankers
and professional, independent appraisers, and demanding overly
aggressive write-downs.''
And a letter from a leading minority bank--and I do want to
put into the record a letter from the National Banker's
Association--but a letter from a minority bank saying, ``What
bank regulators will not tell the chairman in those hearings is
that they have told their examiners all across the country to
be tough on banks.''
The ``be tough'' problem started in Washington, was told to
the regional staffs, and said, ``Marching orders to examiners
in the field,'' and quotes a December article from ``The Wall
Street Journal,'' with which some of you may be familiar, by
Damian Potter: Headline, ``Bank Examiners Are Told To Step Up
Sanctions.''
Let me ask you to respond, all three. Let's start with Mr.
Long, Mr. Polakoff, and Mr. Gruenberg, to the assertion by the
representative bankers, and they are hearing, obviously, from
their own constituent members that there has been a toughening
of the standards on the part of the examiners.
Mr. Long?
Mr. Long. Congressman, we hear those concerns, too. Over
the past several years, beginning in 2003 at the OCC, we began
to talk to our banks about a number of excessive risks that we
were seeing in the system. The risk has built up. I don't think
we have ever gone into an economic downturn with the kind of
concentrations in commercial real estate-related credits in the
community bank line of business that we have now. And they are
in some parts of the country where the asset valuation has
grown significantly.
There are some very heavy concentrations, so naturally our
examiners are focusing on that during examinations. You have a
situation in the economy.
The Chairman. Mr. Long, are you saying that people may have
heard this but it's inaccurate?
Mr. Long. We haven't ordered our examiners to crack down on
banks, but they are obviously more sensitive to problem assets
and loan portfolios.
The Chairman. All right, but Mr. Polakoff, how would you
respond to that?
Mr. Polakoff. There is an element of truth in those
statements. Examiners are human beings. They're going to react
to the environment. They are going to react to bank failures.
We have met with the National Association of Home Builders. We
had that group meet with our regional directors. What we have
to do here is improve our communication in this area.
There are mixed messages on a number of different levels,
Mr. Chairman.
The Chairman. Mr. Gruenberg?
Mr. Gruenberg. Mr. Chairman, we view this as a very serious
issue. You mentioned in your opening remarks that you need to
try to strike a balance between safety and soundness, and
making credit available. And we have spent a lot of time with
our examiners from the regional directors on down, trying to
make clear the need to really act with sensitivity on this
issue, trying to strike this balance and work closely with
bankers. It is an ongoing challenge.
The Chairman. All right. Let me just say, and I have gone
over my time, but I assume that you are in regular contact;
and, specifically I would hope that there would be, maybe even
today, we get a break, some conversation about this. Because
these are fairly specific assertions and finding out where they
come from, there are a large number of people to control.
Let me just close with this. To some extent, we have been
part of the problem, and it is fair to say that public
officials, public employees, are worried that maybe if a bad
loan went through and they didn't catch it, they would be
unduly criticized and more prone to that sometimes.
We want to send a message that as far as the Congress is
concerned, we think that while there is always a problem with
bad loans, there is a very great problem with not enough good
loans right now. And I do want to give people some reassurance,
both your agencies and the employees who work for you, that
this is not a time when, I think, you have to worry about
excessive criticism if a certain number of the loans go bad.
There will be more focus on getting good ones to go forward.
Mr. Bachus.
I'm sorry. Mr. Marchant?
Mr. Marchant. Thank you, Mr. Chairman. I think one of the
big mixed messages that the public is getting is they're
picking up the newspaper and they're reading that the Federal
Reserve is putting a trillion dollars of liquidity into the
system, into the banking system.
And they're hearing that there's TARP money going into each
of the banks. They're thinking that because of all this money
that's going into the banks and the TARP money going into the
banks, that there surely must be money available at the bank
that they can borrow.
I don't think they realize that most of this money is going
to the loan loss reserve and to rebuild the capital reserves.
And if anything, the TARP money, by paying 5 percent on the
TARP money, money that costs 5 percent--5 percent is more than
the bank's cost of funds right now.
So their best customers, the customers that your examiners
like to see when they come in and crack the books, actually are
paying 3 to 3.5 percent on their loans. They are prime plus 1
or 2.
So any TARP money used to make a loan to their absolute
best customer will be made at a loan value that is less than
the cost of funds.
So obviously the TARP money, while I believe the Congress
felt like that is what the money was going to do, to be put in
the system to make more liquidity, it hasn't ended up doing
that.
And when that public reads that the Fed is putting
liquidity into the system, I think the message they think is
that there is more money available to borrow. But what the
customers in my district are finding out is that they are
facing rising interest rates.
A lot of the prime borrowers are going back in to
renegotiate a line of credit that they have done for 20 years,
and they're finding out that instead of having a prime plus 1
or 2 now, there's a floor being put on the amount of the loan
that can go down. And in most instances, that floor is now 5
percent.
They are the best customers of the bank. And the reasons
that are being given are: We have this special assessment
coming. Our bank is not going to be profitable next year,
because of these special assessments.
The other thing that has happened is that there is a
definite restriction in the amounts that these lines of credits
can grow. So de facto, if a business is doing well and can
expand, they're not going to be able to expand their credit
line. And most bankers are not expanding credit lines.
And then, of course, you have the customers who are going
in and finding that their HELOC loans they're having, they're
getting letters in the mail that say that their line has been
cut; they're getting letters from the credit card companies
that are saying the same things. I know that this hearing is
not about that.
And they're getting extra demands on their collateral.
So there are mixed signals that are coming out. I believe
sincerely that everyone at this panel today is doing exactly
what you feel like is the best thing to do for the system.
The borrower does not understand the interplay of all of
these things. And frankly, this Congressman does not understand
the interplay many times, and does not understand what the
benefit to the system is if the headline is that a trillion
dollars has been put into the system by the Fed, but my
constituents don't find that to be of any benefit to them
whatsoever, when they go to the bank and want to borrow money.
Thank you, Mr. Chairman.
Mrs. Maloney. [presiding] Thank you. The Chair recognizes
herself for 5 minutes, and I welcome all the panelists. I would
like to ask Governor Duke, whom I understand has experience as
an online banker in commercial banking, do you believe that the
Federal Government could or should have taken different actions
in the fall or more recently to ensure that credit would be
more available?
I believe all of us are hearing the same story when we go
to the caucus meetings, when we talk to our colleagues on both
sides of the aisle, that the credit is just not out there; we
need to get the liquidity moving.
I'm hearing particularly commercial credit has absolutely
dried up; it's very hard to get loans. How effective do you
believe that the TALF program and the Public-Private Investment
Program will be in opening up credit and allowing financial
institutions to lend money?
And also last night, I was reading a report where banks
used to provide 60 percent of the credit in our country, and
now are providing roughly 20 percent, and it has been picked up
by other forms of credit.
Just your comments in general on these questions. Thank
you.
Ms. Duke. Mrs. Maloney, thank you.
As you know, I was a banker and a community banker for
nearly 30 years, and so I'm well aware of the tension that
exists between bankers and bank examiners, as well as lenders
and borrowers.
I think, to your first question, I do believe, I honestly
believe that the Federal Government has made every response we
can think of to make, in particularly the Federal Reserve, in
order to ensure that lending is continuing to take place. And I
think if we had not done that, that the circumstances would be
substantially worse.
Provision of liquidity to banks is critically important in
order that they have the funds to lend. The capital that we put
into the banks not only strengthens the banks, but also
strengthens them in the minds of others who would provide
liquidity. And it's the liquidity that really gets lent forward
on to borrowers.
In addition to that, you're right that the banking system
percentage of the credit that was extended has dropped. It
dropped to about 30-some percent, anyway below 40 percent,
although if you add back the securitization that banks did,
they were still probably facilitating more than 40 percent of
the credit, going into this recent episode.
And so the TALF is really designed to restart
securitization markets. And what we have found in our Fed
facilities, first with those that were directed at commercial
paper, was that by creating a facility to support commercial
paper, gradually that market improved.
Now, the first version of the TALF is directed at consumer
loans, student loans, and small business loans. And, we had the
first issuance of TALF, which is $8 billion. It may not sound
like a lot in the context of trillions and trillions of
dollars, but that is more than had been done in the last 4
months.
These are difficult times, they're difficult times for bank
examiners, they're difficult times for bankers. I think at the
end of the day, probably the best thing we can do is everything
that we're doing to improve financial conditions.
A lot of the reasons lines get cut is because collateral
values have dropped. So if we could put a floor under housing,
anything we can do to support mortgage lending and housing will
tend to put a floor on the value of housing, and then that
stops the value of the collateral from dropping.
Same thing with commercial real estate, and we're hearing
the same things that you hear on commercial real estate. The
securitization market for commercial real estate loans has
completely shut down. In addition to new commercial real
estate, there are also a number of commercial real estate loans
that are currently up for renewal. And, we need to provide for
the renewal of those. So we are looking at commercial real
estate as part of the TALF in the next version.
But again, commercial real estate values are tied to the
cash flows of the businesses that operate out of that
commercial real estate, and so to the extent that business is
down, that retail sales are down, that attendance is down in
hospitality areas, that's going to tend to reduce the value of
that collateral, and reduce the ability of those owners to
borrow and to expand their businesses.
Mrs. Maloney. Well, thank you. Could you comment briefly?
My time is almost up on the first auction of the Public-Private
Investment Program. I understand that took place last week. Is
that--
Ms. Duke. It was the first issuance under the term asset--
the TALF, the Term Asset-Backed Securities Loan Facility, which
we had actually been working on for about 4 months I believe.
And this one would cover student loans, credit card loans,
small business loans, and auto loans, and $8 billion was issued
that was TALF eligible.
Mrs. Maloney. Okay. Thank you. My time has expired, and the
Chair recognizes--
Mr. Bachus. I am sorry, Madam Chairwoman, we are going go
on the order. I will give you the order.
Mrs. Maloney. Okay.
Mr. Bachus. Mr. Posey, and then I'll give you the list.
Mrs. Maloney. Okay. Mr. Posey?
Mr. Posey. Thank you, Madam Chairwoman.
I hope that we would all agree that the best solution to
the crisis would be more private capital into the market. And
just to save time, can you shake your head ``yes'' if you
agree?
And so we all agree. Wonderful.
Ms. Duke, are we still approving charters for anybody who
wanted to start putting a new institution out there and putting
more private capital into the marketplace?
Ms. Duke. I'm frankly not aware of how many charters the
Federal Reserve has approved recently, but we are still
approving charters.
Mr. Posey. Okay. What is the timeline on something like
that?
Ms. Duke. I believe we respond to all applications that
come in within 60 days.
Mr. Posey. Whether up or down?
Ms. Duke. But, I would like to check that, if I could, and
get back to you.
Mr. Posey. If you would. And the reason I ask that, you
know, we parlayed, our Nation did at one time have about 100
percent of the commercial launchers to satellites, to do our
communications. And we parlayed that into about 5 percent of
the world's commercial launches.
That was a pretty staggering loss. And we did that
basically with the help of, I think, one person, a range safety
officer, who was there longer than he should have been, who
thought the only safe launch was no launch.
So we overregulated and drove business to other countries
and we're suffering for it now.
That was the reason for my question. I mean, I'm familiar
with the instance of some business people who are successful
bankers in other areas, and they decided that they wanted to
open a new branch in a needy area of my district. And they have
been approved by the State, but they can't get a yes or no from
the Federal Government. And I'm not going to tell you who they
are, because I don't want to say I'm pushing them or I'm not.
But I'm puzzled by their inability to get a response, a timely
response, what I would think would be a timely response from
you: Yes or no?
If you're going to do it, do it. I mean, they have done
other banks. I don't think there's anything in their background
that would be fuzzy. I think they meet the requirements.
I will promise you the people in this community need
another bank, and I don't know--I have never really met a
banker in my life who wanted to make a bad loan. I know that
they have been forced to make some bad loans by some external
forces in the past--and I blame, you know, Congress to a large
extent for that--but we heard earlier about our community
banks.
I think on a scale of a side-by-side comparison to the
larger ones, they're in a lot better shape. And I don't think
they have gotten any of the relief money or any significant
amount of relief money.
I would trust my community banks a whole lot better, just
like I trust local government a whole lot better than I do
higher government. You know, they're closer to the people,
they're more responsive, they're better managed. I mean just--
Anyway, I would appreciate it if you could look into it and
find out what the up and down time is, or the yes or no time.
Because I think that just like we parlayed the commercial
launch business into oblivion, we can do that with the
financial market just as well.
And I sure would hate to see us do that.
Ms. Duke. Congressman, if I could. There are actually two
steps to it: There is the charter, which could come through any
agency; and then there is also the ability to get insurance
through the FDIC.
Mr. Posey. Yes, I understood it's hung up at the FDIC.
Mr. Gruenberg. Congressman, let me say, if there's a
particular institution that you believe has had difficulty and
hasn't gotten a response, please let us know, and we'll look
into it.
Mr. Posey. Well, I don't want to interfere with the--I'm
observing it and I'm puzzled by it, and I want to understand it
a little bit better. Because it doesn't make a whole lot of
sense to me at this point.
Thank you very much for your indulgence, Madam Chairwoman.
Mr. Watt. [presiding] I will recognize myself for 5
minutes. We seem to be playing musical chairs up here, but I
think we will provide some continuity.
Let me first thank the Chair in his absence for having this
hearing, because it really, this situation has kind of put us
in a real practical set of problems here, where we are on the
one hand saying, ``Extend more credit,'' and on the other hand,
saying, ``Be more prudent.''
And what it has done for Members of Congress is
interesting, and that's where I want to address my question to
Mr. Polakoff at the end of the description of the situation
that I described, but I want everybody else to try to be
helpful to me in knowing how we should be responding.
I have been on this committee more than 18 years now; I am
starting my 19th year. I can count on one hand the number of
times in the first 17 years that I got calls from constituents,
saying, ``Would you intervene in a financial lending decision
with a bank?''
Hardly a week passes now that I don't get a call from
somebody, saying, ``My loan was turned down, you all are
putting all this money into banks, and would you intervene with
the bank and tell them to approve my loan?''
That's the situation that Members of Congress find
themselves in at this point.
Two examples quickly. A university that had historically
for years and years financed at the end of the year until the
next tuition payments came in, had their line of credit pulled
and was told in order to renew it, they had to pledge the
entire campus, every piece of real estate that they owned, just
for a 60-day loan until the next group of students came in and
paid their tuition, so they could pay the loan back.
Yesterday, I talked with a gentleman who had a commitment,
or a verbal commitment from his S&L--that's why I'm addressing
the question to Mr. Polakoff--for a $400,000 loan to do a
business which would employ 25 people in my congressional
district.
And he said, ``Well, you know, maybe I can get away with
$200,000.'' So he takes the $200,000, then he needs to go back
and get the other $200,000. In the meantime, they have merged
with a First Community Bank, he thinks out of West Virginia,
nowhere close to North Carolina, and the line of credit, the
money that they told him verbally he could get isn't even
available any more.
The problem we have is we can't tell lenders what a
commercially prudent loan is, but they're expecting us to,
because the Federal Government has put all this money into
banks--
And then to make matters worse, they waltz with this guy
for 4 or 5 months, so that he can't go and get a loan from
anybody else. So by the time they make a final decision, the
business opportunity is gone down the pike.
Now the question I have is: Under those circumstances, what
are we supposed to do? You are monitoring this as loans on a
global level. You say that loan volume is up, especially with
community banks.
But this is a problem for all of us, because everybody
knows that they have pulled back on the credit.
So, Mr. Polakoff, I have described my problem to you. I
don't want to step over the line and start telling lenders when
a loan is commercially prudent or not. I don't have that
expertise.
But I also have some obligation to try to be helpful to
constituents in these situations. It's not like getting a
social security check, where I can call up a governmental
agent, and say, ``What am I supposed to do?''
Mr. Polakoff. Mr. Chairman, I don't know if I have a good
answer for you on that one. It's a tough situation.
Each institution has a loan policy, and it describes what
sort of loans it will make under what terms for what sort of
borrowers.
I have yet to meet a banker who wants to turn down a good
loan. That's the way they make money.
Mr. Watt. I just described one to you. They said it was a
good loan several weeks ago, and then all of a sudden they
merged and the new owners say, ``Oh, no, no, we're not making
this loan.''
Mr. Polakoff. Each situation is different, sir. I mean it
could be that the merged institution has--
Mr. Watt. Does anybody else have any suggestions for me?
Mr. Polakoff can't help me. What am I supposed to do in these
situations?
[no response]
Who is next on your list? I guess nobody has a suggestion
for me?
Ms. Duke. I will take one stab at it. I have been in that
situation, and, so you may not find this very satisfactory, but
the one thing we are finding is that those that are increasing
their loans are banks that are looking at each individual deal
one at a time, and they are finding that they are increasing
their business, not because there's a lot more loan demand, but
they're doing it because there are banks that are pulling out
of specific types of lending. And so they're finding that if
they can go in and look at the deal on its merits, there are
some banks that are out there making those loans.
Mr. Watt. My time is expired. Well, I'll let Mr. Gruenberg
respond. But maybe I should address it to the second panel,
that has some bankers on it. Maybe they will be able to help
me.
Yes?
Mr. Gruenberg. Just in regard to what you might say to a
constituent, the FDIC does have a call center, where if
individuals are having difficulties with their financial
institution, and in some sense feel that they have been treated
unfairly or haven't been given a fair hearing, they do have the
ability to call, and we do try to follow-up on concerns that
are raised.
Mr. Watt. I thank you.
Mr. Jones is recognized for 5 minutes.
Mr. Jones. Thank you, Mr. Chairman.
I'm going to be repetitive to many of the questions that
you have been asked and many of the statements. But to
piggyback on what the chairman just was asking about his
situation, Mr. Long, I'm just going to read a subtitle to your
comments, and then I'm going to get to your point, and then
hopefully maybe a question.
Regulators and examiners are taking a balanced approach,
consistent with safe and sound banking practices. Well, I would
expect that even in good times, but certainly in tough times,
that makes a lot of sense.
About 5 weeks ago, I had the president and a CEO of a
bank--and I'm not going to say the name, because I think
everybody would have an idea, know who it was--to say the
problem is that the regulators, you're being told as Members of
Congress, and certainly Mr. Obama, the new President, has said,
you know, talk money, we want to get some money out into Main
Street, we want to help businesses, we want to get them, you
know, sound so that they can expand, or whatever to keep their
business running--but this CEO and president said to me,
``They're telling us, the regulators, don't move so fast, hold
back.''
And I think this is what some of the questions and concerns
are today.
I realize you have a tremendous responsibility, each and
every one of you. But this country right now is suffering on
Main Street. There's no two ways about it, it has been said 100
times by other people.
And when I have a CEO and president of a well-known bank--
I'm not going to say community, regional, or national--but a
well-known bank, come to a Member of Congress, and says,
``You're being told, yes we want to free up the credit, but
when the regulators come in, they're saying, no, slow down.''
So therefore either--Mr. Long, you might have said it, or
Mr. Polakoff might have said it--that you need to do a better
job. Because I think there is a serious problem.
Yesterday most of us in this Congress, not just the Banking
Committee, but most of us had members from home builders
associations from our States come to Members of Congress--and I
had two or three, they're not even my constituents, they're
from Raleigh, North Carolina, which is the capital of North
Carolina--telling me that he has been told by his banker--and
he said, ``I could get my banker to call you, Congressman, and
tell you, that he is being told not to make the loans.''
Now I'm not going to question your integrity, because
you're people of high integrity, but there's something missing
in this program right now. And if the truth is that you expect
things to get a heck of a lot worse before they get better,
then say it.
Let's be honest with these people, because they're coming
to us, as Mr. Watt mentioned just a moment ago. The don't
understand, they have been good stewards of their businesses,
good stewards with the banks, they're paying back on time, and
doing everything they were asked to do.
But now they're caught in a situation where many of them
will not be here a year from now, if the credit somehow does
not get back to Main Street, as the President has said many
times.
I don't know if I'm asking you a question or not. I guess I
want to comment, because I'm being repetitive, but I can't help
it, that's what I'm hearing. And it's more frequent now than it
was 4 months ago, and I'm afraid it's going to be even more
frequent 6 months out than it is now.
If this is your policy--and I believe it--if this is your
policy, can you somehow--at least the bank examiners or the
regulators understand that they are supposed to work with these
people. And if it's a bad loan, say it's a bad loan.
But I think some of these people who are crying out here in
Main Street are pretty good customers who would meet the
obligation.
That's my statement. If you can figure a question out of
that, and anybody wants to respond to it, that will be fine.
Mr. Long. I will take a shot at it, Congressman. And they
are concerns that we hear too. There are a couple of things. In
terms of, do we think it's going to get worse? I would tell
you, from the OCC's standpoint, where we are in the cycle, I
believe for many community banks, it is going to get worse.
So we are definitely asking our examiners to have good
communications with bank management and make sure that they're
vigilant, make sure that they have a good handle around the
concentrations of credit, the amount of loans that they have to
a certain--whether it be industry, developer or whatever.
It may be that being told to slow down could be
appropriate, but I would need some more information to address
it specifically. It may be that the banker or the regulators
feel like that concentration level in total on that balance
sheet is getting a little heavy and they need to be a little
more selective in terms of the risk.
It may be in terms of their underwriting, given the credit
quality of the borrowers and the stress that the borrowers are
under, as you know, Congressman, over the last 3, 4, or 5 years
underwriting standards got pretty loose. It was pretty easy to
extend credit, and it wasn't that difficult to get a loan.
What is happening in the industry right now is a normal
occurrence. Bankers tighten up, underwriting standards tighten.
Loan demand by good quality borrowers--as I said in my
statement, businesses aren't expanding, they don't have capital
expenditures--good quality loan demand is harder to come by.
But the examiners and the bankers hopefully are having good
robust conversations around risk management issues,
concentration issues, underwriting issues, whether it be from
an individual loan or from a portfolio loan.
So the comments along those lines could very well be not:
Slow down, we don't want you making good loans. It may be: Make
sure you have a good handle around the risk profile of your
portfolio, because certain concentration levels, no matter how
good they get, when you get into an economic downturn, it
doesn't take much to tip a bank over.
Mr. Watt. The gentleman's time has expired.
Mr. Sherman is recognized for 5 minutes.
Mr. Sherman. Thank you, Mr. Chairman.
You know, we're all looking back nostalgically at this
mythical 2007, when all worthy people got the credit they
needed to realize their dreams. And we all are asking, why
can't we return to that Shangri-La?
I think we have to remember that back in 2007, I was
getting plenty of complaints from people who weren't getting
the loans they wanted. They didn't ask me to do anything about
it, because back in 2007, we had a capitalist economic system.
But also in 2007, the living standards were too loose, even
though the banks were in relatively, or thought they were in
reactively good shape. Today the banks are in bad shape, and
every borrower is in worse shape than they were back in 2007.
The solution, or one of the solutions is to allow banks to
make loans even when the good bank examiner, a conservative
bank examiner, says you need a 10 or 20 percent reserve against
that loan by having the banks have more capital.
I hope that you are pressing your banks to sell more stock,
even though at today's depressed prices, they may not want to
do it.
I want to address the mark-to-market rule, which I think is
depressing bank capital in just a second.
But I also want to mention the credit unions, who aren't
represented here. We as a Congress have prohibited almost all
credit unions from issuing subordinated debt. That is the way
they could have capital, where private investors could give the
credit union money, and then if the credit union made a few
risky loans and it didn't work out so well, the investors would
lose money, instead of the taxpayer or the insurance system.
But we have prohibited issuing that subordinated debt, and
I think we should revisit that, maybe not as a permanent change
in the way that credit unions are run, but for the life of this
economic crisis.
Because for every time somebody has to say no to a
businessperson on a loan, hopefully there will be a credit
union that's able to say yes, if it's a good loan.
Governor Duke, I would like to ask you a question that's
identical to the question I asked Chairman Bernanke yesterday,
because I liked his answer and I'm hoping that you give me the
same answer.
You may be familiar with Section 13-3 of the Federal
Reserve Act. That's the one that says the Federal Reserve can
loan money in a time of economic exigency, but only on a fully
secured basis.
And your Chairman yesterday said that he figures that means
no risk or as little risk as is possible in a financial
situation, that was equivalent to triple-A paper, not double-A,
not single-A--Triple-A--and that he would stand by that
interpretation even if Wall Street came to you a year from now
and said, ``My God, we need another trillion or the sky is
going to fall, and those idiots and populists in Congress won't
pass the bill. So you have to step forward, avoid all that
democracy stuff, change your interpretation of Section 13-3,
and give us the money Congress won't.''
Under that kind of pressure, would you give me the same
answer as Chairman Bernanke, and say, ``13-3 is for triple-A
paper?''
Ms. Duke. Yes, sir, I would.
Mr. Sherman. That's a great answer.
Mr. Kroeker, let's talk a little bit about mark-to-market,
because my concern is that in the accounting standards that the
standards are written to embrace the verifiable and the
unassailable, rather than the relevant and the meaningful.
You have probably heard me talk about FASB II, where we
assume that all research programs are failures, because that's
easier than figuring out which research programs were
successful.
Likewise, it's easier to look at computer screen and say
that a group of assets is worth 10 cents on the dollar, because
that was the last trade, rather than to evaluate what they're
likely to yield to maturity, knowing that we're going to have a
bad economy at least for a while.
One of the principles of accounting is that two similar
institutions are going to face the same standards. But one bank
may make a bunch of loans for its own portfolio and not take
the steps for them to be sold off into the market.
And so they have a billion dollars of exposure to the
widget industry, and you know, 22 different widget companies
all in red buildings.
And then another identical bank does a billion dollars
worth of loans to the widget companies also in red buildings,
22 of them, and they take the steps to make those loans
securitizable. As a matter of fact, they bought this package of
loans from somebody across the country.
Why should 2 banks, both of which have a billion dollars of
exposure to 22 widget companies, be treated differently, based
upon whether it's a securitized group or just a--
Mr. Watt. You have to wrap up your question, so he can
answer it.
Mr. Sherman. Yes.
Mr. Watt. And your time has expired.
Mr. Kroeker. We have recommended improvements in the mark-
to-market accounting rules. And to get to the specific
question, does it make sense, I think the FASB's proposal on
other than temporary impairment seeks to at least in the income
statement do just that, to replicate the losses, the credit
losses you would have if these securities were in fact loans.
That would be the credit loss and the impairment that you would
take through the income statement.
That being said, when loans are packaged up in securities,
they often do differ from holding a whole loan; that is,
they're tranched up. People take different risk portfolios out
of the securitization, they add derivatives or other things to
the securitization vehicle.
So it is very difficult once you put the loans together and
scramble the egg, if you will, to unscramble that in the
accounting.
Mr. Watt. If you need to elaborate on that, could you do it
in writing?
Did you get sufficient elaboration? Or not. You all can
talk off the record.
The gentleman's time has expired.
Mr. Manzullo is recognized for 5 minutes.
Mr. Manzullo. Thank you.
I only wish that the first panel had been placed together
with the second panel. I would hope that you gentlemen and
gentlelady would stick around to listen to the second panel,
because there is a huge disconnect that is going on.
Mr. Polakoff, you said you have ``yet to meet a banker who
turned down a good loan.'' Well, there are two of them sitting
behind you. They're both community bankers. Steve Wilson, LCNB
Bank, from Lebanon, Ohio; and Mike Menzies from Easton Bank &
Trust Company. And you could take a look at their testimonies.
Menzies says, ``The current bank regulatory climate is causing
many community banks to unnecessarily restrict their lending
activities. Left unaddressed, certain field examination
practices to propose FDIC special assessment, mark-to-market,
will prevent community banks from realizing their full
potential as participants in the rebuilding of our economy.''
That's not only as to banks that receive TARP funds, but
banks that are doing it on their own dollar. And then also the
testimony of Steve Wilson from the LCNB Bank in Lebanon Ohio.
Now, these are the guys on the streets. And they might as
well be the bankers that I talk to back home. And you have to
listen to them. Because they're under siege from the bank
examiners. I mean really under siege.
``Banks hear the message to continue to lend''--this is Mr.
Wilson--``to help stimulate the economy. Then they hear
messages to pull back, from field examiners that may apply
overly conservative standards, from FDIC premium assessment
rules that penalize banks that use the Federal Home Loan Bank
advances for short-term liquidity.''
I mean, you have to listen to them. And you have to, you
know, obviously listen to the people who work for you in the
field.
And then, Mr. Long, you made the statement that businesses
are not expanding. That's not true. I mean, I represent most of
northern Illinois, and we have over 2,500 factories, and they
have been hit. But you know what? A lot of those factories have
some good orders.
And banks are making the statement, they're hearing from
the examiners, ``Don't loan to manufacturers.'' That's what
your people are telling them. Because, oh, you can't trust the
manufacturing climate.
And you know what, you know what's going on with these guys
that can't expand? Those jobs are going to China.
I mean, this is--I guess--I'm not giving anybody heck. I
mean, I did that yesterday on my birthday, and my blood
pressure can't take that much. But what I'm saying is, there is
so much disconnect that's going on here.
Mr. Long, have you ever accompanied one of your examiners
to the bank? Of course, that would be counterproductive because
they would see you there. But did you do any bank examinations
yourself? I think you have, haven't you?
Mr. Long. I have been on this job for 30 years as a bank
examiner, for the first 23 of if in the field. Yes--
Mr. Manzullo. Because I know that you have that experience
and I know you're very--
Mr. Long. And I have gone on exams as recently as less than
12 months ago. Yes, I go on exams.
Mr. Manzullo. But I mean, there are--I want you to know
there are businesses that are expanding. I mean, really not a
lot, but it is happening.
Mr. Long. Congressman, my written statement reflects more
of a general sense. During an economic recession--
Mr. Manzullo. Oh, I believe you 100 percent--yes, sir.
Mr. Long. --businesses pull back. I don't mean that there
aren't businesses that are expanding.
Mr. Manzullo. Right--
Mr. Long. And I can tell you that at the OCC, our examiners
are not telling our bankers to not lend to manufacturers.
Mr. Manzullo. They are telling them. That's what my bankers
are telling me. You need to get that out to them, because they
may be--I mean everybody is acting honestly--I mean everybody--
with integrity. There's no dishonesty going on.
There's a lot of disconnect that's going on. Because the
examiners, you know, want to make sure they do the best job
possible. And under the circumstances, they believe in their
heart that they are doing that.
But I'm just saying that this is what we're hearing from
the banks and also from the manufacturers.
Mr. Long. And Congressman, we hear that too, and I think
it's a good point, and I think it's a good purpose of this
hearing, and of the outreach that we do with the bankers.
I know that there is a fine line of when underwriting
standards get too loose and banks are taking on too much risk,
and the line of--
Mr. Manzullo. But we know--
Mr. Long. Examiners tell bankers--
Mr. Manzullo. We know, Mr. Long, we know of business after
business that has never had a problem with their line of
credit, they're being cut off on lines of credit. They're
throwing their arms up in the air, and suffering.
But I know you're going to look at it, because I know where
your heart is. And it is in the field with those people and the
people who want to borrow the money. And I appreciate that.
Thank you.
The Chairman. The gentleman from California.
Mr. Baca. Thank you very much, Mr. Chairman, and thank you
for holding this hearing.
All of us realize that we are at a crisis right now and
people are losing their jobs. And you have to understand and
put yourself in the place of the people who are losing their
jobs. And why are a lot of them losing their jobs? A lot of
them have not gotten the kind of loans for the occupations
where they are working, whether it is a small business, whether
it is even the State of California where I have just talked to
the secretary who says, ``I'm going to have to borrow `X'
amount of dollars just to exist in our area.'' You have to put
yourself in the place of an individual who is losing their job.
And right now it seems like there is a disconnect or a
blaming that goes back. Who is really at fault, is it the
regulators or is the bankers? I mean you guys are just throwing
it back and forth to one another, but the problem is that the
loans aren't going on in the area. We would see the economy
changing. And in California, especially in my district where
the majority of small businesses aren't getting their loans,
and we are looking at automobile dealers and others that can't
obtain a loan.
Why is it? You have to put yourselves in the faces of
people who have lost their jobs, people who aren't able to
provide those kind of jobs for someone else. Put yourselves in
that kind of situation and say, how the hell am I going to make
sure that people get the kind of funding that will create the
kind of job or how do we make the State of California solvent
to assure that they don't have to continue to borrow the money?
Unless you, both of you guys, the bankers and the regulators,
do something.
So whose fault is it? I want you to answer that. And more
importantly, how do we fix it now? What is the remedy? What can
we do? What can you do to expedite the process and stop this
blaming one another? Any one of you want to tackle that?
Mr. Polakoff. Congressman, I hope it is not coming across
that we are blaming one another.
I think the regulators and the bankers typically have a
good, healthy relationship. There is no tension involved with
that relationship. We all want the same thing, which is money
to be lent.
Mr. Baca. When someone loses their job and they are not
getting a loan, that is tension where they are losing revenue,
and we are not picking up revenue. That is tension.
Mr. Polakoff. I'm not sure I'm understanding the question,
but indeed, an examiner would be very uncomfortable, rightfully
so, if money was lent to an unemployed individual who didn't
have the capacity to repay the debt.
Mr. Baca. Anybody else want to tackle this?
Yes, we are at a crisis. Praise the Lord, we will say a
prayer.
Mr. Long. I don't have a lot to add. It is a natural
tendency for banks during downturns, particularly coming out of
a period of very loose credit, where they pull back, they
protect the balance sheet, they protect liquidity, and they
protect capital and they tighten the underwriting standards.
And Scott is absolutely right. I mean the fact that
somebody lost a job and they want to get a loan but the don't
have the repayment ability, most bankers probably are not going
to make that loan.
Mr. Baca. But there are a lot of them who do, even on the
minority small businesses or the automobile dealers. I mean,
they are the last to get funded, first to get de-funded. It
seems like here again, even among minority dealerships who have
really helped the economy, are trying to get loans, can't even
get loans.
Mr. Long. I agree. I think the regulators and the bankers
are doing a better job this time of communicating with each
other and talking with each other, and I think it is important
that we continue to do so.
And I think the banks are struggling with this too. I mean,
they do want to make good loans, but some of them have gone so
far out on the risk curve that they currently have a balance
sheet full of loans that are having problems, and they dont
have a lot of capacity to--
Mr. Baca. But those loans weren't created here. It was
those that were created because we did it with some foreign
countries and others and all this money that has gone back
there that we can't even recover because all of these bonuses
that were there.
I'm sorry.
Ms. Duke. I just want to point out we are very aware of the
problems with loans to small businesses in particular. One of
the functions of the Fed facility that just started up last
week is that it included floorplan loans for auto dealers in
addition to auto loans to consumers. And then we added to it
very recently loans for business equipment, and it also
includes SBA loans.
In addition, I am reminded from my days as a banker that
most small business credit is frankly funded through home
equity. A lot of those loans are based on home equity, which
again brings me back to anything that we can do to improve
mortgage lending in the housing market will also be helpful to
small businesses.
Mr. Baca. I hope we get an answer when, and hopefully we
turn this economy around. And we are all working together and I
know that we are all trying, but I think they need to say when
is it going to happen and how is it going to happen because
every day that we don't provide assistance, that means some job
is lost somewhere because they are not able to attain the
capital to operate.
Thank you. I yield back the balance of my time.
The Chairman. The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
As each of you knows, there has been a lot of discussion
about a systemic risk regulator in some form or another, both
from the Executive Branch and from within this committee. And I
realize that is not something that you necessarily focus on,
but you all are regulators, you are all familiar with the
various financial institutions which are out there.
I would be interested in your thoughts about a systemic
risk regulator. And I'm not asking you to put together how it
would be done precisely but as to the effect of it in terms of
the decisionmaking that might have occurred in this case
earlier in looking at financial institutions and perhaps any
credit type institutions in this country, and what direction
perhaps we should be looking. This is still in an infant stage
as far as Congress is concerned. So I am interested in your
views on the concept of a systemic risk regulator.
Mr. Polakoff. Congressman, I will get started if it is
acceptable.
We at OTS would support the notion of a systemic risk
regulator. We believe that term has three parts: One part of it
is the receivership activity associated with that regulator;
another part is the ability to provide temporary liquidity
assistance; and then the third part is the functional
regulation.
The functional regulation can be done in a couple of
different ways. It can be done in a prudential examination way,
meaning the systemic regulator has the responsibility to
actually understand the risk profile of individual
institutions. It could be done in a macro way, which means the
systemic regulator has the responsibility to assess the
horizontal risk across a number of large institutions, or it
could be done in a product way, which means a systemic
regulator focuses instead on emerging products and what the
systemic risk would be associated with those.
So those are some critical issues for Congress to address,
but the notion of a systemic regulator makes complete sense to
OTS.
Mr. Castle. Any other comments?
Ms. Duke. I think we have talked a lot about systemic risk
regulation and, again, I feel like it is important that there
is a broad policy agenda. There should be oversight of the
system as a whole, not just oversight of the individual
components or individual firms. Some parts of it that we think
are important are functional supervision and onsolidated
supervision, such as we have for bank holding companies, and
for companies that may not necessarily be bank holding
companies, in addition to systemic risk regulation.
There does need to be a resolution regime for systemically
important financial institutions, but I don't know if that
necessarily has to be held by the same entity that has
responsibility for systemic risk supervision. We think it is
important that systemically important payment systems, as well
as firms, be supervised, that there be attention paid to
consumer and investor protection, and that some authority have
the express responsibility to monitor and address systemic risk
wherever it happens.
Places where this might have come to light would be places
where individual exposures in firms were identical to
individual exposures at other firms, so those two--if the risk
of an event happened in one firm, it wouldn't necessarily spill
over to all firms. It might also involve looking at particular
products, and obviously the mortgage-backed securities and the
more complex securities would be an example of that. A third
example of a place where this might have come into play would
be in credit default swaps.
Mr. Castle. I think you said this, Governor Duke, but if we
had a systemic risk regulator, should we be looking at things
like hedge funds and investment banks and even corporations,
insurance companies, other entities beyond the banks which are
very involved in the credit markets today?
Ms. Duke. I'm not certain--I think one of the things about
systemic risk is we have to look beyond individual firms. And I
think a systemic risk regulator would certainly want to gather
information from all participants in the financial markets
while they might not necessarily regulate specific firms and
specific industries.
Mr. Castle. Thank you. Anybody else on that subject?
Let me ask you this question, Governor Duke. I mentioned
this earlier in the opening, many hours ago, that I know of a
major financial institution in my State that is told go out and
extend credit, make loans, or whatever. And yet when they have
had the various regulators come in, they have had a much
tighter view of it saying, ``You have to watch your capital,
you have to be careful,'' whatever, discouraging--in their
minds, at least, discouraging loans to a degree.
Is there a communication issue here? Are we hearing
something different than is being said when these regulators
are sent out on the street?
Ms. Duke. It is possible that there are some differences
between assessments of creditworthiness and factors that have
to do with the firm itself. Does the firm itself have enough
liquidity to make loans, does it have enough capital to make
loans, does the firm have concentrations in areas such as
commercial real estate that prevent it from expanding in that
area in particular? But a lot of it is communication.
So, in addition to the guidance that we put out there, I
can tell you that I personally went back before this hearing
and looked at my calendar, and in the last 2 weeks, I have met
with our community bank examiners for the system as a whole,
with our New York bank examiners, with two community groups,
with two banker groups, with a construction industry group, and
with the Conference of State Bank Supervisors.
So we are trying to have these conversations and really
find out what is happening on the ground and do what we can
about it.
Mr. Castle. Thank you. I yield back, Mr. Chairman.
The Chairman. The gentleman from Texas.
Mr. Green. Thank you, Mr. Chairman. I thank you for holding
the hearing and I thank the witnesses for appearing.
I ask that you provide some ocularity in one specific area,
one area. The question is, are creditworthy borrowers being
denied loans? Creditworthy. Now you define creditworthy in your
minds, but it is creditworthy borrowers that we want to talk
about. The empirical evidence as well as the anecdotal evidence
seems to connote that they are not getting loans. Not all, but
a good many, and possibly too many given the current
circumstances.
So let me start by finding or ascertaining whether or not
you agree that there are creditworthy borrowers who are not
acquiring loans. If you think that creditworthy borrowers are
not acquiring loans, would you kindly extend a hand into the
air? This will help me to know to whom I should speak. Okay,
let's note that we have two persons, Ms. Duke and Mr. Polakoff,
who have indicated that creditworthy borrowers are not getting
loans.
Let's start with you, Mr. Long. You are a banker. Is it
your contention that all creditworthy borrowers are getting
loans?
Mr. Long. Well, I'm not a banker, I'm a bank examiner,
Congressman.
Mr. Green. Excuse the misstatement.
Mr. Long. No, that is okay.
I don't know the answer to it. I mean obviously with all
the communications we have and in talking to bankers, I have
made it a point over the last several months to talk to as many
bankers as I can and ask them point blank, ``Are you making
loans to creditworthy borrowers? Are you making credit
available into the industry?'' And everybody I talk to is
telling me, ``Yes, we are.''
However, there are some bankers, some banks, that as I said
earlier have gone so far out on the risk curve and they are so
loaded up on problem assets that they are maybe not able to
lend into the market as much--
Mr. Green. Is it your opinion that in this circumstance,
then, that some creditworthy borrowers may not be getting loans
because of the circumstance with the bank?
Mr. Long. Can I sit here and say that every creditworthy
borrower is getting a loan? I obviously can't say that, but I
don't--
Mr. Green. I don't want to talk about everyone. We are
trying to ascertain whether or not we have a significant number
such that it is becoming a part of the problem that we are
trying to extricate ourselves from.
Let me go on. If we conclude, as some have, that
creditworthy borrowers, many are not getting loans--what I
would like to do is get to the root of the problem. Is it
because of capital requirements or is it because of money that
is not available within the bank to lend? The capital
requirements, the TARP money that the banks received, generally
speaking, was to capitalize the banks. That was not money to
lend, generally speaking. Is this a true statement? If you
agree that it is a true statement, raise your hand. Alright,
everybody has agreed.
Now if that was not money to lend, the money that the bank
would lend will come from either money that it gets from
overnight circumstances or from various discount windows, true?
If so, raise your hand. You are going to have to participate,
everyone. Okay, good, everyone agrees. Or it can come from
monies that the banks will have in their loan portfolios, which
comes from deposits, true?
So the question is this. Is the problem one of being
undercapitalized such that they can't lend money from deposits
or from the discount windows, or is one of being capitalized
properly, fully capitalized, and not having the money available
from deposits? Do you follow my question? If you do not, raise
your hand and I will give it to you again.
So if you would, Mr. Polakoff, give your commentary,
please.
Mr. Polakoff. Congressman, I think each situation is
different, but I don't believe it is either a capital
restriction nor do I believe that it is a liquidity problem. I
think that these are day-to-day decisions that institutions are
making as to where they want to be on the risk spectrum given a
number of different variables.
Mr. Green. Mr. Long.
Mr. Long. The one thing I would add--and to agree with you
in terms of where maybe creditworthy borrowers aren't getting
credit--until we get that securitization market opened up,
clearly credit is not flowing like it should. That is a huge
problem that we have to get fixed.
Mr. Green. So Mr. Long, you and I are having a kumbaya
moment. We are in agreement with each other, because we agree
that there are some creditworthy borrowers, too many probably,
who are not getting loans, and we at least have one reason why.
Mr. Long. I think that there are creditworthy sectors that
are not getting access to credit because of the securitization
market.
Mr. Green. My time has expired. I would dearly like to
continue, Mr. Long, but perhaps you and I can talk afterwards.
The Chairman. I'm going to go to Mr. Neugebauer.
Let me make an announcement. There are votes. We will
probably be gone for about 40 minutes. When we return, the
members who are now here, who have not questioned this panel,
will be allowed to question this panel if they wish. We will
then go to the second panel.
So Mr. Neugebauer is going to go, and then we are going to
break. Mr. Cleaver, Mr. Perlmutter, Mr. Foster, Ms. Kosmas, and
Mr. Himes will be given priority to question this panel, and
then we will go on to the next panel. The minority has
concurred in that. The gentleman from Texas is recognized for 5
minutes, after which we will break.
Mr. Neugebauer. Thank you, Mr. Chairman.
One of the things--and I don't want to spend a lot of time
on it because I think the point has been made--we are hearing
from a lot of our constituents is that credit terms have
changed. I have been a loan officer, been on a loan committee,
been a bank director, I have borrowed a lot of money, and one
of the things I know--and I'm hearing, I think, things haven't
changed is when things are good, everybody runs to loans
secured by real estate. When things go bad, everybody runs away
from them.
And a number of the loans that I am hearing are getting
either renegotiated or are getting more scrutinized or in fact
being asked to be paid off for loans having to do with real
estate. I think fundamentally sometimes that has to do with
maybe regulators pressing that button. I hope that is not the
case, because most of the time when we look at losses that
banks take on in real estate, it wasn't because of the real
estate necessarily, it was the capacity of the borrowers. But I
think sometimes real estate gets tainted as the poisoned pill,
particularly when we have a downturn.
But I want to go to the PPIP program. I guess that is what
we are calling it, PPIP. We heard yesterday or this week that
Mr. Geithner layed out that plan, and it puts FDIC as the 95
percent guarantor of those obligations that are created. Then
we also know that the FDIC has issued a special assessment on
banks, and it is costing Texas banks nearly a billion dollars,
right off the bottom line, right off their capital structure,
at a time when we are hearing that banks are cutting back on
their lending.
I guess the first question I have is, if the FDIC doesn't
have the appropriate reserve funds now, why are we asking them
to take on additional responsibility?
Mr. Gruenberg. Well, Congressman, the program that was
announced on Monday is an effort to deal with the troubled
assets on the balance sheets of these institutions. Part of the
purpose of the program is to take those troubled assets off the
balance sheets and put those institutions in a better position
to lend. So part of the objective here is to respond to this
issue of credit availability.
And that program is still in the process of development,
but we are trying to structure it in a way to keep it separate
from the Deposit Insurance Fund and have it separately
supported by collateralizing those guarantees with the assets
that are purchased. Also, fees will be charged for the
guarantees, which will be an additional buffer. Furthermore,
there will be private equity investment, which would be an
additional buffer. So we believe we can structure the program
in way to separate it from the Deposit Insurance Fund.
Mr. Neugebauer. But you don't currently have any money in
any fund for that purpose, so where are you going to get that
money from?
Mr. Gruenberg. The collateralization of these guarantees
will come from the assets that would be purchased. That would
be the first line of protection.
Mr. Neugebauer. But you don't have a reserve for that
currently?
Mr. Gruenberg. Well no, once the purchase was made, the
assets would be available for collateral.
Mr. Neugebauer. I understand the assets, but in other
words, if you are purchasing assets and you are making banks
reserve for loan losses and you are saying that you are taking
bad assets--those are your words, not mine--off of the books of
banks with some potential loss, they may be securitized, but
the question--and you said that you weren't going to use any of
the funds from the other reserve--so where are you going to get
money from this reserve? I mean, if you have losses, how would
you pay them?
Mr. Gruenberg. Well, if there was a default on the loan, we
would have the assets placed as collateral. There would be a
number of funds established. Each fund would charge fees for
the guarantee. They would also have the ability to build up a
reserve fund as an additional cushion, and there will be
private equity investment in each of these funds as well.
Mr. Neugebauer. I get that. I still don't see where you are
going to have any cushion to absorb those losses should those
securities--
The second piece of it. It says, I believe, in Treasury
Secretary Geithner's plan is that FDIC or the regulating
entities will go in, and I guess they will have to sit down
with banks and maybe give them permission to participate in
this plan. Do you foresee FDIC or any of the regulatory
entities encouraging or making banks take certain assets off
their books and participating in this program?
Mr. Gruenberg. I think the program is designed to be
voluntary. I think it will be done in conjunction with the
primary Federal regulator as well as the institution.
Mr. Neugebauer. I can see my time has expired, Mr.
Chairman.
The Chairman. We will return probably about 12:40.
[recess]
The Chairman. The committee will reconvene. Mr. Perlmutter
is here. I assumed he will be ready to go while we wait for Mr.
Kroeker, because that is mark-to-market, which you have already
been very explicit about. So, Mr. Perlmutter is recognized for
5 minutes.
Mr. Perlmutter. Thanks, Mr. Chairman, and when Mr. Kroeker
returns I do have a question or two for him. But he and Mr.
Polakoff had a chance to hear me the other day on mark-to-
market and I appreciate both of you gentlemen returning. We
have had a lot of hearings in this subject, but just, you know,
sort of to summarize, we have lost a lot of capital from the
securitization market. Chairman Volcker said, you know, it was
at a point where it was 70 percent of credit was coming from
the capital markets, 30 percent from the banking. We have lost
a lot in the capital markets.
I think we determined the other day that we have lost a lot
of capital for lending and credit purposes because of mark-to-
market, legitimately so or not, you know, there's been a lot of
loss and Mr. Long, you have been very honest and I appreciate
your testimony today that, you know, from a regulator, from an
examiner's point of view, OCC is, you know, concerned about,
you know, where we're going in the economy and wanting to make
sure that the banks are strong, as strong as they can be.
But, we really have had a dramatic contraction in capital.
And it is hitting hard. It is not anecdotes anymore. You heard
from Mr. Jones, you have heard from all of us, businesses, home
builders, restaurants, car dealers, who have been good
borrowers, good business people in the past, are being shut out
of credit. They are. Whether you're hearing that from your
examiners or not, they are. That is happening.
And so, Governor Duke mentioned the Interagency Statement
on Meeting the Needs of Creditworthy Borrowers of November
12th, and there is one sentence in here, I mean, a number of
sentences about making sure that credit is extended. I am
reading from the third or fourth paragraph, ``The agencies have
directed supervisory staffs to be mindful of the procyclical
affects of excessive tightening of credit and to encourage
banking organizations to practice economically viable and
appropriate lending activities.'' So, there are words in there
that talk about prudence, but also about encouraging lending. I
will start with you, Mr. Long, and then I want to go to Mr.
Kroeker on sort of the mark-to-market situation. Did you guys
get that memo?
Mr. Long. Yes, Congressman, actually, we participated in
writing it.
Mr. Perlmutter. Okay. So, in Colorado--
The Chairman. If the gentleman would yield. I do want to
note, for historical purposes, that a Member of Congress just
asked people if they had gotten the memo and there really was a
memo.
Mr. Perlmutter. And this really does, back in November,
recognize the need to maintain, you know, and extend credit
because we have seen, you know, just a loss of demand, a loss
of credit, at levels we have never seen before, or at least not
for many, many decades. And so, to a degree, we proceed with
the prudent lending practices, there still has to be a good
look at the borrowers. And my bankers and my borrowers are
saying, the examiners are questioning concentration levels.
So, if you're a homebuilder, like Mr. Neugebauer was
talking about, and you want a new loan, even though you've been
a good customer, you're not going to get it because there's too
much concentration in real estate. Too much concentration for
auto dealers because that's a distressed industry. Restaurants,
commercial facilities, you know, retail outlets, what do you
say? And then, an increase of capital from 10 to 10 percent.
So, they're giving me specific requirements, or at least
suggestions, by the examiner. When an examiner makes a
suggestion, you follow it. Am I wrong? Are my guys way off?
Mr. Long. No, Congressman, they are not way off. But let me
put in some context because you raise a number of issues that I
want to address.
First of all, in the memo, we periodically get all 1,800 of
our examiners on the phone and we walk them through, very
specifically, how we want them to treat various loan products,
how we want them to treat concentrations, how we want them to
treat real estate appraisals, all of that type of thing and
what we do is try to use lessons learned from the last time we
went through this.
So, we do spend a lot of time with our examiners on the
phone, in person, through outreach and through memos to them
trying to strike that balance that I talk about in my written
testimony. Secondly, the issues that you are hearing from your
bankers, they are real issues. These are real issues. We have a
number of banks with heavy concentrations of distressed assets
and some of those banks are going--
Mr. Perlmutter. But I think they're in distressed sectors.
They're not, sorry.
The Chairman. We can be more lax, sir, go ahead.
Mr. Perlmutter. As opposed to, I mean, these are performing
assets in a distressed sector as determined by you guys. That's
what I'm hearing.
Mr. Long. Well, Congressman, if we have the time, I would
like to address one thing, because I hear this a lot. I hear
that examiners are looking at current loans and classifying
current loans. And I--
Mr. Perlmutter. Or not allowing the extension of the line
of credit. And with that, I'll shut up, Mr. Chairman.
The Chairman. Mr. Long, do you want to finish for a bit, go
ahead. Mr. Long, do you have any, do you want to conclude, you
go ahead.
Mr. Long. Well, I guess the one thing I would say, I won't
take a lot of time. There is a lot to talk around this
performing, non-performing issue and, if a loan is performing
and it's under reasonable terms, an examiner will not classify
that loan. But just because it's current does not mean it's
performing and that's a whole long conversation and if you want
to talk about that I would--
The Chairman. Well, I would ask you to elaborate a bit on
that. What do you mean, just because it's current, it's not
performing?
Mr. Long. Well, if the loan is performing under reasonable
repayment terms, an examiner won't classify that loan. But what
I hear from bankers at times is, the loan was current but the
examiner classified it. Well, it may have been current, but
it's not necessarily performing.
The Chairman. Well, yes, explain what would make a loan
where the payments were being made not performing?
Mr. Long. We run into this a lot with commercial real
estate. It is normal practice in some sectors of commercial
real estate lending for the bank to fund an interest carry. And
that's simply to bridge the timing differences between the cash
outflows and the cash inflows.
So, what we run into in a lot in community banks right now
in some parts of the country are these busted residential
development loans. And technically, they're current because the
bank's paying themselves interest and they're going to be
current right up until the day they default and that loan has
to be foreclosed.
The Chairman. Oh. So by current, you mean the bank is
paying itself? But not that the borrower is paying it. But if
the, I think that's a term of art that I may not have been the
only one who missed. But if the banker was, if the borrower was
continuing to pay, making the payments, could that still be
non-performing?
Mr. Long. No, it needs to be under reasonable payment
terms. I mean, every situation is--
The Chairman. Well, how about the terms that are in the
contract?
Mr. Long. Every situation is different. If you have a
residential development loan, and it is not working and there
is a big hole in that project, and the borrower is only able to
step up and pay interest and the 2-year loan turns into 12-year
loan, that is not acceptable repayment terms.
The Chairman. Well, but that would, say if it was a 2-year
loan, and it would take 12 years, then that wouldn't be, they
wouldn't be making the payments. You may be using terms of art
that, by ``current,'' I mean the laypeople, myself included,
would think that it meant that they were making the payments
they were legally obligated to pay. Is that not what you mean
by current?
Mr. Long. Per the contract, if it's interest only, which
many of these are, they may be current, but the loan isn't
performing. The loan is dead in the water. And many times our
examiners will go in and--
The Chairman. All right, so you're talking, if it's
interest only, even if you're making the interest payments, but
no principal payments, that would be an example.
Mr. Long. Right. If it were making principal payments and
it was a reasonable, it was a reasonable repayment,--
The Chairman. But what do you mean, if they're making
principal payments and it's a reasonable repayment, is that
other than what the contract calls for? How do you, I mean,
because I think that's some of what, at least, has been alleged
to us is, well, I borrowed the money and I'm paying it back on
the schedule I'm supposed to pay it back, but they still, you
know, cut me off. What does ``reasonable'' mean, other than in
the terms of the contract?
Mr. Long. In many of these residential real estate
development loans, per the terms of the contract, there are
curtailments made as the lots are sold and as the houses are
built and sold, and the interest reserve is built in.
Technically, some of these loans can be contractually current,
but they're not going to pay at renewal. The curtailments will
not have taken place. There's a big hole in the project, so in
some cases--
The Chairman. So, even if they are paying back the
principal on schedule, they can be declared non-performing.
Mr. Polakoff. Mr. Chairman, if I could jump in because I
agree with what Tim is saying. If they are paying back
principal and interest, it won't be determined to be non-
performing, but indeed it could be classified and we could
require reserve against it. So, we're probably mixing jargon a
little bit.
The Chairman. Yes, and I think--
Mr. Polakoff. It's agreed, it will not be delinquent but it
indeed, could be adversely classified.
Mr. Long. The point I want to make is, because I hear this
a lot from legislators and bankers that examiners are
classifying loans that are current. Current may not be
performing--
The Chairman. You said that so, but do you not understand
how confusing it is, your use of the term ``current?'' You may
be making all the payments you're supposed to make--
Mr. Long. Congressman, I can be current on my 30-year car
loan, but I'm not performing. That is not an acceptable
performance.
The Chairman. What does that mean?
Mr. Long. That's not acceptable.
The Chairman. How are you current but not performing?
Mr. Long. Because the payments aren't at the, performance
needs to--
The Chairman. Are you making the payments that you are
contracted to? But what, you have a 30-year car loan, you said?
That is a hell of a car. But, so you're paying on your, but
you're making all the payments you're supposed to make.
Mr. Long. Here's my point. You know, performance needs to
relate to something--
The Chairman. No, don't--
Mr. Long. Performance needs to relate to something. And
it's generally the source of repayment.
The Chairman. And performance does not relate to the terms
of the contract is what you're telling me. That when we say
performance, some of us would think, well, you're performing
according to the terms of the contract you signed under which
you got the money. Then you're saying no, performance has more
meaning than that--
Mr. Long. Yes, it does.
The Chairman. Meeting the terms of the contract doesn't
mean you are performing.
Mr. Long. Congressman, in many cases, it means more.
The Chairman. But I think you're using confusing terms and
you need to re-work those terms. At least I, maybe I'm alone,
but I would have assumed that if I were meeting all the terms
of the contract, I was performing under the contract. Now, so
there's a real--
Mr. Perlmutter. Would the gentleman yield?
The Chairman. Yes.
Mr. Perlmutter. I think what you're saying, because I did
some of this work back in my old days, when they classify a
loan, it's because at some point they have made the
determination as a prudential regulator that it's being paid,
but it isn't going to get paid off, or there ultimately is
going to be trouble at the end of the loan. And that's a
judgment call. And what I'm saying is, go back and read the
memo on the judgment calls, please.
The Chairman. And I would just add, I understand that, but
don't call it non-performing. I believe you're confusing what,
at least, people meeting the terms of the contract are
performing. There may be other reasons for canceling it, but I
think rather than saying it's not performing, you ought to say,
in some cases, performance isn't enough. And you have to cancel
it. I apologize for the extra time and the gentleman from
Alabama is now recognized.
Mr. Bachus. Maybe I can get a little extra time. I have a
letter from Jimmy Duncan from Knoxville, one of the Congressmen
that I have tremendous respect for and he wrote to all four of
the Federal bank regulators. And on December 29th, and his
letter was about the same thing we're talking about here. He
said that as the president of one bank, with which I have no
connection whatsoever said, holding one hand up much higher
than the other, I guess he just said, ``Look, I swear this is
happening. What they are saying at the top is not getting down
to the bottom.''
In other words, it goes on to say, when the President, the
Secretary of the Treasury, and other top officials are trying
to unfreeze the credit market and urging banks to make loans,
the bank examiners at the local level are making it almost
impossible to do so. And here's, I think this is part of the
essence of it. And I mean with all respect for all parties. The
examiners, almost none of whom have ever been in the banking
business and thus do not fully appreciate how difficult it is,
are writing up the best, safest loans on the books.
They are doing this even though all payments are current
and even on loans people have, oh, loans to people who have
more than sufficient income and assets to cover the loan. He
goes on to say, and one of the things that I have talked to him
about this letter and to numerous members and they say, the
bankers don't want to say this publicly because they're
actually, they fear, whether it's founded or not, that the
examiners will crack down even more.
But, he says, every bank in east Tennessee has told me over
the last 3 months or so, that the examiners have just gotten
ridiculous. Another banker said, banks cannot make even very
good loans now, strictly because the examiners and their
``CYA'' attitude. I figured out what CYA meant. And he talks
about the economy actually is strong in Knoxville, but one of
the problems that they're having, and Chamber and other people
have said to him, they're pulling lines of credit.
Now, I think today's hearing has been very helpful, because
there has been a lot of dialogue and communication. And I am
seeing the other perspective. But, what I have tried to say to
my colleagues and I issued a statement the week before last,
saying to my colleagues that we're all in this together and we
have to watch what we say and what we do. Because there's a lot
of fear out there, there's a lot of uncertainty, and we ought
to all be constructive and really realize that right now there
are, just, these are really challenging times.
And even though it may be prudent banking, it may actually,
it may appear to be by the rule book but as Governor Duke said,
you know, until there's a floor under the housing market, and
how do you do that, you know, we're going to continue to have
problems. And what people are seeing, they're seeing us pump
hundreds of billions of dollars into some of these companies
and saying, by the Secretary of Treasury, the Chairman of the
Fed, and others, when the economy recovers, these institutions,
we're going to give them some breathing room. We're going to
give them some time, we're going to give them liquidity where
there's none and when the economy comes back, we can get our
investment back.
You know, that what these customers are facing right now
and some of our banks. I mean, they need time. That's what they
need. And that's why mark-to-market is not giving people time
to deal with illiquid assets. You know, before, in these
downturns, they have had time to work through those and it has
taken 4 or 5 years. I had a conversation with the Chairman of
the Fed and he said, it is going to take years to work these
things out. That's true of a developer. That's true of some of
these manufacturers. They're going to need time.
And if you sort of look ahead and particularly if you say,
we're feeding into our calculations things are going to get
worse, boy they will. Because you call in some of these loans
or you increase the terms, you make them pay other than just
interest instead of working with the customer, they'll dump a
lot of inventory on the market. You'll have more fire sales.
Everybody. It's just a downward cycle. And I really want to say
to you, if you're sitting there and you have to make a choice
between, I would make a choice of trying to give people time to
work things out.
You know, we're doing, we're spending trillions of dollars
to give people breathing room. We're spending trillions of
dollars understanding that if the economy doesn't come back,
you know, that money then be gone. But you know, I think we
have to all assume that we're going to all go through this
together and things are going to get better. If we don't, they
won't. And, I don't know.
I really think, and let me say this, my father was a
contractor, and there were times when he had to go to the bank
to pay his men. But then, you know, they knew at that bank
because this was a guy he'd worked with for years. They knew
when times got better, he'd do better. Sometimes he had 20 guys
working for him. One time he had 2,000. And he rode through the
bad times, but his banker was his friend. And, you know, he
needed that banker. And then, in good times, he was a friend of
the bank.
And I think we up here, particularly, we're on a fixed
income. I mean, I'm going to make the same salary whether the
market falls off next month or goes up. You know, we examiners,
we that work for the Federal Government, our salary, but you
know, that's not the way it is in these downturns for most
people. I don't have to worry about my income dropping from
$150,000 to $80,000, but you know if I did, and all of a sudden
it dropped, for a year or two and somebody started looking at
that and said, I'm not sure he can pay this loan, or I'm not
sure he can pay that, I'm going to call in this line of credit,
I would be in trouble. And, I mean, I think that's what we're
facing.
And finally, let me say this, and I usually ask questions,
I usually don't talk, but sometimes it's not even prudent
lending to, you know, if you go to a developer that has a
million dollar line of credit, as one in Birmingham told me
last week, he's paying the interest off, and you call in
$200,000 of that, and he's going to have to liquidate, or put
up for sale one of his two developments, you know, he's going
to have to sell that really cheap and that's going to cause a
domino effect. And you know, I think that actually worsens your
chances.
You might get that $200,000 back, but you may end up losing
in the end. And I'm just going to say to you, my time is up. I
wish you would communicate to your examiners, that if given a
choice between calling in a loan and giving folks time, if you
can do it within the regulations. You know, a lot of times, you
have discretion. We have discretion up here. We make decisions
every day whether to meet with people or whether not to, or
whether to have, is use your discretion, number one with the
attitude that times are tough out there and number two, I don't
assume things are going to get worse. Because they will if you
keep restricting credit or calling in these loans.
So, thank you.
The Chairman. The Congressman from Illinois, Mr. Foster.
Mr. Bachus. I would like unanimous consent to introduce--
The Chairman. Without objection.
Mr. Bachus. --Congressman Jimmy Duncan's statement.
Mr. Foster. Yes. One of the most tragic slices of small
businesses that, you know, come to my office, and I'm sure
everyone else's, are healthy businesses that have good orders
and a profitable business and everything else, and yet their
credit line is being reduced because of the drop in the real
estate value that was used to collateralize, you know, their
loan. And I was wondering, are there any of the--any programs
out there that could provide collateral support, if you
understand what I mean, for businesses in this specific thing?
That is, healthy businesses who are just being clobbered by the
drop in real estate values.
Mr. Polakoff. Congressman, I would offer that--well, first
if you accept the notion that it's the bankers who make the
decision what to do with the loans, not the examiners. So the
examiners don't decide which loans get funded, which loans
don't get funded, which loans get called.
Having said that, though, I would submit that both bankers
and examiners should be looking at the cashflow analysis of the
underlying loan. The collateral is important, but the
collateral really only comes into play if there's a cashflow
crisis. So the cashflow of the loan should support whatever the
line is.
Mr. Foster. And do you believe that is the de facto policy?
Because I have certainly heard from people who are being
squeezed by their bank that part of the reason give is that,
well, look, you know, your factory is not worth anything like
what it was worth.
Mr. Polakoff. Well, sir, there are over 8,000 banks, so I
suspect that there are some bankers who maybe are doing things
a little differently than what I just described. And I suspect
there may be some examiners who are erring way too much on the
aggressive side just to be sure that they don't make any
mistakes. But as a general theme, I believe what I said would
be accurate.
Mr. Foster. Do you think if there was explicit collateral
support, that might encourage some slice of lending? Governor?
Ms. Duke. Congressman, you're right, and particularly a lot
of small businesses that use their home equity to finance their
businesses are being squeezed by that. I think some of the
progress that we have made in talking about loan modifications
and talking about refinance that are now allowing, in the GSE
loans, refinances to take place, even when the loan to value
might be up to 105 percent. I think that could have some help.
On the commercial property side, there is a program under
SBA, and I'm not quite sure what the funding necessary is. But
SBA does have a program where the bank lends 50 percent of the
value and then the SBA loan covers 40 percent and the
businessman has 10 percent. That sometimes helps businesses who
otherwise wouldn't have largedown payments or equity positions
in their buildings.
Mr. Foster. Okay. And those SBA programs are limited by the
funds allocated to them? Are they limited by recent
availability?
Ms. Duke. I have to say I'm not quite sure I understand
that, but I think that's a program that could be very valuable
in the current environment.
Mr. Foster. Okay. Mr. Polakoff, you mentioned that lowering
the loan to value during economic upswings was--could be a
crucial part of keeping from getting into this mess ahead of
time. And do you imagine doing that by formula or by some
political appointee or an independent entity with the wisdom of
Greenspan or--who's going to make that decision?
Mr. Polakoff. Well, I think the folks sitting up at this
table in all likelihood through the FFIEC, which is that
interagency body, need to be chatting about, things like that
which is countercyclical, that the former Comptroller of the
Currency, Gene Ludwig, has given a number of speeches about,
countercyclical regulation and the importance of it. And it's
something as simple as the LTV. It's something as important as
building up the allowance for loan and lease loss in the good
times without the outside accountants and auditors suggesting
that it's inflated.
So there are a number of issues I think we can touch on.
Mr. Foster. Yes. But you could actually imagine that
someone like you would be in a position where the economy is
going and the bubble is going up, and, you know, half of this
committee is asking you, why are you squeezing the bubble when
it's bubbling up? It seems to me that if you could establish
formulas that at least provided a basis level for what the loan
to value ought to be, then--and established a very high
political threshold for changing that formula, that you'd have
a much better defense against political pressure to, you know,
not rain on the parade.
Mr. Polakoff. Yes, sir.
Mr. Foster. I yield back.
The Chairman. The panel--oh, the gentlewoman from Florida
is here and she is the last member here who has the right from
our prior discussions to ask questions. So I will recognize the
gentlewoman from Florida.
Ms. Kosmas. Thank you, Mr. Chairman. Thank you all for
being here today. I wanted to chat with you for just a moment
about a very specific aspect of lending that I am hearing, and
you've heard people sort of nipping around the edges of this
all morning, I believe. But I'm dealing with a lot of people in
my district, and people coming to me here in Washington who are
currently operating their businesses, and it could be anything
from, you know, $500,000 to $100 million a year business based
on lines of credit that they rely on.
These are commercial loans, which, as you know, generally
have what I call a rollover, 3 years, 5 years, 7 years,
whenever they become due to be renewed. And they, as you have
heard others say, are being denied the opportunity to renew or
rollover those loans.
And I have been saying at every turn that I have an
opportunity to say it, is that this is what I call, you know,
Tier 2 of the economic problems that we're seeing in this
country. Tier 1 may be the housing that you talked about,
Governor Duke, but Tier 2 being those businesses, and I'm not
talking about small businesses less than ten employees that
were discussed this morning, but I'm talking about other
businesses, whether it's shopping centers, hotels, leisure
activities, cruise ships, time share businesses, or any other
kind of business, and there are lots of them. I happen to be
from Florida, so thus the tourist interest specifically.
But I'm very, very concerned about this particular group of
borrowers and their inability to renew their lines of credit
that keep them in business, because I think if we think a
neighborhood of empty homes is a problem, when we start to see
shops and other things literally closing their doors, we're
going to understand that we have a whole different problem on
our hands. And, obviously, the ability for these businesses to
continue to operate helps the employment statistics and helps
the housing statistics, and it keeps some things at bay that
would be significantly worse should they not be able to get the
credit.
So my question I guess to you is, what is it perhaps that
you are regulating, or is it the banks and lenders that is
putting this pressure on people who have completely performing,
compliant loans and lines of credit that are unable to get them
renewed or rolled over so that they can keep their businesses
going? What do you think is at the root of that? And then what
would you think would be some way that we can mitigate it or
resolve it? Would anyone like to respond?
Mr. Polakoff. Well, I'll take a stab, and my colleagues
will help me. I think, as Tim said earlier, there are a number
of institutions that want to diversify their loan portfolio.
The two consistent problems within institutions that are
distressed is either a concentration of risk or excessive
growth. And I think we're finding more and more institutions
that need to diversify their portfolio or believe they need to
diversify their portfolio to better spread out the risk among
various industries, various borrowers.
Many times, it is simply a strategic decision by the board
of directors or the executive management of the institution.
Ms. Kosmas. Thank you. Did anyone else want to respond? I
would only say in response to that, I'm wondering whether
anybody is looking at the big picture. Because if what you're
saying is that individual institutions or banks or lenders are
making decisions based on their individual portfolio, that we
could have a sort of a stealth crisis going on here that could
explode and, as I said, turn into something much worse than
what we're currently experiencing if what I'm hearing is as
consistent across-the-board as I believe it to be, then how do
we resolve it?
Ms. Duke. I'll take a stab at it if you like. I think
Congressman Bachus may have put his finger on the problem. It's
not necessarily the most creditworthy borrowers or the
healthiest banks. It's when you have banks that have some
difficulties of their own, and they can't be as accommodating
to long-term customers as they might have been otherwise.
And so we have this whole chain of the government being
more patient in working with the banks in order to--or working
with the bank regulators so that they can work with the banks,
so that they can then work with their customers. And in a lot
of these cases, the customers are under stress themselves.
Their sales are down and their collateral values are down. And
so if at the same time the banks are in weak condition or
concerned about criticism from examiners, then they are not as
willing as they would have been otherwise to work with those
borrowers until they get to better times.
And I think that's the case that we really need to find a
way to attack. I think you're exactly right.
Ms. Kosmas. Again, I guess my question would be, is there
anybody looking at the big picture of what the cumulative
difficulty of this is, rather than to say each bank has its own
problems. And, again, I refer back to the opening comment. I'm
talking about completely compliant, performing loans, which
have not seen any difficulty at all and the businesses have a
business plan that is working, and there's no reason to suspect
that they wouldn't continue to function in the same way that
they have for as many--in some cases, many, many years.
And the big picture question is one, and then, Mr.
Polakoff, if you're going to address that, I was wondering
whether your 4th suggestion as a solution which referred to
countercyclical regulations might include anything that would
allow lenders or banks to perhaps set aside these performing
loans and have them counted in a different way or set aside
from the other regulatory restrictions?
Mr. Polakoff. Congresswoman, I have a number of thoughts. I
think you touched on an interesting point that I had not
thought about before, which is assessing in a horizontal way
what industries may be finding themselves limited, limited
access to capital. That's an interesting point. We hadn't
thought about that. There are ways for us to do that, so, I
think that's a takeaway for us we should consider.
The countercyclical aspect, one area that we hadn't
discussed, is literally the notion of capital. Right now, the
regulators tend to look at institutions and have a standard.
All institutions should be well capitalized. Is it rational for
us to say all institutions should be well capitalized both in
the good times and in the bad times, or are there ways for us
to say, in the most distressed times, like what we're facing
right now, maybe it's okay to be adequately capitalized.
Now the reality is, there are some triggers that are
impacted by an adequately capitalized institution. Maybe we
need to look at those and make some determinations as to
whether they're relevant in today's economic cycle.
The Chairman. We're running out of time. If I could borrow
15 seconds from the gentlewoman, I would say that's exactly,
the last point, where I think mark-to-market comes in. That is,
are they inadequately capitalized because of some major
failure, or are they inadequately capitalized because of a
mark-to-market on some longer-term assets? And I certainly
think the capital reaction ought to be different in those
cases. That's very much what we have been trying to get at.
I thank this panel.
Mr. Bachus. Mr. Chairman?
The Chairman. The gentleman from Alabama first, and then
the gentleman from Colorado.
Mr. Bachus. I have a mark-to-market question, and basically
what it is, I'm not one who wants to suspend mark-to-market. I
think the revisions are going to be good. But I also think
maybe that we could rethink capital requirements or moving to
capital requirements that are more countercyclical, that
recognize the environment we're in, which is exactly what you
have said. But I will submit that for the record for you all to
make--
The Chairman. Yes. And I think on that last point, we have
a lot of agreement on that. The gentleman from Colorado is the
last--
Mr. Perlmutter. For the record, thank you, Mr. Chairman, on
the mark-to-market issue, I want to introduce a letter dated
March 23, 2009 from former FDIC Chair Isaac, written to you,
Mr. Chairman, and the ranking member, on mark-to-market and the
changes, and I would like to give a copy to you, Mr. Kroeker,
so that you guys can continue to work on this. Thank you.
The Chairman. And I reiterate, if there are any statutory
changes that are needed for you to act in that way, we need to
know them. The panel is thanked and excused, and the next panel
will come forward. Let's move quickly, please. We will convene
the second panel, and I want to begin by--but before we do, let
me say this. And I'm going to call on my colleague, Mr. Wilson,
but I have consulted with the ranking member. We have had a
very long day.
I think what we most want to hear is what this panel has to
say about what you have just heard. So in consultation with the
Ranking Member, I'm going to ask everyone to speak for 7
minutes rather than 5 minutes. We probably won't need a lot of
questions. We do have a markup at 2:15, but I think we believe
it is much more important for us to hear your comments on what
we have just had the conversation about than to ask you further
questions. So, with that, you'll each have 7 minutes if you
want, and then there will be time for a couple of rounds of
questions. And with that, I want to recognize my colleague from
Ohio, Mr. Wilson, to make an introduction.
Mr. Wilson of Ohio. Thank you, Mr. Chairman. Thank you for
giving me the opportunity to introduce a fellow Ohioan. Steve
Wilson is here on behalf of the American Bankers Association.
Steve is chairman of the board and chief executive officer at
LCNB National Bank in Lebanon, Ohio, and past chairman of the
Ohio Bankers League.
He has been very active in the Ohio community, serving as
board member of the Federal Reserve Bank of Cleveland, chairman
of the Advisory Board for Miami University in Middletown, and
current board member and treasurer of the AAA in Cincinnati, a
board member of the Harmon Civic Trust, a trustee of
Countryside WMCA in Lebanon, and a board member of the Warren
County Foundation. He is a member of the Area Progress Council
of Warren County, and he serves as the vice chairman of the
Warren County Port Authority.
I'm pleased to have an Ohioan here to testify, and I'm
proud that he's a banker who is actively investing in our
community. In January of 2009, LCNB National Bank approved
$11,593,000 of loans to individuals, $6,892,000 in loans to
businesses, and $18,353,000 in loans to municipal governments,
including Salem Township in my district in southeastern Ohio.
Steve, welcome to our committee and thank you for coming
today. We look forward to hearing from you.
The Chairman. Mr. Wilson, please go ahead for 7 minutes.
STATEMENT OF STEPHEN WILSON, CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER, LCNB CORPORATION AND LCNB NATIONAL BANK, ON
BEHALF OF AMERICAN BANKERS ASSOCIATION (ABA)
Mr. Wilson. Thank you very much. Chairman Frank, Ranking
Member Bachus, and members of the committee, as introduced, my
name is Steve Wilson. I am chairman and CEO of LCNB National
Bank. We have over $650 million in assets and have served our
community for 131 years. I appreciate the opportunity to
testify on behalf of ABA.
Everyone is frustrated about the current confused situation
surrounding the Capital Purchase Program (CPP). We had hoped
that by the time we were here today, the mixed messages and
disincentives would have disappeared, but in fact they are
worse today than they ever have been. If programs to stimulate
the economy are to reach their full potential, the confusion
must be clarified and the disincentives corrected
Conflicting messages have characterized the Capital
Purchase Program from the beginning. Banks were actively
encouraged by Treasury and banking regulators to participate.
Indeed, many healthy banks decided to participate even though
they were already very well capitalized. And even though they
were very nervous at the time, that already the program
requirements could change dramatically, and unilaterally, at
the will of Treasury or Congress.
My bank, which is well capitalized, applied for and
received $13.4 million of CPP in January. I am proud to point
out that we were given that opportunity to receive these funds
because of our past and current performance in providing loans
to those in the communities we serve. We are strong and we are
secure. The CPP funds enabled us to respond to our customers
when they need credit. In fact, we continue to make loans,
sticking to our traditional commitment of making responsible
loans that make good economic sense for both the borrower and
our bank.
I would also note that we sent Treasury our first dividend
check of $67,000 last month. The first dividend payment for all
CPP banks totaled $2.4 billion, which shows that CPP is truly
an investment by the government in health banks.
Over the last few weeks, banks have received messages that
discourage participation in the CPP. But it goes beyond banks
that have received the capital injections. The entire industry
is unfairly suffering from the perception of weakness
perpetuated by government-created mixed messages. Banks hear
the message to continue to lend, to help stimulate the economy.
But they also hear messages that pull them back from lending,
from field examiners that may apply overly conservative
standards, requiring severe asset writedowns; from FDIC premium
assessment rules that will take $15 billion out of the industry
in the second quarter; and from misplaced accounting rules that
overstate economic losses.
Any one of these challenges could be handled on its own.
But taken collectively, the impact is an absolute nightmare for
banks. All of these forces work against lending, which is so
critical to our economic recovery. Clarity is so important
right now, particularly for CPP participants. The continued
speculation of further government involvement continues to
unnecessarily erode consumer confidence in the Nation's banking
system. I cannot say strongly enough that the investment of
private capital will not return until the fear of further
government involvement or dilution of private equity
investments in the banking system has been significantly
abated. Private capital, rather than taxpayer money, is the
foundation of our economic system. What the private capital
markets are looking for is a steady hand and a predictable
government. Wary investors will fear that the government will
further change the rules that were in place when banks signed
the contracts with the Treasury. That is why it is so critical
that the role of government be clearly defined and limited.
I thank you for the opportunity to testify today, and I'll
look forward to answering questions. Thank you.
[The prepared statement of Mr. Wilson can be found on page
176 of the appendix.]
Mr. Wilson of Ohio. [presiding] Sorry, Mr. Ranking Member,
sir. Let me repeat that. We will now hear from Brad Hunkler,
vice president and controller, Western & Southern Financial
Group, on behalf of the Financial Services Roundtable.
STATEMENT OF BRADLEY J. HUNKLER, VICE PRESIDENT AND CONTROLLER,
WESTERN & SOUTHERN FINANCIAL GROUP, ON BEHALF OF THE FINANCIAL
SERVICES ROUNDTABLE
Mr. Hunkler. Thank you. I would like to express my
gratitude to Chairman Frank and Ranking Member Bachus and the
committee for the opportunity to be here today and to speak on
behalf of the Financial Services Roundtable and Western &
Southern Financial Group.
The role of the financial services industry, including
nonbanking institutions, needs to be a significant component of
your work in expanding credit to consumers and commercial
enterprises. The financial services industry invests in all
types of consumer loans, including mortgages, credit cards,
auto loans, student loans, and many others. The primary
investment vehicle for these loans for nonbanking institutions
is through securitization.
The amount of consumer lending financed by nonbanking
institutions is critically important to maintaining adequate
lending capacity for the broader economy. Unfortunately,
though, there have been many problems with these assets for the
financial services industry as a whole. As such, the industry
has been adversely impacted by a lack of regulation, oversight,
and clarity of the securitization process. Certainly the
economic conditions, such as high unemployment and falling
housing prices, have adversely impacted the collateral of these
assets, but other noneconomic factors that could have been
avoided also have contributed to the losses.
As noted in many media reports, this includes rampant fraud
in the mortgage origination and underwriting process, poor
underwriting standards that overemphasized rising housing
prices and did not adequately consider borrower
creditworthiness, monoline insurers whose risk exposures were
too highly correlated, inadequate analysis and stress testing
from the rating agencies resulted in over-inflated ratings, and
a lack of transparency relating to the underwriting
collateral--underlying collateral and deal structure which
contributed to inefficient price discovery.
In addition to the liquidity--I'm sorry. The issues are--
these issues are specific primarily to the nonagency mortgage
markets. The industry has also been adversely impacted by lack
of transparency and regulatory oversight of the student loan
market, where investors who purchased auction rate preferred
securities for short-term liquidity needs, are now stuck with
illiquid long-term securities with uncertain payment
provisions. Some of these issues have been resolved for
consumers but not large institutions like insurance companies.
In addition to the liquidity and valuation challenges,
mark-to-market accounting has compounded the problems for the
financial services industry. Some institutions generally hold
whole loans that are not required to be fair valued, while
others, including institutions companies, hold mostly
securities which are required to be mark-to-market. These are
the areas I ask Congress to focus on going forward so that when
economic conditions improve, institutions will return to the
securitization markets.
The industry has raised the issue of mark-to-market
accounting concerns since the first major application of market
value accounting in FASB Statement Number 115. At the time of
early deliberations on FAS 115 in the late 1980's, interest
rates were at all time highs, primarily Treasury rates. The
insurance industry had extraordinary unrealized losses on its
investment portfolios, and most, if not all, insurance
companies would have reflected negative book values at that
time. The industry on the whole question of usefulness or the
meaning of reflecting negative book values due to high interest
rates having a long-term cashflow-oriented investing strategy
allows insurers to manage through periods of interest rate
volatility.
Today, excessive speculation in the markets has made market
prices potentially deceptive when reflected in the equity of
financial statements. Market participants speculate more on
assets--can speculate more on assets' ability to increase or
decrease in value than on its inherent ability to provide
future cashflows. This speculation has led to market bubbles
and busts. Adding market values to financial statements in this
environment can be misleading. During market bubbles, financial
statements can illustrate a false wealth effect. This can lead
to excessive risk-taking and over-leveraging nonexistent
equity. During periods of market declines, the opposite is
true. As the market values decline, reported losses in excess
of real losses can lead to restricted risk-taking and capital
preservation. This can lead to irrational exuberance in bubble
periods, irrational fear during the bust. While markets can
accommodate, potentially accommodate this type of volatility,
the sanctity of the Nation's financial institutions needs to be
immune to it.
To address the issue of procyclicality, some would suggest
providing a countercyclical regulatory capital model and
retaining market values and other procyclical indicators in
reported financial statements. I do not believe this represents
a sound approach. Reported financial statements that show
excessive volatility and potentially negative book values can
fuel adverse consumer activity. If regulatory reporting shows
strong financial strength through this reporting mechanism, it
has the potential to be dismissed, or even worse, it can
discredit the regulatory model altogether.
Market prices do, though, provide beneficial information
for financial statement users. They provide an objective source
of value and can, during normal market cycles, be a proxy for
value. Also, market prices are the value that can be exchange
of assets or required to be liquidated. In addition, some
assets are acquired for purposes of trading and should
therefore reflect market prices in the financial statements.
Investors have spoken clearly that fair value accounting
does provide meaningful information. But the desire for
objective financial data has led to the replacement of
principles of prudence and conservatism in accounting with fair
value accounting. Therefore, I believe the primary measurement
should be cost for cashflow investors. Losses should be
recorded when cashflows are impaired, up to the amount of the
impaired cashflows. Then to accommodate the needs of investors
and to provide transparent financial information, fair value
supplements can be provided to investors that would accompany
earnings releases and reported results. These fair values could
represent exit values and reflect the impact of liquidating
financial instruments if required.
While the FASB may have a more than adequate due process in
the exposure and issuance of new standards, the problem is that
the preparer concerns have had little weight in the ultimate
decision on the issuance of new standards. Investor concerns,
primarily the voices of large investor organizations, have
driven the FASB agenda in support of fair valuing all financial
instruments, and other nonfinancial instruments.
What is interesting, though, is as the FASB has continued
to introduce new fair value measurement requirements, equity
analysts continue to guide companies to exclude the results of
these fair value changes from the core operating earnings they
report in their earnings release. What equity analysts are
interested in is understanding run- rate earnings and growthin
earnings so that they can determine the fair value of the
company, as opposed to reflecting the results on the balance
sheet.
Congress could potentially play a role in the oversight of
the FASB due process, but I think we want to stress the
importance of independence in the standard-setting model. We do
believe that is critical, but we would welcome some oversight
to ensure that preparer concerns are adequately reflected in
the due process of FASB. It's a good due process but doesn't
always result in all concerns being adequately addressed. I
appreciate the opportunity to be here and welcome any questions
you have.
[The prepared statement of Mr. Hunkler can be found on page
112 of the appendix.]
Mr. Perlmutter. [presiding] We will now hear from Michael
S. Menzies, Sr., president and chief executive officer of
Easton Bank and Trust Company on behalf of the Independent
Community Bankers of America.
Mr. Menzies?
STATEMENT OF R. MICHAEL S. MENZIES, SR., PRESIDENT AND CHIEF
EXECUTIVE OFFICER, EASTON BANK AND TRUST COMPANY, ON BEHALF OF
THE INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)
Mr. Menzies. Thank you, Mr. Chairman. Thank you, Ranking
Member Bachus. It is certainly my honor to be here.
As you said, I am president of Easton Bank and Trust from
the beautiful Eastern Shore of Maryland. I am especially proud
to be the new chairman of the Independent Community Bankers of
America.
We are a $170 million bank on the Eastern shore, a
community bank, a Subchapter S bank. I am thrilled to represent
some 8,000 banks from around this Nation and our 5,000 members
in the ICBA to talk about exploring the balance between
increased credit availability and prudent lending standards.
Notwithstanding Mr. Long's concern that community banks are
overextended, and community banks need to be prepared for a
worse environment, the vast majority of community banks are
well capitalized, well managed institutions, actively
participating in the economic recovery by lending to small and
medium-sized businesses and consumers in their communities.
Community banks represent thousands of communities
throughout the Nation and they make relationship-based
decisions. We do not make decisions based solely on scoring
models or rating agencies, algorithms or computer simulations.
However, the community bank regulatory climate is causing
many community banks to unnecessarily restrict lending
activities.
For one, there appears to be a disconnect between the
banking regulators in Washington who are promoting lending, and
we are hearing this, and the field examination staff who
require overly aggressive write-down's and reclassifications of
viable commercial real estate loans and other assets.
Yes, Mr. Bachus, what they are saying at the top is not
reaching the bottom.
Community bankers report that examiners require write-
down's or classifications of performing loans due to the value
of collateral irrespective of the income or the cash flow or
the liquidity of the borrower.
By placing loans on non-accrual, even though the borrower
is current on payments, discounting entirely the value of
guarantors, substituting the examiner judgment for that of the
appraiser, and de-valuing loans merely because it is lying in
or close to an area of high foreclosure levels, this all
reduces credit available to communities.
What we expect is examiners to be more thorough and careful
with their examinations during an economic downturn. Based on
what we have heard from our members, we believe that in many
cases, examiners have gone too far.
Excessively through exams that result in potentially
unnecessary losses of earnings and capital can have an adverse
impact on the ability of community banks to lend, since
community banks are the prime engine behind small business
lending, any contraction of lending further exacerbates the
current economic downturn and impedes the flow of loans to
creditworthy borrowers.
Community banks are not de-leveraging. We are leveraging up
and we need to continue to leverage up.
ICBA does appreciate the recent overtures from banking
regulators to improve the examination environment for better
communications between banks and regulators, and the education
of agency field staffs on the consequences of overly
restrictive examination practices on credit availability.
We have several recommendations in our written testimony
that would create a regulatory environment that promotes
community bank lending. I would like to highlight a few.
Number one, examiners must take a long-term view toward
real estate held by banks as collateral on loans and not demand
aggressive write-down's and reclassifications of loans because
illiquid or dysfunctional markets have forced sales.
Real estate assets are long-term assets, and should not be
based upon the short-term business cycle valuations that we are
facing today.
Number two, unlike some large money center in regional
banks, the hallmark of community bank loan underwriting is a
personal relationship with the borrowers we lend to, and
character does in fact count in community bank lending.
During this economic crisis, regulators should allow a bank
to hold a small basket of character loans from borrowers who
have a strong record of meeting contractual obligations and
where there are other indicators that support the repayment of
that loan.
Loans in the basket would be exempt from strict
underwriting standards and could not be criticized by examiners
as long as they are performing. The amount of loans that could
be held in such a basket might be a percentage of capital.
Three, the examination in the field process should be
strengthened to make it easier for bankers to appeal without
fear of examination retaliation.
Agency ombudsman determinations should be strengthened and
the ombudsman made more independent.
Four, the FDIC should find an alternative, and we are
pleased they are seeking an alternative, to the 20 basis points
special assessment which would consume much of bank earnings in
2009 and further constrain lending.
The special assessment should include a systematic risk
premium and be based on assets. I have never lost based on
deposits and liabilities.
Five, OTTI accounting rules are distorting the true value
of financial firms and needlessly exacerbating the credit
crisis. This does not serve the best interest of investors or
the economy.
We appreciate the committee's efforts to resolve this
accounting issue. We believe FASB's recent proposal could be a
positive step in resolving mark-to-market problems. We will be
providing further suggestions and clarifications to the FASB.
If there is time later, I would be happy to comment about
this subject to performing loans, I have strong opinions about
the meaning of a ``performing loan'' in today's regulatory
world.
Thank you so much for this opportunity.
[The prepared statement of Mr. Menzies can be found on page
151 of the appendix.]
Mr. Perlmutter. Thank you for your testimony, Mr. Menzies.
Now, we will turn to Mr. Randall ``Truckenbrodt.'' Is that
close?
Mr. Truckenbrodt. Close.
Mr. Perlmutter. American Equipment Rentals on behalf of the
National Federation of Independent Business.
Mr. Truckenbrodt?
STATEMENT OF RANDALL TRUCKENBRODT, AMERICAN EQUIPMENT RENTALS,
ON BEHALF OF THE NATIONAL FEDERATION OF INDEPENDENT BUSINESS
Mr. Truckenbrodt. Thank you. Mr. Chairman and members of
the committee, I want to thank you for allowing me the chance
to tell my story.
My name is Randall Truckenbrodt. I am a small businessman
and member of the National Federation of Independent Business.
I am in the construction equipment rental business in Florida,
Illinois, and Indiana.
I and my employees have felt the economic downturn, and I
am doing everything I can to stay in business and keep my
employees working.
While many policy leaders have talked about improving
access to credit for small business, my problem, like most
small businesses, has been just trying to keep the doors open
and my employees on the payroll.
Unfortunately, my experience with Bank of America has made
that prospect more difficult. I started doing business with
Bank of America about 7 years ago in Fort Lauderdale, Florida.
The relationship started with a small line of credit of
$250,000, with a company that was in need of rebuilding. After
accomplishing that feat, the lending officer was impressed and
wanted to do more deals.
Over the years, we have done quite a few mortgages with
Bank of America. In August of 2008, I received a call from an
executive at the bank's headquarters stating that I was in
their work-out department. The work-out department of a bank is
where they work on non-performing or underperforming loans.
I asked why I would be in a work-out department since I had
never missed a payment on any loan with Bank of America or any
bank for that matter over 32 years that I had been in business.
The executive stated I was in the work-out department
because one of my companies, American Equipment Rental in
Pompano Beach, Florida, was operating at a loss, to which I
replied, ``So what.''
I reminded him that I had never missed a payment with the
bank and have no intention of stopping payments going forward.
We discussed the probability of the company making a profit
going forward. I explained that forecasting a profit is
difficult to predict in this credit market because it is
holding up construction projects and the fact that the real
estate market had been overcooked for years in Florida.
I further explained that we were changing some things to
help the recovery process and that I have a pretty good track
record of fixing our businesses when they come under outside
pressures.
After several months, Bank of America advised me that it
would be sending me terms for a waiver letter to be issued. I
have had 25 to 30 waiver letters issued by banks through the
years, and they have always been issued at no charge. Waiver
letters protect the bank's rights while allowing a customer to
work their way back into compliance.
Since late November, Bank of America sent three proposals
explaining their terms for issuing a waiver letter. In the
first letter, the Bank of America executive indicated he would
charge my company $59,000 in fees and require the company to
re-appraise all the mortgaged properties at an estimated cost
of $25,000. The bank was proposing to impose all these fees on
an not profitable company that it used measuring profits
against. I have never heard of anything so ridiculous.
The rest of the conditions of the waiver terms included a
statement that I would agree to release all claims against Bank
of America. The natural question is, why would I be asked not
to sue them if they are doing the things right?
We received 4 of these demand letters over a period of 6
weeks, each one offered to lower the fees in order to get this
waiver letter issued.
The third letter indicated it would waive all fees and
costs if we would agree to change the maturity of these long-
term notes from 2025 to April of 2009. Of course, to sign a
statement not to sue them.
The final offer imposed on the last day of this past year a
default interest rate of 12.95 percent, 6 points higher than
the current rate.
I refused to agree to their terms. One of my concerns was
the difficulty in getting these small business loans placed
elsewhere, and what it would cost the business to replace them.
These tactics are very troubling especially since they are
directed at a small business that has always paid its debts. It
bothers me that these tactics might be directed at small
business owners all over this country, some of whom might not
put up a fight or even understand that they can fight back.
Imagine if a bank were doing this to a homeowner who was
granted a mortgage based on a certain income level but then
lost his job. Would the bank then demand additional fees even
though the homeowner continued paying his mortgage from
savings? Would the bank start reappraising the property and
charging the homeowner the cost?
In my case, it feels as though Bank of America is doing
everything in its power to drive my company towards bankruptcy.
Over the past 6 weeks, the bank has initiated without
consent the reappraisal of the properties and they have not
communicated any information about these appraisals after
numerous requests.
I have never had an appraisal of real estate where a
request for more capital was not the basis, such as a
refinance.
Finally, I was instructed last week that they intended to
raid our accounts for the cost of the appraisals. I will fight
these fees in court, if necessary, and have advised Bank of
America of that fact.
Bank of America has received billions of dollars in
taxpayer bail-out money. It was my understanding that the money
was supposed to be used to help individuals and businessmen
through this rough economy. Instead, they have used it to fund
a war against their customers.
I have never asked for or expected help from the
government, but I also was not expecting an attack on my
business from a bank where all my bank loans are current.
It seems to me that Bank of America is trying to pull cash
out of my business to benefit theirs. I wonder if I am the only
small business they are doing this to.
If Congress treated Bank of America the way they have
treated their customers, they would be out of business, and
everything that has been said today applies to me. There is so
much more to this story, but I appreciate the opportunity to
tell it.
Thank you.
[The prepared statement of Mr. Truckenbrodt can be found on
page 172 of the appendix.]
Mr. Perlmutter. Thank you, Mr. Truckenbrodt.
Those buzzers mean we have some votes. I think we can get
through Mr. Berg, and probably Mr. Wilson, and then hopefully
Mr. Manzullo before we take a break.
Mr. Richard S. Berg will be our next witness. He is the
president and chief executive officer of Performance Trust
Capital Partners, LLC.
Mr. Berg?
STATEMENT OF RICHARD S. BERG, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, PERFORMANCE TRUST CAPITAL PARTNERS, LLC
Mr. Berg. Thank you, Chairman Frank, Ranking Member Bachus,
and members of the committee for inviting me to speak today.
My name is Richard Berg. I am the CEO of Performance Trust
Capital Partners. We are a broker-dealer specializing in
evaluating the risk rewards of fixed income cash flows,
including mortgage backed securities. Our customer base
consists of community banks throughout the United States who
also lend.
My written testimony obviously is beyond the 5-minute span,
so I am going to summarize it in the following points, and
really was interested in the discussion on the securitization
market that no longer exists, because I will address that in
this.
Here is question number one. What is the definition of a
``toxic asset?'' We are spending trillions, we ought to know
what that is.
Number two, what makes an asset toxic?
Number three, what are the automatic ramifications once an
asset is considered toxic?
Number four, are there assets called ``toxic'' that should
not be called ``toxic?''
Number five, what can be done to de-toxify assets?
One of the keys to understanding the toxic problem can be
found in recognizing how the use of letter ratings hard coded
into investment policies, regulations, collateral agreements,
counterparty agreements, can become an automatic mechanism for
labeling assets as ``toxic.''
For regulated institutions like banks and insurance
companies, toxic assets are typically identified by the credit
ratings provided by the rating agencies.
As you may know, the rating agencies' scale typically goes
from AAA to AA to A to BBB to BB to B, all the way down to the
letter D.
Most regulations for financial institutions and insurance
companies set BBB as the lowest rung for investment grade.
Corporate bonds below investment grade are called ``junk.''
Mortgages and other structured product below investment grade
are called ``toxic.''
Let me give you a simplified example. Consider in 2006 that
a lender sold 1,000 loans to good creditworthy borrowers and
those loans were then sold in the marketplace, packaged as a
normal mortgage backed security. Let us say there was a AAA
tranche created off that mortgage backed security.
Three years later in 2009, the housing market deteriorated.
The economy deteriorated. More people are delinquent than were
originally expected.
Let us suppose for the sake of argument that we know enough
loans will go bad so the investor of this AAA security will not
receive the full 100 percent but will receive 99 percent of the
contractual cash flows.
The impact on the yield of the organization or the
institution is minimal, maybe going from 6 percent down to 5.95
percent.
I believe everybody in this room will agree that while this
is not perfect, this asset is clearly not toxic, but rather
remains a high quality one.
I am not sure that everyone in this room is aware that this
security, because it is expected to not receive 100 percent of
its contractual cash flow but 99 percent, would be rated CCC.
Stated another way, 100 percent of this asset backed by
thousands of individual loans is considered toxic because of a
very small percentage of loans that default.
Now that the security is well below investment grade, what
are the automatic ramifications hard coded into policies,
accounting, collateral agreements, and regulatory standing,
like the system?
Your capital goes down. There are few buyers of CCC assets,
so market prices go down. You have an increase in troubled
assets, you are becoming a troubled bank. OTTI says you have an
impairment problem, we are going to mark-to-market.
Counterparty agreements are problematic, you have liquidity
problems. You have ineligible collateral. You have more
liquidity problems.
What is the result of this? You are not going to have a lot
of lending and you have a frozen securitization market.
In essence, this security went from a AAA, high quality,
liquid, pledgeable security, to 100 percent highly speculative,
very illiquid, non-pledgeable security because of a CCC rating
based on an expected 1 percent loss in cash flow.
Although the economic difference between getting 100
percent of cash flows and 99 percent is insignificant, the
ramifications to a financial institution is devastating because
in most cases, the letter rating is hard coded into all the
rules, and below investment grade becomes a cliff event.
For decades, letter ratings made sense because all issuers
were single obligor issuers, and the rating tried to describe
the probability of default, because default was either zero or
100 percent.
For a multiple obligor backed security, like most of the
securities backed by loans, the letter scale makes no sense. We
know there will be defaults. The question is how many.
The rating scale for multiple obligor assets should be
numerically based, because so many existing policies,
agreements, collateral agreements, regulation, accounting, is
hard coded into these letter ratings.
Billions if not trillions of multiple obligor securities
are now considered toxic because they are simply below
investment grade, even though many of them will actually incur
minimal loss.
We need to change the letter ratings for multiple obligor
securities immediately to a numerically based rating system, to
more accurately reflect the structure and the risk of multiple
obligor securities.
Thank you in this late moment for allowing me to present my
opinions.
[The prepared statement of Mr. Berg can be found on page 63
of the appendix.]
Mr. Perlmutter. Thank you, Mr. Berg. We really appreciate
your testimony.
Mr. Polakoff, I am glad you are still here to listen to
this, and I hope that when you leave today, you will share with
Mr. Long, Mr. Kroeker, Governor Duke, and Mr. Gruenberg what
you are hearing.
This is what we are hearing all the time. It is with
justification that we are concerned about the actions that are
being taken on behalf of the regulators, that it is just
contracting credit at a tremendous rate. We are pouring money
in at the top and it evaporates at the bottom.
Mr. Manzullo, why do we not hear from Mr. Wilson and let
him ask his questions. Do you want to take a break now, go
vote, and the three of us will ask questions when we come back?
Mr. Wilson of Ohio. Maybe we can explain to them what we
are doing.
Mr. Perlmutter. Since I do not often sit in the chair, I
will apologize. We are voting now on a couple of matters. We
will leave and run over to the Capitol. We have two votes.
We will probably be back here in about half-an-hour. With
your indulgence, gentlemen, let us take a recess, and when the
votes are over, we will be back here to ask you some questions.
Thank you very much.
[recess]
The Chairman. I apologize to the witnesses. The hearing is
concluded. It was very helpful for us to have this, and I
apologize for my oversight that you were kept here
unnecessarily during the votes. I apologize.
The hearing is concluded. We are going to start the mark-
up. The witnesses are excused.
Again, it is my error and I apologize for it.
[Whereupon, at 2:23 p.m., the hearing was adjourned.]
A P P E N D I X
March 25, 2009
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