Tags: FDIC | Dodd-Frank | bank | real estate

House Subcommittee Looks at Community Bank Studies

By    |   Monday, 01 April 2013 02:17 PM

Unwilling and unable to contain the financial crisis that has plagued the U.S. economy for roughly half a century, the Dodd-Frank Act of 2010 (hard to believe it’s almost three years old) established new bureaucratic agencies with Orwellian names like the Office of Financial Stability (OFS), as if the 2008 episode of the ongoing financial crisis occurred because of the lack of these agencies. Much as the United States was attacked on 9/11 because its leaders had forgotten to establish a Department of Homeland Security.

Hundreds of rules were mandated under Dodd-Frank, and over 100 studies and reports were ordered. A search to determine how many will bring up the answer that “a number” of studies and reports are prescribed by Dodd-Frank. One is reminded of a chapter on easements in a real property text that addresses the question of how many types of easements there are, and the answer is that there are many types of easements.

Now a generation of offspring of Dodd-Frank studies has emerged, spawned by policymakers who are not satisfied with the 100-odd studies already provided by Dodd-Frank.

So this series of three articles is a modest one and will discuss only three of this bumper crop of studies, because these three happen to have been released recently and examined on March 20 by the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit, which is chaired by Rep. Shelley Moore Capito, R-W.V., a zoology major from Duke whose husband Charles is a banker.

In fairness, one of the studies, the FDIC’s “Community Banking Study,” was commissioned by FDIC Chairman Martin Gruenberg. The other two, conducted by the Inspector General of the FDIC and by the Government Accountability Office, respectively, were mandated by legislation sponsored by Rep. Lynn Westmoreland, R-Ga., a homebuilder and relentless critic of policies of financial regulators he believes have not done enough to promote banking and housing.

The theme of the hearing was that community banks are oppressed by excessive regulation that keeps them from serving their communities and fostering economic growth. Capito complained that banks and their borrowers “will not be well-served if the current regulatory environment forces institutions into one-size-fits-all compliance.”

Westmoreland said, “The studies show the FDIC has no plan for dealing with the potential debacle in the real estate market, the expiration of loss-sharing agreements and the expiration of 2009 guidance. Loans should not be written down simply because the value of the collateral has declined.”

In fairness to Westmoreland, he also said, “The regulators have had trouble handling the boom and bust cycles over the last 25 years, repeating the same pattern of action and expecting different results.” This is true, but during his questioning of the panel, Westmoreland said that Georgia is still one of the fastest growing states and, “My fear is that the examiners won’t allow the banks to participate in the economic comeback we’re having in Georgia.” He made this statement without any apparent sense of irony that he himself, as a homebuilder slash legislator, may be contributing to the next stage of the boom-bust cycle that chronically marks what I call the “Housing-Industrial Complex.”

The FDIC study found that the banking industry had undergone a period of consolidation during which more than 12,600 banks exited the business through mergers and consolidation. The study suggested that technology may drive further consolidation, but expressed doubt that this would occur at a pace comparable with the earlier wave.

The FDIC study read like it might have been produced by interns rather than by the highly compensated, studious and erudite career staff who inhabit, and perhaps inhibit, the agency. Marty, did you read this? Could you read this? Could anyone?

Three issues cry out for attention:

1. Interest rates. The study rightly refers to the question of how community banks will be affected whenever interest rates return to “historical norms.” While this is delayed, the banks will continue to experience a squeeze on net interest margins, but the study noted, “At the same time, a large and abrupt increase in interest rates also carries risks to institutions that have increased their holdings of long-term assets in the current low-interest-rate environment.”

2. Risky lending strategies. The study found that community banks that shifted into risky construction and development and commercial real estate lending after 2000 failed at five times and two times, respectively, the average failure rates of community banks between 2006 and 2011. At the same time, the study concluded, more needs to be learned about “the social benefits that arise from commercial real estate financing by community banks.”

3. Risky capital strategies. The study stated that hopefully the trends it found “suggest a community banking sector that can generate most of the capital it needs through retained earnings.” However, it offers as caveats that the bank must achieve healthy earnings and that this can only be done “if the asset base of the institution is not growing more rapidly than its earnings.” Good point.

If one wants to read an even more troubling study by the FDIC, grab an adult beverage and look at this study of the lessons supposedly learned from the real estate crash of the 1980s and 1990s. See if you think the FDIC and the other regulators have learned anything at all.

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Unwilling and unable to contain the financial crisis that has plagued the U.S. economy for roughly half a century, the Dodd-Frank Act of 2010 established new bureaucratic agencies, as if the 2008 episode of the ongoing financial crisis occurred because of the lack of these agencies.
FDIC,Dodd-Frank,bank,real estate
Monday, 01 April 2013 02:17 PM
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