Congress has expressed deep concern about the regulatory control of banks, yet at the same time wants banks to aggressively finance business and economic growth.
Last week Dave Wilson, the senior deputy comptroller for bank supervision policy and chief national bank examiner, offered a fairly pragmatic testimony about the current problems and regulatory enhancements recently added to the OCC's banking oversight and control. He also professed that they sought to maintain fair and balanced supervision and not discourage new business.
What was lost in this testimony was the impact these universal requirements are having on costs and management time at the better performing banks.
In this era of increasing regulations most community banks are screaming "uncle" from the expectations for reports, analysis, reviews and oversight, and the costs related to the required steps. These actions draw management attention away from customers to conduct and oversee the analysis, reviews and to maintain regulatory compliance.
Better performing banks recognize the purpose of the requirements, but are feeling paralyzed by this expanding process.
A few of the specific expectations include extensive reviews and analysis of loan provisions, loan and portfolio stress tests, plus second- and third-level external opinions on loan loss provision adequacy and the impact rate changes would have on capital and earnings. The growing requirements include detailed analysis of subjective, qualitative factor impacts on anticipated loan losses and formal annual reviews of all term loans and leases, even the smallest and fixed term commercial real estate loans.
Most all of these matters and reviews have been informally considered in the past but are now part of structured processes. Many of these requirements seem unnecessary and irrelevant to the better performing community banks.
The recent problems at some banks — including community banks — cannot be overlooked, but these steps cannot collect troubled loans, prevent bank failures or protect against the next economic cycle, whereas strong management and a process of assuming appropriate levels of risk can.
These steps result in extensive management time and effort directed at maintaining regulatory credibility and away from customers. This is particularly difficult for better performing community banks where the senior officers, of necessity, become directly involved in the specifics of the process.
At community banks the regulators will spend weeks each year on site and in consultation with management. Each of these visits and contacts requires hours of top management participation and attention, all of which means less time dealing with the needs of their customers. This expenditure of time comes on top of increased deposit insurance costs and the multitude of required costly external reviewers.
Banks should be subject to reasonable rules and oversight and required to maintain adequate levels of capital and reserves, but universal application of review and analysis are for the most part overkill threatening the ongoing viability of many small banks. They serve to overwhelm community banks, limit new activities and restrict their ability to meet the needs of communities.
Many community banks have performed well during a troubled period thanks to quality management and boards that are deeply concerned about the responsibility they have to their customers and investors. Healthy banks should not be subject to the same requirements as the troubled banks.
Some level of common sense and discretion should be applied to these growing requirements to insure performing banks remain competitive. Save the regulatory resources, rules and oversight for the poorly managed or "Problem Banks" and free up the other 6,000 community banks to help get our economy back on track.
Robert H. Smith, the former chairman and chief executive of Security Pacific Corp., is a founder and director of Commerce National Bank in Newport Beach, Calif.