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House Subcommittee Considers FDIC IG Study

By    |   Tuesday, 02 April 2013 02:02 PM

This second of three articles looks at a study by the FDIC’s Inspector General (IG) that was one of three reviewed by the House Financial Institutions Committee’s Subcommittee on Financial Institutions, which is chaired by Rep. Shelley Moore Capito, R-W.V.

The legislation that mandated the study called on the IG to study more than 30 topics under the following headings:

1. The effect of loss-sharing agreements;

2. The significance of losses;

3. The consistency of procedures used by examiners for appraising collateral values;

4. The factors examiners consider when assessing capital adequacy;

5. The success of FDIC field examiners in implementing FDIC guidelines for commercial real estate workouts;

6. The impact of cease and desist orders on troubled institutions;

7. The FDIC’s procedures for evaluating potential private investment in insured depository institutions; and

8. The impact of the FDIC’s policies on private investment in insured depository institutions.

As noted from time to time in articles on the financial crisis, this committee is studded with members of Congress who are affiliated in one way or another with the financial services industry, either as bankers, mortgage bankers, developers or lawyers for these enterprises. For example, Capito is married to a banker, and Rep. Lynn Westmoreland, R-Ga., the sponsor of the legislation mandating the studies, is a homebuilder in Georgia. He and his Democratic colleague from Georgia, Rep. David Scott, have decried the wave of closings of community bank closings in Georgia and have blamed it to a large extent on harsh administration of banking laws by the financial regulators.

Evidently, the purpose of the studies is to document this phenomenon and to bring pressure upon the regulators to ease the regulation of these institutions, in the name of promoting lending and economic growth in affected communities, perhaps with the side effect of promoting the political and business interests of the legislators.

In presenting his findings, Jon Rymer, the FDIC’s IG, took the trouble to remind the subcommittee that in the wake of the savings and loan and banking crisis of the 1980s, Congress enacted two laws, known as the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which were intended to govern the actions of regulators in dealing with future decisions regarding the examination, closure and resolution of banks.

The IG’s review covered the years 2008 through 2011 and entailed extensive interviews with representatives of regulatory agencies and banks, and with bank customers, as well as the review and analysis of data and documents between January and October 2012. Rymer pointed out that bank regulators are required to close institutions that become seriously undercapitalized and cannot be recapitalized and to resolve them in the least costly manner.

In general, the IG found that the actions of the regulators were “market-driven” and that the failures of the banks were caused by “aggressive growth, asset concentrations, poor underwriting and deficient credit administration coupled with declining real estate values. These factors led to write downs and charge offs on delinquent and non-performing real estate loans as opposed to examiner-required write downs or fair-value accounting losses.”

The IG made three recommendations based on the study:

• Shared-Loss Agreement Program. Additional controls and more formal monitoring and strategy development may be needed.

• Appraisals and Workouts. Clarification of policies may be needed to ensure that regulators are applying relevant guidance consistently.

• Enforcement Orders. Bank regulators should study their practices and employ approaches that have proven to have been most effective.

Readers may conclude that more than 30 years after Congress enacted legislation to give better direction to financial regulators as to how to prevent another wave of costly bank failures, the agencies are still floundering in their efforts to implement the law, and they still face pushback by legislators captured by the industry, much as they did during the crises of the 1980s.

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This second of three articles looks at a study by the FDIC’s Inspector General (IG) that was one of three reviewed by the House Financial Institutions Committee’s Subcommittee on Financial Institutions.
Tuesday, 02 April 2013 02:02 PM
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