WASHINGTON — After months of complaints to Congress about overzealous examiners, frustrated community bankers took the matter one step further on Friday by pressing a House panel to pass legislation that would force regulators to be more lenient.
Under a bill by Rep. Bill Posey, R-Fl., banks would be allowed to treat non-accrual loans as accrual for capital purposes if they are current, amortizing, not paid from an interest reserve account and have not been more than 30-days delinquent within six months.
Community bankers said the legislation, which does not have the support of regulators and faces an uphill battle in Congress, is necessary because examiners are going overboard in declassifying loans, forcing bankers to hold higher capital than necessary.
"The misplaced zeal and arbitrary demands of examiners are having a chilling effect on credit," said James McKillop, president of Independent Banker's Bank of Florida, who testified on behalf of the Independent Community Bankers of America. "Good loan opportunities are passed over for fear of examiner write-downs and the resulting loss of income and capital."
But regulators warned the legislation was dangerous, saying it undermined examiners' ability to ensure the safety and soundness of banks.
"This proposed legislation would result in an understatement of problem loans on banks' balance sheets and an overstatement of regulatory capital," George French, deputy director of the Federal Deposit Insurance Corp.'s division of risk management supervision, said in written testimony.
Despite sympathy from both parties for bankers' woes, the issue appeared largely partisan on Friday, with Republicans arguing the bill would help and Democrats looking for other, better ways to correct the situation.
Posey, who has attracted 39 Republican co-sponsors to the legislation, cited cases where banks were penalized even though payments were still being made. For example, he spoke of instances where the borrower's parents made payments while the borrower was out of work, or regulators felt the borrower should not have been able to make payments because of the poor economy.
"Such subjective overregulation makes banks less inclined to lend," Posey said.
Posey and other Republicans on the House financial institutions subcommittee flashed occasional anger at the banking regulators who testified, saying that borrowers and lenders in their districts tell story after story of unfair treatment by examiners.
"The pendulum has swung way too far," said Rep. Michael Grimm, R-NY. "Every banker I've spoken to says they're afraid of their regulator."
Although modified loans are typically treated as non-accrual for six months, the bill would also allow such mortgages to be considered accrual so long as it met the legislation's other standards.
Additionally, the bill would require the Financial Stability Oversight Council to study how best to "prevent contradictory guidance from being issued" with respect to loan classifications and capital requirements. The legislation would sunset after 2 years.
But Democrats said Posey's bill was not the right way to address these issues.
Rep. Carolyn Maloney, D-NY, asked McKillop whether there might be other ways to help community banks without impacting capital. "There might be," McKillop acknowledged.
The Democrats' skepticism won support from Simon Johnson, a professor of entrepreneurship at the MIT Sloan School of Management.
"Banks need capital as a buffer against losses," Johnson testified. "The FDIC has a responsibility to ensure there is an acceptable level of capital in these banks."
"I would caution you against this kind of regulatory forbearance," he said. "I think it will lead to more trouble down the road."
Jennifer Kelly, senior deputy comptroller for midsize and community bank supervision at the Office of the Comptroller of the Currency, also expressed concerns.
In her written testimony, she said the bill would have only a limited impact, given that the most common reasons for placing a loan in non-accrual status are those still allowed by the legislation.
Still, she said there would be ways the bill could be used to hide troubled loans.
"We are concerned that this bill could allow other credit structures, which have similar effects as interest reserves, to support and potentially mask inherent weaknesses in a bank's loan portfolio," she said. "More fundamentally, we are concerned that this bill is a step in the direction of regulatory forbearance and ... would create regulatory accounting standards that are less stringent than GAAP for regulatory capital purposes."
Jaret Seiberg, a policy analyst at MF Global, said that the bill reflects the frustration bankers are feeling in the post-crisis regulatory environment. But he cautioned the legislation was not good policy nor likely to become law.
"It is always dangerous to have Congress determining how loans should be treated for accounting and capital purposes," he said. "The key to the health of the U.S. banking system is investor confidence in the books and records. Legislation that changes the rules in a way that could be argued hides potentially troubled loans is going to weaken investor confidence in the system. That's going to make it harder for banks overall to raise capital and to raise short-term funding."
A second bill, sponsored by Rep. Lynn Westmoreland, R-GA, would require the FDIC's inspector general to study the impact of bank failures, and specifically the extent to which failures were the result of paper losses, and report back to Congress with recommendations. That bill drew bipartisan support at Friday's hearing.