Amid all the public remonstrations and finger-pointing from Washington complaining that banks participating in TARP have not done enough to spur consumer and business lending, the Independent Community Bankers of America testified before the House Committee on Financial Services that lending by their members is being constrained by “the current bank regulatory climate.”

R. Michael S. Menzies, chairman of the ICBA and president and chief executive officer of Easton Bank and Trust Co., lauded an interagency statement last fall calling on banks to meet their obligations to lend to credit-worthy businesses and consumers. But regulators are making it difficult for community banks to fulfill these responsibilities, according to Menzies. “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 writedowns and reclassifications of viable commercial real estate loans and other assets.”

Examiners also have been critical of banks that take large amounts of Federal Home Loan advances, which are a necessary liquidity and longer-term funding tool for many community banks, Menzies testified. “Current mark-to-market accounting rules have a highly negative impact it trying to get credit flowing,” he added.

The Federal Deposit Insurance Corp.’s 20-basis point special assessment—to bolster the Deposit Insurance Fund—will put a damper on lending, too, according to Menzies. “ICBA asked its members to estimate the impact of the special assessment on their earnings. According to the survey, 32 percent of community bank answering estimated the special assessment will consume 16-25 percent of the 2009 earnings; 17 percent of the respondents estimate it will consume 26-40 percent of earnings,” he said. The ICBA supports  “borrowing from the Treasury or the industry, or issuing bonds,” to rebuild the DIF now. The industry would repay the loans down the road, said Menzies.

The ICBA suggested greater “transparency in the criteria examiners use to evaluate loans;” better communication between examiners and bankers; consistent criteria geographically; a more robust appeals process; a “longer term view” of real estate holdings; and consideration of the “basket approach,” which exempts from strict underwriting standards a basket of solid loans as long as the loans keep performing. 

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