WASHINGTON — In an unusual congressional hearing, regulators were essentially put on trial Thursday for having closed a Chicago-based chain of community banks last fall.

During the hearing before a subcommittee of the House Financial Services Committee, former FBOP Corp. Chairman Michael Kelly said regulators should have given the nine-bank company more time to recover before it was seized.

"They basically just did not want to extend more time," he said.

Several subcommittee members sided with Kelly, accusing the Federal Deposit Insurance Corp. and other regulators of moving too precipitously to close community banks, even as big banks were bailed out.

"I have grave concerns that the FDIC has taken its mission to protect depositors and used it to promote a world in which there are fewer banks. FDIC actions … have further concentrated assets in already large depository institutions," said Rep. Tom Price, R-Ga., whose state had about 20% of the nation's 144 bank failures last year.

At issue were the October failures of FBOP's banks, totaling $19 billion of assets, which were sold to U.S. Bancorp at a cost to the FDIC of $2.5 billion. The banks had huge writedowns on Fannie Mae and Freddie Mac stock and also had problems with commercial real estate loans.

After seven of the institutions were deemed insolvent, the remaining two failed when the FDIC — using statutory authority to stem insurance losses at affiliated banks — assessed them a fee for the other collapses.

The hearing was called to determine what could be done to save institutions such as FBOP, which enjoyed community and political support, evidenced by the large turnout of spectators from the Chicago area. (Rep. Luis V. Gutierrez, D-Ill., the subcommittee's chairman, represents the area.)

Yet the hearing turned into a broader forum on whether regulators are moving too aggressively to clamp down on community banks and how the government can support smaller institutions on a par with the unprecedented aid given to the largest banking companies.

"Unfortunately, this bank was chosen to be a loser, while other banks were chosen to be winners," said Rep. Randy Neugebauer, R-Texas.

Lawmakers questioned what the agencies should do to stave off the failure of struggling institutions.

"If the FDIC requires a change in the current laws to be able to account for our communities' well being, then by all means we should have that discussion now, before more and more banks fail," Gutierrez said.

Regulators said current law required closure of the banks, which had suffered big losses and were endangering depositors.

"Our intent was never to look for any type of institution to fail, but the statute is very clear about us trying to protect the Deposit Insurance Fund," said Mitchell Glassman, the director of the FDIC's division of resolutions and receiverships.

Jennifer Kelly, the Office of the Comptroller of the Currency's senior deputy comptroller for midsize and community banks, said the closures were triggered by a legislative structure created during the savings and loan crisis.

Yet FBOP's Kelly, though not directly blaming regulators, said a capital infusion from the Treasury Department's Troubled Asset Relief Program would have saved the company. The aid never arrived. "Tarp funding would have been adequate for us to recover," he said. "That was not available to us. I still don't understand why that wasn't available."

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