Differences of opinion were on display at the American Bankers Association's conference Wednesday after a regulator spoke out against the a bill designed to reform the examination process.
John Walsh, the acting Comptroller of the Currency, told bankers that the OCC, along with other federal regulators, was strongly against the Financial Institutions Examination Fairness and Reform Act. His tone contrasted with the ABA, which had prepped bankers a day earlier on how to promote the bill before making a trek to Capitol Hill. More than 1,000 bankers attended the ABA's annual government relations summit this week.
Walsh said that there was no need to add another appeals process to the existing systems that are in place at each federal agency. He then introduced the audience to the OCC's ombudsman, who was sitting in the front row.
"Federally chartered institutions should not hesitate to avail themselves of the services of the Ombudsman if there is an issue you feel needs review," Walsh said. "You won't know if the process works unless you try it."
The proposed bill is primarily intended to ease the appeals process while revising standards on classifying loans. Walsh claimed that the bill would instead add a new "federal bureaucracy" that would actually prolong the process. "With so many challenges, it's not surprising to me that industry groups and lawmakers are looking for ways to ease some of the burden that community institutions face," he said. "But as we have testified I don't believe that this bill, as it is currently drafted, is the best way to accomplish those objectives, and other parts of the bill are very troubling."
He said that those "other" troubling parts include mandating a time frame for when an examiner does bank "exit interviews" through when the exam report is finally issued. Walsh said there is "good reason" for why more time may be needed to complete such a process as well as giving the bank some time to respond. "Some examinations raise complex policy or legal issues, and it's critical that our policy and legal staff have sufficient opportunity to review and provide direction," he said.
Walsh admitted that there have been delays largely from integrating 600 thrifts into the OCC following the July dissolution of the Office of Thrift Supervision. Still, he was adamant that legislators should not alter their exam process, thereby allowing the OCC to get back to a normal schedule.
"We have been dealing with a higher than normal level of problem institutions for several years and the complexity of the issues in those banks, coupled with the need for additional levels of review to ensure consistency and balance, has resulted in delays in report issuance," Walsh said. "But I can assure you we are monitoring our performance carefully and seeking to improve it, but speed has to be balanced with the need for careful review to ensure our written products are accurate and well-supported."
So too, the Federal Deposit Insurance Corp's acting chairman, Marty Gruenberg, spoke separately on the importance of the agency's ability to execute bank failures.
"There's a big public stake in the FDIC being able to carry out these authorities in an effect way," Gruenberg said. "At the end, any financial company in effect cannot be held accountable to the market place, to the consequence of its decisions. If it can't be held accountable for those decisions, to the discipline of the market place, then there is a significant cost to the health" of the financial system.
At the same hand, bankers were wary of the heavy-handedness of examiners, regulators and the new regulations coming down the pike. Of particular concerns, bankers questioned both regulators on not being able to use credit ratings when underwriting certain securities and the prolonged appraisal process from new regulations thwarting potential loan growth.
"Appraisals are incredibly slow right now largely because appraisers are overloaded with the workload of new appraisal guidelines," said Michael Jacobson, the president and chief executive of NebraskaLand National Bank in North Platte. "It makes it nearly impossible to do a commercial real estate loan."
On the topic of appraisals, Walsh said that there was not enough "time and attention" put into the section of the Dodd-Frank Act that addresses appraisals, though regulators were paying "considerable amount of attention" to it as the rules roll out.
Many bankers also sought regulatory clarity on capital and classification of loans during the question-and-answer periods. With regard to when a loan should be classified in nonaccrual status, Walsh said "the primary determinant is collectability" but that is also where "judgment is needed." Again, he was adamant about lawmaker not "tying the hands" of examiners on judging loans.
"These are decisions that require an understanding of the loan's term and structure, and the borrower's ability to repay both principal and interest, and those calls involve judgments by seasoned bankers," Walsh said. "We recognize that, and we expect our examiners to exercise judgment as well in assessing those decisions."
Regulatory clarification has been a key point for bankers during the conference. After Gruenberg's speech, one banker stressed that it was key to setting and achieving operating goals going forward.
"I don't get any feedback from my boss," said Stephen Ranzini, the president and chief executive of University Bancorp Inc. in Ann Arbor, Mich. "I'll just make a plea that it's very difficult to manage your business when you don't know what your goal ought to be."
Gruenberg sought to clear up the notion that the FDIC's was any banks' boss. "I would be the last person to characterize the FDIC as the boss of any institution," he said. "You are all private sector entities that ultimately make your own managing decisions. We want to be helpful. But at the end of the day you are responsible for your own judgments" for your own institutions.
Walsh and Gruenberg agreed that it is important for regulators to collaborate with community banks. The FDIC plans to hold "off-the-record" roundtables throughout the country with community bankers as a part of a major research effort to find improvements as well as banks success stories. The agency also expects to issue a report later this year on its findings.
"Community banks really do play a crucial role in our financial system," Gruenberg said. "There's a clear public interest in maintaining a strong community banking sector in the U.S."