To the surprise of no one closely watching a new bill seeking to give banks some cover from examiners, federal regulators confirmed last month that no, they would not be OK with Congress writing new guidelines regarding the treatment of commercial loans or creating an alternative appeals route for banks that want to dispute their exam ratings.
After weeks of arching their eyebrows at the proposal in private, agency officials testifying at a Feb. 1 hearing finally pitted themselves publicly against the banking trade groups and the bipartisan group of lawmakers backing the bill.
Sponsored by Republican Rep. Shelley Moore Capito and Democratic Rep. Carolyn Maloney, the measure would give bankers more time to try to deal with problematic commercial loans.
It also would establish an ombudsman's office at the Federal Financial Institutions Examination Council, the interagency group that establishes uniform standards for bank exams. Banks could appeal exam findings to the ombudsman as an alternative to the current practice of running appeals through the agency that conducted the exam.
Regulators presented a unified front at the hearing of the House subcommittee on financial institutions and consumer credit, suggesting in their testimony that the proposal raised safety and soundness concerns and compromised the independence of the banking agencies.
It was a thankless task.
At times, the subcommittee hearing resembled a ritual flogging of the regulators, who have frequently been called up to Capitol Hill to hear lawmakers and bankers complain about disparities between the words of agency officials in Washington and the actions of examiners in the field.
"I kind of wonder if we're a little bit in an alternative universe here," Capito said, trying to reconcile the testimony of the agency officials with assertions by bankers who say that regulators' standards are tightening and inconsistent. "Is there a big disconnect here?"
Rep. Lynn Westmoreland, a Georgia Republican whose home state has been hit particularly hard by bank failures, responded to the argument that Congress should not meddle with exam standards by asking the regulators: "So do you think we can screw up this more than y'all have?"
Jennifer Kelly, the Office of the Comptroller of the Currency's senior deputy comptroller for midsize and community bank supervision, responded that the OCC constantly talks with banks and solicits their views on inconsistencies in exams. "So we are continuing to try to work these issues very aggressively," she said.
Later, upon learning that the FDIC bars retaliation against banks that complain about their exam results, Westmoreland resorted to a colorful analogy.
"That's like your dog having its teeth into your neighbor's leg, and you telling the neighbor, I don't allow it to bite," Westmoreland said.
Rep. Melvin Watt, D-N.C., was one of the few committee members to speak out against the bill, but even he had some complaints about how bank exams are being conducted. "I don't think we can micromanage examinations in this committee, and when we try to do that, I think we do ourselves a disservice," Watt said. "Having said that, there is a lot of arbitrariness going on."
Both the American Bankers Association and the Independent Community Bankers of America testified in favor of the legislation. "This bill will go a long way toward improving the oppressive examination environment, a priority concern of community bankers and a barrier to economic recovery, by creating a workable appeals process and consistent, commonsense standards for classifying loans," said Noah Wilcox, president and CEO of Grand Rapids State Bank in Minnesota, on behalf of the ICBA.
But regulators cautioned that the legislation might let dangerously weakened institutions decline further while an appeals process played out.
Further, noted Sandra Thompson, director of the FDIC's division of risk management supervision, the proposed ombudsman's office would have authority, but no responsibility, for the condition of a bank if it failed.
But Eugene Ludwig, a former comptroller who is now CEO of the consulting firm Promontory Financial Group, was broadly supportive of the idea of an independent appeals arena for banks, or what he described as a "super-ombudsman."
Said Ludwig, "There are no divorces in banking. Without a polite, professional relationship marked by mutual respect, communication can deteriorate in a way that benefits no one."
