[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




 
                   TOO BIG HAS FAILED: LEARNING FROM
                    MIDWEST BANKS AND CREDIT UNIONS

=======================================================================

                             FIELD HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                            AUGUST 23, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-151




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES WILSON, Ohio                 KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
              Subcommittee on Oversight and Investigations

                     DENNIS MOORE, Kansas, Chairman

STEPHEN F. LYNCH, Massachusetts      JUDY BIGGERT, Illinois
RON KLEIN, Florida                   PATRICK T. McHENRY, North Carolina
JACKIE SPEIER, California            RON PAUL, Texas
GWEN MOORE, Wisconsin                MICHELE BACHMANN, Minnesota
JOHN ADLER, New Jersey               CHRISTOPHER LEE, New York
MARY JO KILROY, Ohio                 ERIK PAULSEN, Minnesota
STEVE DRIEHAUS, Ohio
ALAN GRAYSON, Florida


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    August 23, 2010..............................................     1
Appendix:
    August 23, 2010..............................................    37

                               WITNESSES
                        Monday, August 23, 2010

Beverlin, John D., Sr., President and Chief Executive Officer, 
  Mainstreet Credit Union........................................    26
Herndon, David L., President and Chief Executive Officer, First 
  State Bank of Kansas City, Kansas..............................    19
Hoenig, Thomas M., President, Federal Reserve Bank of Kansas City     6
Kemper, Jonathan M., Chairman and Chief Executive Officer, 
  Commerce Bank, Kansas City, and Vice Chairman, Commerce 
  Bancshares, Inc................................................    23
Kemper, Mariner, Chairman and Chief Executive Officer, UMB 
  Financial Corporation..........................................    21
Marsh, Marla S., President and Chief Executive Officer, Kansas 
  Credit Union Association.......................................    25
Stones, Charles A., President, Kansas Bankers Association........    17

                                APPENDIX

Prepared statements:
    Moore, Hon. Dennis...........................................    38
    Beverlin, John D., Sr........................................    40
    Herndon, David L.............................................    45
    Hoenig, Thomas M.............................................    52
    Kemper, Jonathan M...........................................    60
    Kemper, Mariner..............................................    72
    Marsh, Marla S...............................................    79
    Stones, Charles A............................................    84

              Additional Material Submitted for the Record

Moore, Hon. Dennis:
    Comments on the Dodd-Frank Wall Street Reform & Consumer 
      Protection Act.............................................    89
    Letter from the National Association of Federal Credit Unions 
      (NAFCU)....................................................    91


                   TOO BIG HAS FAILED: LEARNING FROM
                    MIDWEST BANKS AND CREDIT UNIONS

                              ----------                              


                        Monday, August 23, 2010

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:40 a.m., in 
the Capital Federal Conference Center, Regnier Center, Johnson 
County Community College, 12345 College Boulevard, Overland 
Park, Kansas, Hon. Dennis Moore [chairman of the subcommittee] 
presiding.
    Members present: Representatives Moore and Jenkins.
    Also present: Representative Cleaver.
    Chairman Moore of Kansas. Good morning. This field hearing 
of the Subcommittee on Oversight and Investigations of the 
House Financial Services Committee will come to order.
    Our hearing today is entitled, ``Too Big Has Failed: 
Learning from Midwest Banks and Credit Unions,'' inspired from 
the April 6, 2009, Time magazine cover story, ``The End of 
Excess: Why this Crisis is Good for America.'' This is the 
second in a series of hearings where we will look at the key 
issues that may not be receiving enough attention, so we can 
learn and work towards a stronger and more stable financial 
system.
    Before we begin with the formal proceedings, I want to take 
a moment of personal privilege to first thank Johnson County 
Community College President Terry Calaway and all of the staff 
and faculty here for hosting today's field hearing.
    For those of you who do not know, before my constituents 
sent me to Congress, I was elected and proud to serve on the 
Board of Trustees for Johnson County Community College, and I 
am very glad we were able to have one of my last subcommittee 
hearings here at Johnson County Community College.
    I also want to thank the other members who have traveled 
and taken time out of their busy schedules to be with us today: 
Congressman Emanuel Cleaver from the 5th Congressional District 
of Missouri; and Congresswoman Lynn Jenkins from the 2nd 
District of Kansas. Thank you very much for being here.
    We will begin this hearing with the members' opening 
statements, up to 10 minutes per side, and then we will hear 
testimony from our witnesses. For each witness panel, members 
will each have up to 5 minutes to question our witnesses. The 
Chair advises our witnesses to please keep your opening 
statements to 5 minutes, to keep things moving, so we can get 
members' questions in.
    Without objection, all members' opening statements will be 
made a part of the record. I now recognize myself for 5 minutes 
for an opening statement.
    Our economy continues to slowly recover following the worst 
financial crisis and recession since the Great Depression in 
1929. While there were a number of contributing factors that 
caused the financial crisis, one of the lessons we have learned 
is that ``too-big-to-fail'' financial firms can cause a lot of 
damage if not appropriately supervised.
    And who paid the price for these mistakes? Unfortunately, 
it was not those ``too-big-to-fail'' firms on Wall Street, but 
rather our constituents and businesses here in Kansas and 
across the country. American households lost about $14 trillion 
in net worth over the course of 2 years. Retirement accounts 
saw an over 20 percent decline in value, forcing many Americans 
to delay their retirement. Millions of Americans lost their 
homes through foreclosure. Bernie Madoff's Ponzi scheme 
defrauded $65 billion from investors.
    And the government was forced to respond to prevent further 
damage. Congress approved, and even though it was deeply 
unpopular, I voted for the $700 billion TARP proposal. I did so 
not because I wanted to, but because it was the right thing to 
do, I believe, for our people and our country. In fact, while 
there continue to be misperceptions about it, economist Mark 
Zandi, an advisor to Republican Senator John McCain in the last 
presidential election, has recently done some analysis and 
found that without TARP, the Recovery Act, and other measures, 
we would have seen the unemployment number double with 8.5 
million fewer jobs, and that is on top of the more than 8 
million jobs we have already lost.
    But given the economic damage we did suffer, it is not 
surprising that many Americans have lost their faith in our 
financial system. As Mr. Hoenig has put it, ``too big has 
failed'' and we need our financial institutions, big and small, 
to get back to the fundamental business of banking and 
financial intermediation. And while not perfect, I believe that 
the types of smaller and medium-sized banks and credit unions 
we will hear from today and others here in the Midwest should 
be held up as an example of what the post-crisis financial 
system should look like. Financial firms should know who their 
customers are and perform proper due diligence before making a 
loan.
    To help restore Americans' faith in our financial system, I 
worked as both a senior member of the House Financial Services 
Committee and as a House conferee to improve and perfect the 
financial regulatory reform measure. Part of this work included 
defending smaller banks, credit unions, and small businesses 
that did nothing to create the financial crisis.
    For example, I worked with my colleagues to provide a full 
grandfathering of existing trust-preferred securities for all 
banks with less than $15 billion. I pushed to fully preserve 
the thrift charter, making the case that while the ineffective 
Office of Thrift Supervision should be eliminated, the business 
model with which many Kansas thrifts acted responsibly should 
not be eliminated. And I offered the amendment to exempt all 
banks and credit unions with fewer than $10 billion in assets 
from the new Consumer Financial Protection Bureau's enforcement 
powers. Many forget, but a new consumer financial protection 
agency was not only called for by the Obama Administration, but 
by former Secretary Hank Paulson as well.
    The Dodd-Frank Act includes other new powers to regulate 
``too-big-to-fail'' financial firms and provides regulators 
with a new liquidation tool that will ensure we end ``too-big-
to-fail'' bailouts, and we shut down any financial firm--big 
and small--that fails. As the bill was being signed into law, 
the headlines from the Wall Street Journal were, ``Big Win for 
Small Banks'' and ``Small Banks Avoid Overhaul's Sting.''
    That said, I understand that with any new set of rules 
comes unfamiliarity. Something I hope to see as the new rules 
are implemented is not an endless stream of additional 
disclosure forms that are difficult for small firms to comply 
with and only serve to confuse consumers. We created the 
Consumer Bureau to streamline and simplify these financial 
forms and documents so that consumers know what they are 
signing up for, and as a result, will be much easier for small 
community banks and credit unions to comply with.
    It is time to move forward with a stronger financial 
system, and I look forward to hearing from today's witnesses on 
what lessons we can and should learn from responsible banks and 
credit unions we are fortunate to have here in the Midwest.
    I now recognize for up to 10 minutes, my colleague, 
Representative Lynn Jenkins, a member of the House Financial 
Services Committee.
    Ms. Jenkins.  Good morning, and thank you, Mr. Chairman, 
for holding today's important hearing. And I would like to 
thank Federal Reserve Bank President Hoenig for being here with 
us this morning. We have an important topic to discuss.
    It is important to every American trying to obtain a home 
loan, small business loan, car loan and even those concerned 
with their own job stability. Individuals and businesses are 
asking about the health of their bank and their ability to 
obtain a loan from their bank when they need it. These 
questions are essential to every American household and 
business, and it is my hope that both President Hoenig and our 
panel of bankers and credit unions can share with us some 
strategies they have employed to ensure that they can continue 
to provide these important services to our communities.
    I am proud to be here today to highlight lending 
institutions in Kansas as industry leaders in making prudent 
financial products available to customers and maintaining the 
integrity of their institutions throughout that process.
    The financial crisis has dramatically impacted the lending 
industry as a whole and many of the banks represented here 
today have managed to provide an example to others of what 
sound judgment and policy looks like during times of irrational 
exuberance. However, many of our witnesses represent community 
banks and credit unions already feeling overly burdened by the 
government and regulators, and now are feeling the crunch more 
broadly with the passage of financial regulatory reform. Other 
witnesses represent regional banks, which have performed 
admirably, but will now have to restructure their business 
model.
    I am eager to learn what lessons you all can share with us 
today that we can carry back to Washington, and what trends you 
see that have you concerned for your industry in the future. I 
am sure the banking community, and the credit unions have much 
to share with us today, and I am anxious to hear from both 
sides as to how this can be constructive for all of us.
    I want to again thank the chairman for putting this 
together, holding the hearing, and I look forward to hearing 
testimony from each of today's witnesses.
    I yield back the balance of my time.
    Chairman Moore of Kansas.  Thank you, Representative 
Jenkins, for being with us today.
    I now recognize Representative Emanuel Cleaver for up to 5 
minutes, another member of the House Financial Services 
Committee. Congressman Cleaver.
    Mr. Cleaver.  Thank you, Mr. Chairman. I appreciate you 
allowing me to participate in this field hearing. I am not on 
the Oversight and Investigations Subcommittee but the work that 
you have done already has paid off with the legislation we 
recently approved. It is an honor to participate with you at 
this very important hearing. You are right on point to look at 
the ``too-big-to-fail'' issues and their impact from the view 
of Midwest banks and credit unions, which have not seen the 
problems that some of their east, west, and north coast 
brethren have encountered.
    It is my pleasure to welcome the very distinguished 
witnesses for today's hearing. From time to time, I consult 
with the financial services industry in my district, and they 
have always provided sound advice. It is also a great honor 
that they can come before us today and provide testimony.
    Mr. Chairman, earlier this spring, Committee Chairman 
Barney Frank joined you and me to honor UMB and Commerce Bank, 
who were named the second and third rated best banks in America 
in 2009, by Forbes magazine. As I was putting together the 
background for the awards, I learned some important information 
about UMB and Commerce Bank that is relevant to today's 
hearing.
    UMB's shared corporate vision is to be recognized for their 
unparalleled customer experience. One of the corporation's 
shared values is, ``customers first, we do the unparalleled to 
create an environment that consistently exceeds the 
expectations of our customers.'' UMB embodies strong community 
involvement in all the communities it serves. From financing 
for small businesses to providing working capital loans to 
companies that support job creation and retention to employee 
volunteerism and corporate donations, UMB stands tall with 
their communities. In fact, UMB recently received an 
outstanding rating from the Office of the Comptroller of the 
Currency in their most recent public evaluation of UMB's 
community lending and participation.
    When the largest banks in America were trying to repay 
billions of dollars in TARP funds and to improve their balance 
sheets to deal with the impact of the severe economic problems 
the States were having, UMB was keeping to their business 
strategy--conservative, with slow, steady growth. And in 
September 2009, the street.com article entitled ``UMB's Kemper 
Proves Boring is Better: Best in Class,'' Mariner Kemper said, 
``The Street, the investor population believed that we could 
leverage our earning streams more if we had taken the same 
risks as the rest of the industry. I am thrilled to be able to 
stand up and say our strategies worked for us. We did not erase 
20 years of earnings by taking three years of risk.'' In a 
press release around the same time, Mr. Kemper said, ``This 
ranking also shows that the regional banking model works. UMB 
sticks to our time-tested prudent business practices such as 
making loans within our territory, building relationships with 
our customers, and understanding that strong underwriting 
practices produce quality results. Our standards have remained 
unchanged in all economic conditions. This principle, as well 
as a focus on a diverse income stream from fee-based businesses 
affords us steady growth.''
    Likewise, Commerce Bancshares, Inc.'s corporate mission is 
to ``raise the voice of the customer and in doing so create a 
differentiating experience which encourages our customers to 
develop a relationship with Commerce and then become long-
tenured loyal customers. The company's customer promise is ask, 
listen, solve. That means the company promises to ask the right 
questions, listen carefully to what our customer is telling us, 
then solve for the appropriate solution to meet our customers' 
specific needs. Commerce Banks embody strong community 
involvement in all that it does in this community.''
    And then finally, Mr. Chairman, Commerce is committed to 
environmental sustainability to reduce their environmental 
footprint. They encourage recycling, try to consume less paper, 
encourage employee carpooling and public transportation, and 
monitor and manage energy usage. In 2008, Commerce opened 
Missouri's first LEED-certified bank branch in O'Fallon, 
Missouri.
    Mr. Chairman, more than 100 banks have failed over the past 
2 years since our economy began its meltdown. They have taught 
us valuable lessons on how not to run a bank. And so today, UMB 
and Commerce Banks, as well as many other community banks, 
regional banks, and credit unions are juxtaposed to those 
``too-big-to-fail'' banks and teach us what banks should do, or 
how not to fail.
    Thank you, Mr. Chairman, I yield back the balance of my 
time.
    Chairman Moore of Kansas.  I thank my colleagues for their 
statements.
    I am very pleased to introduce our first witness, who was 
so respected the last time he testified before our subcommittee 
earlier this year that we had to invite him again.
    This morning, we will hear from Mr. Tom Hoenig, President 
and Chief Executive Officer of the Federal Reserve Bank of 
Kansas City. President Hoenig is currently the longest-serving 
Federal official and this year is a voting member of the 
Federal Open Market Committee. He has been a strong, 
independent Midwestern voice in the national debate on 
financial reform and economic recovery. In fact, our title from 
today's hearing comes directly from a speech Mr. Hoenig made in 
Omaha in March 2009. And he has been one of the leading experts 
people turn to on ending ``too-big-to-fail.''
    I want to publicly thank Mr. Hoenig and his entire staff at 
the Kansas City Fed for being such a valuable resource to me 
and our office, as well as for your service to the Kansas City 
community.
    Without objection, Mr. Hoenig, your written statement will 
be made a part of the record, and you are recognized for 5 
minutes to provide a summary of your written statement.

STATEMENT OF THOMAS M. HOENIG, PRESIDENT, FEDERAL RESERVE BANK 
                         OF KANSAS CITY

    Mr. Hoenig.  Chairman Moore, thank you very much, and 
Congresswoman Jenkins and Congressman Cleaver, thank you for 
this opportunity to testify before the subcommittee. I think it 
is a timely hearing about the future of community banks.
    Before I begin, I do want to note and share with you, 
Chairman Moore, that this wonderful campus and this wonderful 
school was also helped to be formed by an individual by the 
name of Will Billington, who was a mentor of mine from the 
Federal Reserve system, and he was one of the founding 
trustees, and so it is a great pleasure for me to join you here 
today.
    Chairman Moore of Kansas.  Thank you.
    Mr. Hoenig.  Let me just say that over the past 20 years, 
as the banking industry has consolidated into fewer and larger 
banks, a perennial question has been, ``Is the community bank 
model viable?'' The short answer is ``yes.'' The longer answer 
is, ``yes, if they are not put at a competitive disadvantage by 
policies which favor and subsidize the largest financial 
institutions in this country.'' I have worked closely with 
community bankers my entire career, through good and bad 
economic times. I know the business model works, and therefore, 
they can survive and prosper.
    There are more than 6,700 banks in the country, and all but 
83 would be considered community banks based on a commonly used 
cutoff of $10 billion in assets. In the Tenth District, we have 
about 1,100 banks, and all but 3 would be considered a 
community bank. A lower threshold of $250 million, which 
focuses on a far more homogeneous group, still includes about 
4,600 banks or about two-thirds of all banks. My submitted 
material and remarks now are directed towards this group of 
banks, this smaller group, which serve Main Street in 
communities across this country of ours.
    Community banks are essential to the prosperity of the 
local and regional economies across the country. The maps I 
provided show that community banks have the majority of offices 
and deposits in almost a third of the counties nationwide. 
However, their presence and market share are most substantial 
among Midwestern States, where their role is particularly 
crucial in rural areas and smaller cities. It is the economies 
in these States that would suffer most significantly without 
their presence. Why?
    Community banks have maintained a strong presence despite 
industry consolidation because their business model focuses on 
strong relationships with their customers and their local 
communities. Banks in our region, for example, serve all facets 
of their local economy, including consumers, small businesses, 
farmers, real estate developers, and energy producers. They 
know their customers and local markets, know that their success 
depends on the success of these local firms, and they recognize 
that they have to be more than a gatherer of funds if they hope 
to prosper as a bank. These factors are a powerful incentive to 
target their underwriting to meet specific local credit needs. 
And it gives their customers an advantage of knowing who they 
will be working with in both good and difficult times. Larger 
banks are important to a firm as they grow and need more 
complicated financing, there is no question. But in this 
region, most businesses are relatively small and their needs 
can be met by the local bank.
    It is said that a community with a local bank can better 
control its destiny. Local deposits provide funds for local 
loans. Community banks are often locally owned and managed 
through several generations of family ownership. This vested 
interest in the success of their local communities is a 
powerful incentive to support local initiatives. It is the very 
``skin in the game'' incentive that regulators are trying to 
introduce into the largest banks, that has been lost for some 
time. It is the small community's version of ``risking your own 
funds'' that worked so well in the original investment banking 
model, and kept partners from making risky mistakes that would 
require personal bankruptcy back then, and government 
intervention more recently.
    There is no better test of the viability of the community 
bank business model than this financial crisis, this recession 
and abnormally slow recovery that we have experienced over the 
past 2\1/2\ years. The community bank business model has held 
up well when compared to the megabank model that had to be 
propped up with taxpayer funding. Community bank earnings last 
year were lower than desired, but on a par with those of the 
larger banks. However, community banks generally had higher 
capital ratios that put them in a better position to weather 
future problems and support lending.
    This is an important point to note as the decline in 
overall bank lending, particularly to small businesses, is a 
major concern to all of us. Data show that community banks have 
done a better job serving their local loan needs over the past 
year. Community banks as a whole increased their total loans by 
about 2 percent as compared to a 6 percent decline for larger 
banks. In addition, community banks have had either stronger 
loan growth or smaller declines across major other loan 
categories. Business lending in particular stands out, with 
community bank loans dropping only 3 percent as compared a 21 
percent decline for the larger banks.
    Of course, some community banks made poor lending and 
investment decisions during the housing and real estate boom of 
the mid-2000's. Unlike the largest banks, community banks that 
fail will be closed and sold. For community banks that survive, 
it will be a struggle to recover. Commercial real estate, 
particularly land development loans, will be a drag on earnings 
for some time yet. Nevertheless, for those that recover, a 
business model that continues to focus on customer 
relationships will be a source of strength for local economies.
    Thus, community banks will survive the crisis and recession 
and will continue to play their role as the economy recovers. 
The more lasting threat to their survival, however, concerns 
whether this model will continue to be placed at a competitive 
disadvantage to the largest banks. Because the market perceived 
the largest banks as being ``too-big-to-fail,'' they had the 
advantage of running their business with a much greater level 
of leverage and a consistently lower cost of capital and debt. 
The advantage of their ``too-big-to-fail'' status was 
highlighted during the crisis when the FDIC allowed unlimited 
insurance on non-interest-bearing checking accounts out of 
concern that businesses would move their deposits from the 
smaller to the largest banks. As outrageous as this may seem, 
in many cases it is easier for larger banks to expand through 
acquisition into small communities. This occurs because smaller 
banks tend to focus on their local markets and, therefore, face 
significant restrictions to in-market mergers. This policy 
ignores the fact that the largest 20 financial institutions in 
the United States now control just under 80 percent of the 
country's total financial assets. In other words, the anti-
competitive market analysis needs to be looked at, given the 
changing times.
    Going forward, the community bank model will face 
challenges. Factors such as higher regulatory compliance costs 
and changing technology will encourage community bank 
consolidation. And despite the provisions of the Dodd-Frank Act 
to end ``too-big-to-fail,'' community banks will continue to 
face higher costs of capital and deposits until investors are 
convinced that advantage has ended. The community banks have 
always faced these challenges, and survived and prospered 
despite them. If allowed to compete on a fair and level playing 
field, the community bank model is a winner and will continue 
to serve our communities well.
    Thank you.
    [The prepared statement of Mr. Hoenig can be found on page 
52 of the appendix.]
    Chairman Moore of Kansas.  Thank you, Mr. Hoenig. I now 
recognize myself for 5 minutes for questions.
    Mr. Hoenig, from your perspective, would you please 
describe the major differences and advantages that smaller to 
medium-sized financial institutions may have over the largest 
financial firms in the United States? And you have spoken to 
this in your opening statement, but if you have additional--for 
example, it seems like a smaller financial firm would be easier 
to manage while also increasing the likelihood that the firm 
really knows their customers. Is there something unique to the 
business model and practices utilized by Midwest banks and 
credit unions that Wall Street banks maybe could learn from?
    Mr. Hoenig.  I think that the advantage of the regional and 
community bank is, in a sense, their size. They are of a size 
that can be managed. We know economies-of-scale advantage cuts 
off long before $50 billion, so that there is the ability to 
manage across functions within the bank. There is a greater 
opportunity, and I think you will hear about that more today, 
about the fact that you do build your customer relationships 
with a medium-sized business line, I think, more easily. And so 
those are extremely important in this country.
    I have been told time and time again about other models 
where you only have three or four banks across the country and 
that seems to work. And I say this country is the greatest 
country in part because it has had a greater availability of 
credit through community banking across the United States over 
the past 200 years. I think we should change that great model 
with great care as we look forward. So I have a lot of 
confidence in this model.
    Chairman Moore of Kansas.  Thank you, sir.
    Do you have any concerns that we may see greater 
consolidation in the banking and credit union sector in the 
next few years as more smaller institutions may fail? And what 
impact might that have on the stability of the financial 
system? For example, would fewer and larger banks and credit 
unions create additional systemic risks that might outweigh any 
benefits enjoyed from economies of scale?
    Mr. Hoenig.  I think that, first of all, there are going to 
be more consolidations. I think the cost, the carry cost for a 
community bank is going to grow per dollar of assets and, 
therefore, you will want to get the size up in order to spread 
that cost over more assets. So I think that will be the trend. 
I do not think that necessarily means the end of community 
banking. It does mean you are going to have a smaller number of 
banks, but I think we will still have thousands of banks in 
this country for some time to come.
    As far as looking ahead, I think we have to be careful 
because the cost of capital is to the advantage of the largest 
institutions. And so, that will work away at the competitive 
position of the smaller banks over time and we need to be 
mindful of that.
    Chairman Moore of Kansas.  Thank you.
    You testified before the subcommittee in Washington on the 
topic of reversing our dependence on leverage and debt. To be 
clear, Midwest banks and credit unions never had the levels of 
leverage that firms like AIG and Lehman Brothers had; is that 
correct? And if so, why do you think that is and what can we 
learn from smaller financial firms that are not overleveraged?
    Mr. Hoenig.  I think first of all, it is correct. The 
largest banks in this country, as I testified, increased their 
real leverage, what I call true equity capital, to assets from 
about 17 to 1 to over 30 to 1 from the early 1990's through to 
2007 when the crisis began. Smaller community banks' real 
leverage ratio did not rise significantly above their original 
16 to 1. Part of that is that they were not thought of as being 
``too-big-to-fail.'' They knew that they had to have the 
capital base and the market expected that of them. And 
therefore, they had an incentive to maintain their capital 
levels at higher amounts. I think that is important to remember 
going forward. That is why we spent important time on this 
issue of resolution in the Dodd-Frank bill to make sure that 
advantage was at least mitigated, if not eliminated. Only time 
will tell whether this ``too-big-to-fail'' will go away and 
whether this will, through the market as much as regulatory, 
force them to reduce their leverage levels not only within this 
country but on a global basis. That is a huge issue coming up 
for the regulatory authorities, both in the United States and 
internationally and that is what should be the leverage 
restrictions on the largest banks. And that is not settled, at 
this point.
    Chairman Moore of Kansas.  Thank you, sir.
    I now recognize for up to 5 minutes Representative Jenkins 
for questions.
    Ms. Jenkins.  Thank you, Mr. Chairman.
    In your statement, you said that the community bank model 
is a viable one but only if they are not put at a competitive 
disadvantage by policies which would favor the larger 
institutions.
    Mr. Hoenig.  Yes.
    Ms. Jenkins.  So I am just curious if you think that the 
Dodd-Frank bill puts the community banks at a competitive 
disadvantage, and if so, how?
    Mr. Hoenig.  The Dodd-Frank bill is designed to, as I said, 
mitigate that advantage by--it calls for a resolution of the 
largest banks should they fail, should they become insolvent or 
unable to meet their obligations. So it is designed to 
eliminate that advantage. But the only way we will know that is 
how the market reacts and whether the market thinks that is a 
viable resolution process. And that is not a foregone 
conclusion, because I will tell you that if you have a trillion 
dollar institution and it is in difficulty and you have a 
weekend in which to make a decision, so you are on a Friday, it 
is incurring a huge liquidity problem, people are running from 
this largest institution.
    And you know that the impact of its failure, of the 
liquidity crisis, will be to affect the broader economy, and 
you have only a weekend. You have to have it resolved by Sunday 
night before the Asian markets open. Will you actually be able 
to get two-thirds votes from the FDIC, two-thirds votes from 
the Federal Reserve, get a court to agree to it, get the 
Secretary of the Treasury to agree to it and actually take it 
into receivership, which will be a very disruptive process--I 
think only time will tell.
    The markets are trying to figure that out right now. If 
they are convinced that it will be taken into receivership, 
then I think the advantage to the largest institution will be 
reduced. It will not be eliminated, but it will be reduced. And 
that will make it a more equal, more level playing field for 
the community bank.
    If it does not take it, then that largest bank, number one, 
will be thought of still as ``too-big-to-fail.'' So, number 
one, if a large firm or a medium-sized firm has to have a 
payroll account that is, say, several million dollars, it will 
not put it in a community bank that it knows can fail, but will 
put it in the largest bank where it may not fail. Secondly, 
knowing that and the markets who are issuing the debt to the 
largest banks know that they will get bailed out in a crisis, 
even though it is not supposed to happen, then they will 
provide funding to those banks at a less costly level. And so 
that will give them a cost of capital advantage.
    So those things have to go away. And that can only happen 
if the markets are absolutely convinced that ``too-big-to-
fail'' has finally been ended, and only time will tell. So it 
is an open question. I am sorry I cannot answer yes or no.
    Ms. Jenkins.  Okay. I guess to follow up on that, 
considering the Dodd-Frank reform bill seems to perpetuate the 
``too-big-to-fail'' problem, is it not likely that the leverage 
problems will even get worse in the future and those ``too-big-
to-fail'' institutions will continue to have funding advantages 
over the institutions like the ones that we have here today, so 
that the big will get bigger? Can you just comment on that 
potential problem?
    Mr. Hoenig.  That is a risk. One of the things in the early 
parts of the discussions that I was actually in favor of was 
breaking up the largest institutions so it would become clear 
that they were not ``too-big-to-fail.'' But that is not what 
was done and we do have this resolution process. And I think it 
all depends on how carefully we enforce the Dodd-Frank bill in 
terms of eliminating ``too-big-to-fail'' or they will continue 
with an advantage over the regional and the community banks. So 
it is a major concern of mine, yes.
    Ms. Jenkins.  Okay, thank you. I yield back.
    Chairman Moore of Kansas.  Thank you. Now, I recognize 
Representative Cleaver for up to 5 minutes, sir.
    Mr. Cleaver.  Thank you, Mr. Chairman.
    Mr. Hoenig, I was in the room, and my colleague Dennis 
Moore was there, when President Bush sent over his Treasury 
Secretary Hank Paulson. Ben Bernanke was there, Christopher Cox 
from the SEC was there, and Sheila Bair from the FDIC. Most of 
us had no idea what would fall from their lips and we were in 
horror when they told us exactly what you just mentioned, that 
if we failed to act--or if they failed to act, then by Monday, 
we could have one of the worst economic crises in history. And 
I do not know about Congressman Moore, but I was shaking under 
the table. I have always been fascinated when I go to townhall 
meetings and people who majored in geography say, ``That was 
stupid, you people are stupid.
    Retrospectively, do you think we acted correctly in 
responding to the Bush Administration's call for action?
    Mr. Hoenig.  I think that under the circumstances, there 
were not a whole lot of choices. And one of the things that you 
have to keep in mind is there was no contingency. For example, 
one of my arguments was not that you did not take actions to 
make sure our financial system and our economy did not 
collapse, but that in doing so, we bailed out the stockholders 
of the largest institutions, whose responsibility it was to 
oversee these institutions by their selection of directors and 
so forth. And there were models--the Continental Illinois 
failure, which was itself ``too-big-to-fail,'' but at least the 
stockholders were not wiped out and the market did have some 
discipline back on those institutions. In this instance, there 
was not that kind of ability to pre-plan and, therefore, you 
ended up with this very chaotic weekend.
    What I am also saying though, is what is the lesson from 
that? We have a new bill and it has a resolution process. And I 
encourage all the authorities--the Federal Reserve, the FDIC 
and others--to say all right, let us say very clearly, let us 
make sure we have rules that will be in place should we have a 
crisis 10 years from now or whenever it is, that says when this 
happens, we have enough notice, we set up who will be the 
management who comes in as we wipe out the other management, 
the directors who come in as we wipe out the directors who are 
responsible for this, make sure that we are in fact putting it 
into a receivership with an operating unit so that it does not 
have to be shut down, it can be run but with new ownership. And 
that we have in place how we are going to hold the debtholders 
who loaned maybe at very good rates to these institutions, so 
that they share the burden rather than the taxpayer.
    The main thing we ought to take from this is it was a 
crisis, we went through it as we did, but let us not repeat 
that process the next time through. That is my best advice 
going forward.
    Mr. Cleaver.  Thank you. I agree with you absolutely.
    Last night, I re-read this article by Kurt Anderson that 
was written in March of 2009, ``The End of Excess.'' In a very 
interesting part of this, he says, ``I don't pretend we didn't 
see this coming for a long time.'' And now when you look back, 
there were those who suggested that we were heading for the 
precipice. Six months before this weekend that we all 
experienced in terror, we had the Fed Chairman, we had the SEC 
Chairman, we had the FDIC Chairman, and the heads of the three 
credit rating agencies before our committee. And not one of 
them--not one--expressed concern about the direction of the 
economy. People criticize John McCain for making some comments 
about the economy being healthy. He was simply reporting what 
the financial services oversight group said we were 
experiencing. And yet, there are those who said that they saw 
this coming for a long, long time.
    I guess my question is, is there something in the financial 
reform or is there anything that we can do to take the long 
view of the U.S. economy to prevent us from a weekend collapse?
    Mr. Hoenig.  I think that there is not only in the 
legislation, but in the regulatory scheme, there is a mechanism 
there to give warning. For example, financial stability, 
oversight committee and the researchers around that, the 
economists at the Federal Reserve, others. There is the 
mechanism, but I will tell you that the real test is in whether 
you can act in the face of an economy, a broad populace who at 
the moment feels everything is very good. And just to give you 
examples, these people that you are talking about saw this 
coming in 2005 and 2006 and 2007, saying there is this leverage 
and so forth. And in fact, the regulatory authorities put out 
proposed guidelines to begin to put some kind of guideline 
limit around exposures to certain kinds of real estate--land 
development, commercial real estate. And the blowback on that 
was enormous. You cannot do this because we want everyone to 
have a home. We want to make sure that the economy stays strong 
and the only way you do that is have it continue.
    I do not think it will be--I do not think we will miss it 
again in the sense of seeing where there is risk. We may not 
identify specifically when the economy will go into a slowdown, 
but the ability to go against the wind and against the forces 
that are in play is overwhelming in any economy, and certainly 
in the United States. So that will be the real test: can we 
step up to it and say I know you think things are really good, 
but we are going to put some limits on this because we do not 
want another bubble and we do not want the leverage to 
continue. And that will be a lot harder than any of us realize 
right now.
    Mr. Cleaver.  So measuring the systemic risk--thank you, 
Mr. Chairman.
    Chairman Moore of Kansas.  Thank you. The gentleman's time 
has expired.
    Mr. Hoenig, if you are available, we have time for a second 
round of questions, if you are available for just one more 
round of questions, please?
    Mr. Hoenig.  Sure, I would be happy to stay.
    Chairman Moore of Kansas.  Thank you.
    Mr. Hoenig, you testified before this subcommittee in 
Washington on the topic of reversing our dependence on leverage 
and debt earlier this year. To be clear, Midwest banks and 
credit unions never have had the level of leverage that firms 
like AIG and Lehman Brothers had; is that correct? And if so, 
what can we learn from the smaller financial firms that are not 
overleveraged?
    Mr. Hoenig.  I think we can learn about the principles of 
leverage regardless of firm. It is just a fact that as you 
leverage up to--if you really run a normal leverage of about 15 
to 1 and you leverage up to 30, you have that much less capital 
to absorb any losses. And therefore, your margin of error slims 
out increasingly as you leverage up. And the thing about it is 
when you get the economy going into a downturn on asset value, 
those values fall immediately. That debt stays there with all 
that cash flow. And it is inevitably a crisis. When you have 
more capital, you have the ability to weather a downturn for a 
longer period. You still may fail if you have too many bad 
assets on your books, but certainly the margin of error is in 
your favor. That is what we have to learn going forward. And it 
is a huge issue because a lot of the issue right now is maybe 
what Representative Cleaver was referring to, when you talk 
now--and there is a lot of discussion about raising the capital 
level for the largest institutions, in other words, lower the 
leverage that we will accept. The first thing that is talked 
about is you are going to cause a credit crisis because as you 
have to build capital, you have to constrain your asset growth 
or bring in new capital and that will slow the ability to fund 
new loans. Right away, you are in a conflict. You know you need 
to get to a stronger position but you know it is not a free 
choice. It is going to cost something else and how you work 
through that, my suggestion has been you put the leverage 
number out there that is the right number, 15 or 16 to 1, and 
you give the industry time to get there. And it is part of the 
very harsh--it is painful. And that is the deleveraging of the 
country, which I am afraid has to take place.
    Chairman Moore of Kansas.  Right. Thank you. You have used 
the word ``painful'' referring to the recession and it has been 
very painful for a lot of people in our country. According to 
the New York Times, the popular belief is that as housing 
prices rebound, they will continue to go up forever. The 
article cites a recent survey by Case-Shiller where many people 
said they still believe, ``prices would rise about 10 percent a 
year for the next decade.'' Yale economist Shiller was quoted 
saying, ``People think it's a law of nature.'' Should people 
have new expectations for the housing market in the next 
generation? Should we believe that the housing market is going 
to continue to rise and rise?
    Mr. Hoenig.  If the American people are looking for the 
housing market to be their investment opportunity, I think they 
are making a mistake. I do not think that the economics of the 
housing industry, as Professor Shiller is suggesting, is really 
designed for that. And right now, the facts are we have an 
excess supply and we created that by providing financing 
leverage that was almost nonsense. So now we have to adjust 
from that. Housing may eventually start to rise again, as other 
assets across the country begin to rise again; but it is not 
something that I think that the American consumer should be 
speculating on in terms of investment.
    I would like everyone to have a home, but not everyone can 
afford a home, and if we try and make it so when it is not 
possible, you create the next problem. So that is the challenge 
going ahead.
    Chairman Moore of Kansas.  Thank you, sir.
    Reform of Fannie Mae and Freddie Mac will be hotly debated 
in the next Congress. How will those reforms in the housing 
market generally affect Midwest banks and credit unions?
    Mr. Hoenig.  It will vary widely depending on what they in 
fact decide. If, as I read some of the discussions that went on 
here very recently, it is determined that this is not the way 
to go with government guarantees where you privatize the gains 
and socialize the losses and if you try and bring the financing 
in housing back to the private industry banks, credit unions, 
thrifts and so forth, whatever it is, and they take both sides 
of the risk, then it will have profound effects, because it 
will take and put I think additional opportunity on regional 
and community banks, but also additional risk. You cannot just 
sell it off your books. But if they then--on the other hand, if 
they decide to merely make this a government agency that does 
it, you make Fannie and Freddie like Ginnie and it is all 
guaranteed, then you will have a different outcome. So I think 
it is really in the hands of the Congress and the 
Administration right now as they define what should be the 
future of how you finance housing in America. It is more than 
just what do you do with Fannie and Freddie. That is hard 
enough. But it is how you are going to decide to finance 
housing in America in the future that will define what impact 
it has on regional and community banks.
    Chairman Moore of Kansas.  Thank you. My time has expired.
    Representative Jenkins, if you have any additional 
questions, you have 5 minutes.
    Ms. Jenkins.  Thank you, Mr. Chairman.
    I really just have one final question for you today. If I 
have heard one thing in the last 20 months since I have been in 
office, it has been from my local financial institutions who 
are frustrated that they are getting mixed messages. They hear 
from policymakers that they need to lend and regulators tell 
them that they need to tighten lending standards and increase 
their balance sheets. So I am just curious as to what steps you 
suggest that we all take to ensure that undue pressure is not 
placed on our financial institutions during these hard times, 
but that it allows them to continue to make worthy loans to our 
constituents?
    Mr. Hoenig.  That is one question that is a very difficult 
question. The first thing about it is the amount of pressure 
across community banks, regional banks, will vary very much 
depending on the condition therein. If you have a bank that has 
had a heavy portfolio of commercial land development loans, 
they are under pressure and the examiners are probably going to 
be saying, you need to build your capital up, you need to 
prepare for that. And there will be impediments to lending, 
because that institution is under real stress.
    On the other hand, if you are a bank that has been more 
conservative during that period, then I think there is clearly 
less pressure on you from the examiner to hold down your 
lending. They would, I think, be in favor. And I tell people no 
examiner that I know, no examiner worth their salt would ever 
say we want a bank to fail. It is just not in anyone's 
interest, even that examiner's, as tough as they may be. So 
that is not the goal. The goal is to separate out those banks 
that can lend and those that have to rebuild their capital.
    The other thing about it is, and this is where I think 
leadership within the agencies, the Federal Reserve, the FDIC, 
the Comptroller, has to be. What we tell our examiners is if 
you go into a bank and it has a portfolio, it has some stress--
it is hard not to have some stress--but you see the loans and 
they have structured them in a way that can work, you do not 
have to come down on them harshly. It would serve no useful 
purpose, and I will stand--as the leadership of this 
institution, I will stand behind you in your judgments 
regarding that institution. That is important for me and for 
the leadership to say because I will assure you that if a bank 
does in fact fail, whether it is large or small, there is an IG 
review of how well you supervised. And that examiner, just like 
any other human being, does not want to be the one to say, you 
were too easy on them and that is why they failed. So you have 
this very important balance and that is why we train our 
examiners well and why we do give them discretion in the field 
and stand behind them. And I think that is critical going 
forward.
    There is still going to be pressure, many banks still are 
under earnings pressure. But I think there is the ability now 
beginning to emerge to lend and we want to encourage them to do 
that.
    Ms. Jenkins.  So you would not have any advice and counsel 
for things that we could do?
    Mr. Hoenig.  I think you have passed the law. I think you 
need to let the regulatory authorities carry it out, with good 
oversight. I think we need to be accountable to you, answer 
questions specific to the issue that may come up before you. 
Our bank gets calls from various Representatives around the 
district and we try and answer their questions about the bank 
to the extent that we can in terms of confidentiality. So we 
have to be responsive to you and I think you have to give us 
some benefit of the doubt, given where we are today in this 
economy of ours.
    Ms. Jenkins.  Thank you.
    Chairman Moore of Kansas.  Congressman Cleaver, you are 
recognized for 5 minutes, sir.
    Mr. Cleaver.  Thank you, Mr. Chairman.
    I want to stick with this article, I just think it is so 
fascinating, Kurt Anderson's article, ``The End of Excess: Is 
this Crisis Good for America?'' And he goes on to write, ``We 
are in a state of shock. In a matter of months, half the value 
of the stock market and more than half of Wall Street's 
corporate pillars have disappeared along with several million 
jobs. Venerable corporate enterprises are teetering, but as we 
gasp in terror at our half glass of water, we really can--we 
must--come to see it as half full as well as half empty. Now 
that we are accustomed to the unthinkable suddenly becoming not 
just thinkable but actual, we ought to be able to think the 
unthinkable on the upside, as America plots its reconstruction 
and reinvention.''
    Do you think with all of our new financial structure and 
practices laid out in the Wall Street Reform bill that the 
United States is now in a position where we are able to think 
the unthinkable on the upside as we plot our reconstruction and 
reinvention?
    Mr. Hoenig.  I think one of our country's strongest points 
has been that we have always been optimistic and I think we 
will continue to be so.
    We do have in the meantime though--I do not consider a 
crisis a good thing. It is sometimes unavoidable when you do 
not take necessary steps, and that is the nature of capitalism, 
it gets very enthusiastic on the upside and then overdoes it 
and then has to adjust. And that is part of the process. It is 
what you learn from that. One of the things we need to do--and 
to answer your question, yes, I think the economy will continue 
to improve. I think we will have new opportunities and I think 
we will prosper. However, we have some things to get through.
    First of all, we have a great deal of uncertainty. I have 
no other opinion other than we have new pieces of legislation 
we have to learn. And that takes time. And so we have to learn 
about both the healthcare bill, about the regulatory reform 
bill and as we do that, then that will be put behind us and we 
will build going forward from here. So that is the process we 
are in right now. And we are also in the process of 
deleveraging.
    An economy that is well capitalized, which has a high 
savings rate, at least a reasonable savings rate, 
systematically does better than an economy that has a very low 
savings rate and is highly leveraged. We are adjusting, and as 
we adjust, new opportunities will present themselves and I 
think, given our basic capitalistic system, that we have every 
reason to be optimistic long term. But we have, as I have 
talked about before this committee actually, we have to think 
about what we are going to do with our national debt in a 
systematic fashion that gives the American people confidence 
that we will not try and solve it all in one year, but that we 
will get on a path that will solve it and, therefore, they can 
make decisions, both consumers and businesses can make 
decisions that are long-term oriented. And then we can think 
about very optimistic outcomes for the U.S. economy.
    Mr. Cleaver.  Thank you.
    Chairman Moore of Kansas.  Thank you Congressman Cleaver. 
And thank you, President Hoenig, for your testimony and your 
years of public service.
    You are now excused and I will invite the second panel of 
witnesses to please take your seats and we will have about a 3-
minute recess while the panelists change. Thank you, sir.
    Mr. Hoenig.  Thank you very much.
    [recess]
    Chairman Moore of Kansas.  The committee will come to 
order. I am pleased to introduce our second witness panel: Mr. 
Chuck Stones, president, Kansas Bankers Association; Mr. David 
Herndon, president and CEO, First State Bank; Mr. Mariner 
Kemper, chairman and CEO, UMB Financial Corporation; Mr. 
Jonathan Kemper, chairman and CEO, Commerce Bank, Kansas City, 
and vice chairman, Commerce Bancshares, Inc.; Ms. Marla Marsh, 
president and CEO, Kansas Credit Union Association; and Mr. 
John Beverlin, president and CEO, Mainstreet Credit Union.
    I want to thank our panelists for being on the panel today 
and sharing your information with us and your wisdom with us. 
Without objection, your written statements will be made a part 
of the record and you will each have up to 5 minutes to 
summarize your written statements.
    We will start with Mr. Stones. You are recognized, sir, for 
5 minutes.

   STATEMENT OF CHARLES A. STONES, PRESIDENT, KANSAS BANKERS 
                          ASSOCIATION

    Mr. Stones.  Thank you, Mr. Chairman, Representative 
Jenkins, and Representative Cleaver. It is a pleasure to be 
here. I think it is appropriate that we are in the Capital 
Federal Auditorium within the Regnier Center at the Johnson 
County Community College. It is a pleasure to be here.
    My name is Chuck Stones, and I am the president of the 
Kansas Bankers Association. Just a few comments on banking in 
Kansas to start off with, and these statistics early on are 
meant to represent commercial banks, not savings banks or 
credit unions.
    The Kansas Bankers Association represents 320 traditional 
community banks in Kansas. Kansas is a State with a large 
number of community banks. As of 12/31/09, there were 323 
chartered banks in the State, ranging from $4.5 million in 
assets to $3.7 billion in assets. The average size of a Kansas 
chartered bank is $155 million, and 36 percent of all chartered 
banks in Kansas have less than $100 million in assets. The 
total assets of all chartered banks in Kansas is just a little 
over $50 billion. So it is not surprising that a high 
percentage of our Kansas banks can be found in rural 
communities. Nearly 20 percent of all Kansas chartered banks 
are located in towns of fewer than 500 people, and 60 percent 
of all Kansas banks are located in towns of fewer than 5,000 
population. It is also important to understand that nearly two-
thirds of all Kansas banks have 14 or fewer employees.
    The overwhelming majority of Kansas banks--or banks in the 
Midwest and specifically in Kansas--were performing well 
leading up to the current economic downturn and continue to do 
so. The agriculture economy has been very strong and banks in 
rural areas continue to be strong and profitable. However, as 
Tom Hoenig said, some banks in the few metropolitan areas of 
Kansas that experienced rapid commercial and residential 
development growth in the early part of the decade are now 
experiencing some distress and are attempting to address those 
issues to the best of their abilities. They are dealing with 
declining value of collateral and the slow market causing their 
customers to be unable to remain current on their loans. It is 
important to remember that banks are reliant on their 
customers' ability to repay the loan commitments in order to 
remain profitable and well capitalized.
    Traditional banking has been the backbone of our Nation's 
economy and yet the term ``bank'' has been misused by almost 
everyone in the media and in Washington, D.C. Kansas banks 
still adhere to the 3-C's of credit--capacity, character, and 
collateral--when making loans. The extension of credit is in 
essence the evaluation of risk. We believe government 
intervention into this process altered decision making by many 
lenders and allowed loans to be made that never would have been 
in a free market system. The Community Reinvestment Act is one 
example of this type of intervention, as is the relaxed 
underwriting standards of Fannie Mae and Freddie Mac. While 
homeownership is a worthy goal, encouraging people to purchase 
homes they cannot afford is much worse, in the long run, for 
everyone. Government intervention in the lending process 
altered decision-making and interfered with the free market 
system on the front end of many transactions. Expecting that 
same free market system to work on the back end is unrealistic.
    Traditional banking needs to be strengthened and encouraged 
because, as in years past, it will be the engine that drives 
any economic recovery. Traditional bankers are just like any 
other small business men and women trying to keep their 
communities strong.
    Too big has failed. There are no chartered banks in Kansas 
that meet the criteria of ``too-big-to-fail.'' In fact, at $50 
billion in assets, the entire State of Kansas probably fails to 
meet that test. In some people's eyes, that makes Kansas and 
Kansas banks insignificant. Yet when you look at the thousands 
of individuals, small businesses, and agricultural operations 
that are financed by the traditional community banks in Kansas, 
one could hardly call it insignificant. However, the 325 banks 
in Kansas are negatively impacted by the policy of ``too-big-
to-fail.''
    When megabanks are systematically bailed out time after 
time, they no longer see downside to their overly risky 
behavior, yet traditional community banks in the whole country 
are hurt by the economic downturn that inevitably follows. It 
has been my view for quite some time that business lines, 
operations, and functions outside of the traditional banking 
function of taking deposits and making loans have put the FDIC 
Deposit Insurance Fund at risk. Those functions need to be 
identified, segregated and capitalized separately; thereby, 
reducing the risk to the entire banking system. Will the new 
systemic risk council and other policies put in place by the 
Dodd-Frank bill work? As Tom Hoenig said, time will tell. It 
will take a great amount of fortitude by policymakers and 
regulators to see if that does ultimately work.
    In the last part of my testimony, I would like to focus on 
regulatory burden and its effects on banks, on consumers, and 
on the economy as a whole. There are some policymakers who 
believe there is no such thing as too much regulation. 
Traditional banks feel the burden of regulation. With a typical 
small bank, more than $1 out of every $4 of operating expense 
goes to pay for governmental regulation and that was before the 
Dodd-Frank bill.
    We are aware that traditional community banks have a 
growing list of regulatory burden. I have brought a list of 
those new rules and regs that have been put in place the last 2 
years. The customers are hurt by overregulation. Banks in 
Kansas have told me that they are trying to decide whether it 
is just impossible or not to remain in business after the Dodd-
Frank bill takes effect. And the realities of lending, 
especially in the mortgage area in the rural area are not given 
consideration when new rules are implemented.
    Chairman Moore of Kansas.  The gentleman's time has 
expired. Can you wind up, sir?
    Mr. Stones.  Yes, thank you.
    Just briefly, everyone should be concerned about 
overregulation and an efficient banking industry. The term 
``financial intermediation'' from economics 101, from my 
economics textbooks, ``commercial banks also perform an 
additional function which other financial institutions and 
businesses do not. That unique function is to create money by 
taking deposits and making loans. Because of their unique 
money-creating abilities, commercial banks are unique and 
highly strategic institutions in our economy.''
    It should be important to all of you, policymakers and 
consumers and business people alike, to maintain a highly 
efficient banking system.
    Thank you.
    [The prepared statement of Mr. Stones can be found on page 
84 of the appendix.]
    Chairman Moore of Kansas.  Thank you, Mr. Stones.
    Mr. Herndon, you are recognized for 5 minutes, sir.

 STATEMENT OF DAVID L. HERNDON, PRESIDENT AND CHIEF EXECUTIVE 
        OFFICER, FIRST STATE BANK OF KANSAS CITY, KANSAS

    Mr. Herndon.  Good morning, Chairman Moore, Representative 
Jenkins, and Representative Cleaver. My name is David Herndon, 
and I am the president and chief executive officer of First 
State Bank in Kansas City, Kansas. I am also the immediate past 
chairman of the Kansas Bankers Association.
    First State Bank was founded in 1901. We celebrated our 
109th anniversary on July 1st of this year. Special uniqueness 
to our bank is that it was founded and remains headquartered in 
Kansas City, Kansas, and it has always been privately and 
locally owned. I have been associated with the bank since 1978 
and served as its President and CEO since 1990.
    Based on asset size, First State Bank is one of the 
smallest banks in the Kansas City metropolitan area. Yet we 
offer a full range of bank services and delivery systems 
directed to our customers and to our community. Our trade area 
is primarily southeast and south central Wyandotte County, 
Kansas, northeast and north central Johnson County, Kansas, and 
west central Jackson County, Missouri. This area includes a 
sizable portion of the urban core of Kansas City, Kansas, and 
it represents a significant number of our customers. Our 
business customers are primarily manufacturing, transportation, 
warehousing, distribution, and subcontracting businesses. The 
consumers that we serve are historically employees of these 
businesses as well as other low- to moderate-income, urban core 
residents.
    Our business model reflects our clients' banking 
requirements. When depositors and borrowers are enjoying good 
times, so do we. The challenge is just the same when those 
times are not so good.
    Throughout the 1990's and the early 2000's, First State 
Bank led its peers in nearly all measures of financial 
performance. Following 12 consecutive years of increasing net 
income and asset growth, profits suffered a decline but 
remained positive after the terrorist attacks of September 
11th. The bank worked with its business customers at that time 
to help them recover from the far-reaching economic shocks and 
business setbacks from this event. But some of our clients did 
not make it and were unable to repay their borrowings. The 
result was that we were forced to boost our reserves, increase 
our capital, and slow our asset growth. Despite the adverse 
impact to the earnings, we still remained profitable and we 
still remained well capitalized.
    We rebounded our earnings in 2005 and returned to the pre 
9/11 levels in 2006 and 2007. Then 2008 hit and the world 
changed again. But they changed and led to headlines that 
reported that banks were in trouble, that banks were failing, 
that banks were not going to be able to help their clients. 
Unfortunately, many of those reports were true.
    But they were not true at First State Bank and they were 
not true at other Kansas banks.
    First State Bank, like it has for 109 years, still makes 
loans to qualified borrowers, still offers professional banking 
services, and strives to build the same strong relationships 
with its clients. And those relationships allow us to adjust 
our business model and work with the bank clients as their 
business models change, whether it be by economic circumstances 
or other circumstances. That adaptability has allowed us to 
survive through the Depression of the 1930's, the 1980's, the 
post-9/11 economy, and it is allowing us to survive today.
    We are trying to position ourselves to persevere in this 
economy just as the other banks throughout the Midwest are 
doing. To put it simply, we are healthy, and we are profitable 
and we remain cornerstones in our communities. But as you heard 
before, many banks and bankers and directors of small banks are 
judging whether they can stay in business and feel that they 
are needlessly under attack. Too many feel that they are being 
punished for actions which they never undertook. For example, 
we never participated in any subprime lending and never relaxed 
our lending standards, yet we were brushed into that group when 
it was in vogue to do so.
    Most of our borrowers are repaying their loans, but some 
are not. And we are working diligently to work with those who 
are struggling. It usually takes a long time to turn around a 
troubled debt but we are not being granted that time in too 
many cases. Banks should not have to write down loans to 
legitimate borrowers who are working through a financial crisis 
they have never seen before but yet they are required to do 
that.
    Additionally, our profits of small and medium-sized banks 
are being attacked. Recent legislative and regulatory actions 
have dramatically decreased income sources and increased 
operating expenses. Increased deposit insurance premiums, 
compliance costs, and restricting interchange fees are 
certainly examples. It appears that many of the banks in this 
area are concerned that government regulators have begun 
choosing winners and losers and if so, the small and medium-
sized banks will regrettably be those losers.
    We were well equipped to meet the requirements of our 
clients, both depositors and borrowers. Liquidity at our bank 
and throughout Kansas banks is and has been significantly 
higher than our peers in several areas of the country. And most 
certainly higher than many of those non-regulated or lesser-
regulated institutions that are mistakenly referred to by so 
many as banks. We are profitable, we have strong reserves, and 
we have aggressively added to those reserves since the economy 
turned sour, further protecting our clients. Our capital is 
strong. First State has and will as long as the current 
ownership is involved always be well capitalized or above based 
on the regulatory definitions. And the majority of bankers 
throughout this region have the same attitudes. Our clients 
have confidence in us and because they know we are their 
financial partners in their success, their success will breed 
our success.
    That mutual process will prove to be the catalyst for an 
economic recovery, I believe. The sources will create and 
sustain jobs.
    Chairman Moore of Kansas.  The gentleman's time has 
expired. If you can wind up, sir.
    Mr. Herndon.  I can, thank you.
    The risk of unsubsided legislative and regulatory burdens 
will have unintended adverse consequences. Too many of us will 
be put out of business. We respectfully request the continued 
work--we are anxious to work with regulators and legislators to 
make that happen. But only through persevering in a diverse 
financial industry will our economy sustain.
    Thank you.
    [The prepared statement of Mr. Herndon can be found on page 
45 of the appendix.]
    Chairman Moore of Kansas.  Thank you, sir.
    Mr. Mariner Kemper, you are recognized, sir, for 5 minutes.

   STATEMENT OF MARINER KEMPER, CHAIRMAN AND CHIEF EXECUTIVE 
               OFFICER, UMB FINANCIAL CORPORATION

    Mr. Mariner Kemper.  Thank you, Chairman Moore, 
Representative Jenkins, and Representative Cleaver. We are 
pleased to be with you today to join in this dialogue along 
with my colleagues here in the credit union arena and the 
banking sector. The country is entering a new era for financial 
services after a very rough time for many in the financial 
sector, as well as consumers and businesses.
    I particularly appreciate the comments by Tom Hoenig. Tom 
has shown outstanding leadership, both in the Federal Reserve's 
relationship with banks here in the Tenth Fed District, as well 
as a sound voice for reasoned policy nationally.
    From our interactions with customers, we can tell you that 
many businesses and consumers continue to face a challenging 
economy, whether through unemployment or weak demand for 
products and services. This makes it especially important that 
we are having this conversation today.
    We believe, as you do, that solid Midwestern businesses 
like UMB and our colleagues here today are very much a part of 
the solution. It is critical that policymakers focus on 
constructive actions now to strengthen business, create private 
sector jobs, and restore growth in places like Kansas and 
Missouri.
    Let me comment briefly on UMB's approach to banking. Unlike 
some financial institutions, UMB did not plunge into the bubble 
mentality. UMB has pursued three goals as pillars of our 
business strategy--quality, diversity, and stability. These 
goals have served us, our customers and our shareholders very 
well over the years.
    UMB ranks as number two in the United States, according to 
a study by Forbes magazine ranking banks on asset quality, 
capital adequacy, and profitability. We take great pride in the 
fact that relative to industry averages, UMB has posted strong 
and consistent earnings year over year through the financial 
crisis. Throughout the crisis, we have had no need or desire to 
seek government bailouts or outside capital infusions.
    In 2010, the Nation is entering a new financial era in what 
we call the ``new normal.'' There is a hangover from this 
period of financial excess, which is hindering the lending 
environment and there is an increase in regulatory involvement 
with banks and other financial institutions, which has only 
begun.
    The lending environment is a topic of much concern. Let me 
assure you, UMB Bank never stopped making loans and has plenty 
of liquidity to meet the needs of any qualified prospective 
borrower. We have increased our total loan balances through 
2007 to the mid-2010 period an average of 5 percent per year 
and our total commercial loan commitment figures have increased 
40 percent since 2007.
    As the economy has slowed down, however, we have 
experienced a decline in demand for commercial and industrial 
loans. The strains of the recession have caused many businesses 
to scale back their plans. We believe it would be a mistake for 
banks to loosen underwriting standards now and take speculative 
loans on in an attempt to return to what we perceive as normal 
levels.
    If our goal is to stimulate prosperity, I encourage 
political leadership to act on the counsel from leaders in the 
private sector who identify specific constructive actions to 
help restore a more vibrant economy. For instance, the Business 
Roundtable has called on Congress for tax reform to help U.S. 
corporations stay competitive and get on a path of expansion. 
The Roundtable has spelled out specific provisions of the Tax 
Code that create a drag on growth and competitiveness. To bring 
on economic recovery and put people to work, we need to 
stimulate business spending, not by increasing government 
spending or pressuring banks to lend, but by reducing the 
burden on businesses.
    Another example of constructive action involves the 
regulation of banking and finance. Passage of the Dodd-Frank 
Act this summer was just the beginning, not the end of this 
process. And many, many questions remain unanswered.
    As further changes are made and rules are developed, we 
support the strengthening of bank capital requirements, 
including both the tiered and risk-based capital levels. But 
this approach should be risk-based to start with, and should 
focus on incentives rather than regulatory penalties. Deposit 
insurance rates also could be incorporated into a set of 
incentives. That is, the higher the risk profile in an 
institution, the higher the insurance rate they should pay. The 
reverse should be true. This distinction between both 
categories is very slight today. This would drive the principal 
behavior that poses less systemic risk such as that 
demonstrated by UMB and others today.
    Although the Dodd-Frank Act was designed with good 
intention of addressing excessive leverage and the ``too-big-
to-fail'' issue, it has unfortunately become a mechanism to 
regulate bank profitability as well as product design and 
competition. History tells us that a lack of regulation is not 
the catalyst for a financial crisis. Rather, the stability of a 
system rests on the will of business and political leadership 
to do what is right when it is right.
    If we truly wish to change behavior and counter the forces 
of human nature, we need to provide incentives for financial 
discipline. We believe banks and other players in the financial 
system, including policymakers and regulators, would do well to 
pay attention to quality, diversity, and stability. We will 
achieve long-term recovery by encouraging sound financial 
practices at every level from banks to business to consumer and 
even government.
    I am happy to discuss the particulars with you as we move 
forward. I will leave you with one of my favorite quotes from 
President Truman, and it seems to apply to shaping this new era 
for our financial system: ``Men make history, not the other way 
around. In periods where there is no leadership, society stands 
still. Progress occurs when courageous, skillful leaders seize 
the opportunity to change things for the better.''
    Thank you again for having me with you today.
    [The prepared statement of Mr. Mariner Kemper can be found 
on page 72 of the appendix.]
    Chairman Moore of Kansas.  Thank you, Mr. Kemper.
    And Mr. Jonathan Kemper, sir, you are recognized for 5 
minutes.

 STATEMENT OF JONATHAN M. KEMPER, CHAIRMAN AND CHIEF EXECUTIVE 
    OFFICER, COMMERCE BANK, KANSAS CITY, AND VICE CHAIRMAN, 
                   COMMERCE BANCSHARES, INC.

    Mr. Jonathan Kemper.  Thank you, Chairman Moore, 
Representative Jenkins, and Representative Cleaver. I always 
love it when my cousin quotes our former employee, Harry 
Truman.
    [laughter]
    Mr. Jonathan Kemper.  I am Jonathan Kemper and, as 
mentioned previously, I am vice chairman of Commerce Bancshares 
and chairman of Commerce Bank of Kansas City.
    In the interest of time, rather than recite my formal 
testimony and repeat those of the co-panelists which I 
certainly endorse, I will attempt to keep to a few major 
points, which I believe are of critical importance, especially 
given Representative Jenkins' comments of taking lessons back 
to Washington.
    As has been said, we really appreciate your efforts in 
setting the record straight, because much of the financial 
crisis stemmed from the very largest financial services 
companies and not the community-oriented banks that you have 
heard from already. The banks have been lumped together without 
distinction and we find ourselves blamed for a financial 
meltdown that we actually warned people about and had no part 
of. This has been the biggest financial crisis since the Great 
Depression and has caused sweeping changes in the banking 
business, not all of which are complete now.
    In the discussion of the questions, I would expand small 
and medium-sized Midwestern banks to traditional banks in my 
remarks and I would say that except for the top four banks in 
our country, the rest of us are all small banks in many of the 
ways that have been described today. I have put a graph into my 
testimony, and I think you have a copy of it, which shows where 
Commerce Bank fits. And when I put this together, I just could 
not believe that there are really two orders of magnitude 
between us and the largest banks.
    To give you a sense of what is going on here, the four 
largest banks are in a world all unto themselves in the 
trillion dollar club. It falls off from Wells Fargo to U.S. 
Bank by a factor of four. So there really has been a complete 
sea change and Tom Hoenig went through that, about how much 
banking has been concentrated in the very, very top. Those 
trillion dollar clubs of megabanks and brokers differ from 
traditional banks both in size, in business style, and on their 
individual impact on the national and global financial systems. 
So we have resisted and certainly would caution against lumping 
us in that pot.
    It has also been fashionable, many have said that the 
government bailed out the banks with TARP. And just to set the 
record straight on that one, not only did traditional banks not 
cause the crisis, but the government will in fact make a profit 
on the money placed into the traditional banks and the bad 
actors who caused the large bailouts, AIG and GMAC, are going 
to have us pay their bills, which is really galling.
    Commerce Bank today is $18 billion. We have operations in 
five States, primarily Missouri and Kansas. Our success--and 
you have seen this in our testimony--is really because we have 
stronger customer focus. Our growth has been a solid organic 
basis and a knowledge and involvement in our communities. We 
would characterize ourselves as a good bank and a good 
corporate citizen. We are among the best capitalized banks, we 
declined TARP funds, and we did not contribute to the crisis, 
but we are paying the cost and bearing the extraordinary 
regulatory burdens. And I will just mention a comment made in 
the press in the signing of the Dodd-Frank bill, President 
Obama said, ``Unless your business model depends on cutting 
corners and bilking your customers, you have nothing to fear 
from this reform.'' I respectfully submit we are concerned and 
we do not believe that is a true statement. We think that the 
FDIC insurance costs have increased already and are now going 
to increase on banks of $10 billion and above. That is clearly 
something that is going to affect our bank. The Consumer 
Financial Protection Bureau has potential to add substantial 
cost and restrict business and the price setting as established 
by the Durbin amendment significantly affects future fee 
income. In fact, there are more than 200 new regulations in the 
Dodd-Frank bill that are going to tax our staff and increase 
our costs.
    I am going to skip over the comments about the last few 
years. I think they have been well summarized previously. All I 
can say is that we, as has been mentioned before, saw what was 
going on in the excesses and did not make the mistakes that 
others did, but we are tremendously affected by it, that the 
growth in borrowing taught by the hedge funds using leverage 
and credit default swaps still is out there and we still have a 
very difficult and ugly picture.
    In fact, in 2007, we had--financial services represented 
over 25 percent of all the profits in the United States.
    In conclusion, I just wanted to say that there is terrible 
trouble if the government gets involved in the level of pushing 
the scale in favor of the largest banks and against us. And I 
have given you a recent--in fact, it is coming out next month--
a Harvard Business Review on where the judgment deficit is 
going to be and I recommend it for your reading. It was done by 
a classmate of mine at the Harvard Business School, and talks 
about the need and importance of local decision-making, and if 
we see the disincentives to the community-oriented banks that 
are represented by the panel and by mid-sized banks and small 
banks, we are going to see a deficit in judgment in the field 
that will provide the future for the economy that we need to 
see grow.
    Thank you so much.
    [The prepared statement of Mr. Jonathan Kemper can be found 
on page 60 of the appendix.]
    Chairman Moore of Kansas.  Thank you for your testimony, 
Mr. Kemper.
    Next, the Chair recognizes Ms. Marsh for 5 minutes.

  STATEMENT OF MARLA S. MARSH, PRESIDENT AND CHIEF EXECUTIVE 
            OFFICER, KANSAS CREDIT UNION ASSOCIATION

    Ms. Marsh.  Chairman Moore and members of the subcommittee, 
I appreciate the opportunity to appear before you today on 
behalf of the Kansas Credit Union Association. Kansas has 103 
credit unions serving 590,000-plus member owners.
    Heavy focus has been placed on the risky practices that 
contributed to the great recession and what the government 
needs to do to prevent systemic failures in the future. We 
appreciate your willingness to also look at the players that 
did not contribute to the recession and are helping to restore 
economic stability. Much can be learned from credit unions with 
their philosophy of putting people before profit. My written 
testimony provides pertinent statistics on the State of Kansas' 
economy and Kansas credit unions in general.
    Here are a few highlights:
    The economy and Kansas credit unions have fared better on 
many economic indicators without the dramatic boom-and-bust 
experienced in other regions. However, we have felt the effects 
of actions by those less cautious and/or more greedy. A flight 
to the safety of a trusted partner is evidenced by our sizable 
asset growth over the past 18 months. Loan growth remains 
strong at over 5 percent as of March. Overall, credit unions 
are healthy and well capitalized at an average 10.8 percent net 
worth to assets ratio. And any consolidation since 2008 can be 
attributed more to the increasing marketplace complexity and 
the escalating compliance and regulatory burden than the 
recession. We hope that the committee will monitor the overall 
impact of new and current regulations and how the Dodd-Frank 
law is implemented.
    As far as systemic risk, no credit union or group of credit 
unions is large enough to negatively impact the entire 
financial system and, therefore, the cost of any credit union 
failures would be contained within the credit union system 
itself.
    The greatest risk to credit unions comes from collateral 
damage caused by the ``too-big-to-fail'' institutions. The 
devaluing of property, the decrease in consumer confidence and 
the increase in unemployment all negatively impact our member 
owners.
    A second and equally damaging result of ``too-big-to-fail'' 
is the rise in regulatory burden, an examiner one-size-fits-all 
approach that stifles our efforts to provide solutions that 
meet member needs and help grow local economies.
    So what lessons can be learned from Kansas credit unions? 
First, structure matters. The biggest difference between the 
Wall Street business model and the credit union business model 
is the member ownership component. When the institution is 
owned by the customer, there is a mutual responsibility to act 
in the best interest of each party. The large degree of 
separation from decision maker to end user seen in large 
financial firms encourages an internal profit focus and 
excessive risk-taking.
    Second, business practices matter. Credit unions have solid 
underwriting processes, hold most of their loans on their 
books, and their loan decisions rely on character and capacity 
to repay, not just collateral or a credit score.
    Third, people matter. Credit unions focus on member needs, 
not greed, offering solutions such as restructuring loans, 
deferring payments, and providing financial education and 
counseling.
    In summary, credit unions are a small portion of the 
overall marketplace. In Kansas, it is only 6 percent. They have 
a strong role to play in financial services as a solid 
alternative to for-profit banking. Even though credit unions 
did not cause the problem, they face steep compliance costs as 
part of the clean-up. We urge Congress to recognize the 
enormous challenges these regulatory changes present to small 
and mid-sized institutions. We also urge Congress to allow 
flexibility and to increase options for credit unions to serve 
their members, such as passing legislation to increase the 
statutory credit union member business lending cap.
    The credit union mission of putting people before profits 
has been good for Kansas. Please help us to continue to deliver 
on that mission. On behalf of Kansas credit unions and their 
member owners, I thank you for inviting us to testify.
    [The prepared statement of Ms. Marsh can be found on page 
79 of the appendix.]
    Chairman Moore of Kansas.  Thank you.
    The Chair next recognizes Mr. Beverlin for 5 minutes, sir.

    STATEMENT OF JOHN D. BEVERLIN, Sr., PRESIDENT AND CHIEF 
           EXECUTIVE OFFICER, MAINSTREET CREDIT UNION

    Mr. Beverlin.  Chairman Moore, and members of the 
subcommittee, I am John Beverlin, president and CEO of 
Mainstreet Credit Union, formerly the Credit Union of Johnson 
County, a $260 million cooperative serving over 52,000 members. 
We were chartered in 1953 by a group of school teachers who 
wanted to control their own financial destiny. We currently 
have branches in Johnson County, Lawrence, Leavenworth, and 
Kansas City, Missouri. We serve employees of the community 
college where this meeting is being held, employees of the 
Shawnee Mission Medical Center and the Honeywell plant in 
Olathe, and over 100 employee groups.
    Mainstreet has had employee groups that have faced 
employment uncertainty and layoffs. This continues today. I 
share this information so that you understand the diverse group 
we serve. In 2009, Mainstreet was making adjustments to our 
operations to better survive the economic downturn. We faced 
assessments from NCUA for the year 2009 of over $627,000, over 
a third of our anticipated net income for the year. We did, 
nevertheless, record a positive bottom line for 2009 and 
remained very well capitalized.
    We continue to review expenses. We froze management 
salaries, reduced the amount of employee raises, and cut 
contributions to employee retirement.
    Some good things did happen in 2009, loans grew as a result 
of larger lenders exiting the lending market. Auto loans issued 
increased over 195 percent, mortgage loans over 75 percent. In 
the end, we survived 2009. A good part of it has to do with 
Mainstreet's conservative approach to business, including a 
diversified loan portfolio, avoiding concentrations in any one 
area.
    Another part of it has to do with the nature of a credit 
union. As a financial cooperative, a member is an owner of 
their credit union. We get to know our member owners and will 
work with members when they are faced with financial 
difficulty.
    So far, we have faced continuing challenges in 2010. We 
have had an assessment of $295,000 from NCUA with an additional 
of up to $400,000 expected. Mortgage lending continues to be on 
the increase; however, auto loans are down. Large national auto 
lenders have re-entered the market utilizing subsidized rates 
as low as zero percent. To date, we have not laid off any 
employees and have refrained from increasing fees to our 
members.
    We continue to review expenses looking for ways to lend 
money, our main source of income and ways to better serve our 
members. We anticipate additional premiums for several years to 
come from NCUA. NCUA assessments aside, these are things we do 
every year. What was unique for this past year and will pose 
additional concerns for us in the future are legislative and 
regulatory burdens. It seems to me that the mere presence of 
this subcommittee and the topic of today's discussion, that 
there is agreement that Midwest banks and credit unions did not 
cause the financial crisis we are dealing with. Yet all 
financial institutions seem to be grouped together when any 
attempt is made to look for solutions to the crisis.
    This past year, Mainstreet has had to deal with credit card 
legislation, spend almost $50,000 educating our members because 
of imposed regulatory changes to overdraft protection, and the 
recent passing of an amendment on debit/credit card interchange 
will result in additional lost income.
    We are concerned with where it will all stop. The impact of 
these regulatory changes will ultimately fall on the shoulders 
of our members and Kansas consumers.
    One area where I think credit unions can help is in the 
area of business lending to members. Mainstreet does not 
currently do business lending by definition of regulation. An 
arbitrary business lending cap of 12.25 percent of assets was 
legislated in 1998 and it is hard to justify putting the needed 
resources in place with a cap at the current level. Legislation 
has been imposed that would increase this cap to 27.5 percent 
of assets. An alternative, it would seem to me, would be let 
our regulator determine the cap. The regulator is in a better 
position, while examining a credit union for risk, to determine 
the cap.
    Mainstreet will survive and continue to serve our members. 
We are anticipating continued pressure on our bottom line, 
reducing our net income for the next 3 to 5 years. It is 
important to note that as a not-for-profit cooperative, we are 
not after net income just for its own sake. Retained earnings 
are our only source of capital.
    In conclusion, Mr. Chairman, I appreciate the subcommittee 
taking the time to explore these important issues. And thank 
you for inviting us to testify.
    [The prepared statement of Mr. Beverlin can be found on 
page 40 of the appendix.]
    Chairman Moore of Kansas.  Thank you, Mr. Beverlin. And I 
thank the panelists for their testimony. I am going to start 
with questions.
    Mr. Hoenig testified that community banks will survive the 
crisis and recession and will continue to play their role as 
the economy recovers. The more lasting threat to their 
survival, though, concerns whether this model will continue to 
be placed at a competitive disadvantage to larger banks. I 
would like to ask each of the panelists if you would care to 
comment, and please keep your responses kind of short so 
everybody will have a chance to comment. Do you believe that is 
a concern? I would like to hear your opinion, please.
    Mr. Stones.  Absolutely, we think that is a concern. Thank 
you for the question. We think that in the long run, the 
regulatory burden placed on all banks by this law and laws in 
the past have placed an undue burden, a more heavily 
concentrated burden, on community banks. They just simply do 
not have the resources to hire new people, to do whatever it 
takes to comply, to try to comply with the new laws and 
regulations.
    Chairman Moore of Kansas.  Thank you, sir. Mr. Herndon?
    Mr. Herndon.  I would concur. Our bank has 26 people who 
work for it. Other banks have departments of 260 people to 
absorb that. So it is absolutely tilted--we need to level the 
playing field.
    Chairman Moore of Kansas.  Thank you, sir. Mr. Kemper, 
Mariner Kemper?
    Mr. Mariner Kemper.  There are a couple of areas I think to 
focus on. One is just the pure compliance costs of living with 
the new bill. I think we will all be finding out what that is 
over the coming years, there are what, 2,000 pages of it. There 
is a tremendous amount of that we do not know what it looks 
like yet, it is going to cost the industry a great deal and the 
smaller banks obviously have a harder time shouldering that 
burden.
    Additionally, I still have a hard time bringing together 
the intended purpose of Dodd-Frank to end or affect the crisis, 
in a lot of the things that have ended up in there like the 
Durbin bill and things like that, that have really nothing to 
do with the crisis and will cost us. I think that is really 
where the greatest fear for the industry is, is the fee income 
that will disappear over the next few years.
    Mr. Jonathan Kemper.  Without question, the Dodd-Frank bill 
disadvantages community banks and it is going to add to their 
cost and restrict their activities. I think this is a very 
valid concern and should be looked into, especially as it 
affects the Midwest.
    Chairman Moore of Kansas.  Ms. Marsh?
    Ms. Marsh.  I think the complexity of the Dodd-Frank bill 
leaves us all kind of wondering exactly what is going to affect 
each of us. It is very complex, 200 new rules, and we know at 
least 35 affect credit unions at this time. Debit interchange 
is a major cost for our credit unions and the Fed sitting on 
identifying what those tier levels will be is very important 
for us. The Consumer Protection Agency and who heads that is 
going to be very important out of that bill. Mortgage lending 
and disclosures and then payments and settlements are also 
contained in there, and that will have a direct impact on us 
too.
    Chairman Moore of Kansas.  Thank you. Mr. Beverlin?
    Mr. Beverlin.  I think overall the credit unions' concern 
has always been that because of our size, we sometimes are 
forgotten. And the impact that regulation has on us is not, a 
lot of times, looked at. I know Mainstreet, for the very first 
time 2 months ago, we now have a full time VP of Risk 
Management or Regulation and Compliance. A lot of small credit 
unions cannot afford to do that. So they rely on other sources 
and sometimes, it is the manager of that credit union who has 
to fill that need and it takes him away from doing other things 
and helping his members.
    Chairman Moore of Kansas.  Thank you.
    I talked to Mr. Hoenig about this and would like to ask 
your reaction, if you have reaction to this. Despite the 
painful recession, according to today's New York Times, the 
popular belief is that as housing prices rebound, they will 
continue to go up forever. The article cites a recent survey by 
Case-Shiller where many people said they still believe prices 
would rise about 10 percent a year for the next decade. Yale 
economist Bob Shiller was quoted, saying, ``People think it's a 
law of nature.'' Should people have new expectations for the 
housing market for the next generation? Mr. Mariner Kemper, do 
you have any thoughts about that?
    Mr. Mariner Kemper.  I absolutely concur with Mr. Hoenig. 
What goes up must come down. We have had 36 some-odd recessions 
since the mid-1850's, most caused by a real estate crisis. That 
is the only fact out of this whole thing is we will see it 
again.
    Chairman Moore of Kansas.  Mr. Jonathan Kemper?
    Mr. Jonathan Kemper.  Housing is one of the most important 
industries as well as important feature in America. And we 
would like to be supportive of responsible resurgence of 
housing, but as you say, there is an unrealistic--as Tom said, 
there is an unrealistic expectation that it is going to recover 
and bounce back. I think the new normal is going to be related 
much more to the value of housing relative to income. It got 
way out of whack and as Tom said, we had several years' supply 
that created a damping effect. As that is worked off, I think 
the valuation of housing will be much more reflective of the 
income available to support it and with the increases in energy 
prices and changes in living, we are going to have to look at 
our housing stock that is fit more for what our Nation's needs 
are.
    Chairman Moore of Kansas.  Thank you. My time has expired, 
and I would ask the other panelists if you have some comment 
you would like to make, if you would submit those please in 
writing, I would appreciate that very much.
    The Chair next recognizes Representative Jenkins for 5 
minutes.
    Ms. Jenkins.  Thank you, Mr. Chairman, and thank you all 
for your words this morning.
    I will start with Mr. Stones. Your written testimony 
indicates that a majority of traditional community banks in 
Kansas serve towns of fewer than 5,000 citizens and operate 
with just a few employees. Given that regulatory costs already 
represent more than 25 percent of the operating budgets of 
these community banks, can you just summarize again for us how 
the Dodd-Frank bill will add to these banks' operating costs?
    Mr. Stones.  As I think Mr. Mariner Kemper mentioned, there 
are over 240 new regulations that will come out of the Dodd-
Frank bill. It is estimated based on historical legislation to 
regulation that there is going to be in excess of 5,000 to 
10,000 new pages of regulation that banks are going to have to 
comply with. Obviously, it would be speculation on my part to 
say how much additional cost that would be, but obviously with 
those kinds of numbers, the amount will be significant. KBA 
employs four full-time attorneys whose job is to answer 
compliance questions for our members. They answer--currently in 
the past few years, they answer somewhere around 5,000 
inquiries per year. That is starting to exponentially increase. 
Most of those are obviously from community banks, but some of 
the larger banks in our State like to just kind of ask 
questions of other attorneys to kind of make sure they are 
thinking along the same lines, but we are trying the best we 
can to help our smaller banks comply with all the laws and get 
ready for the new Dodd-Frank legislation.
    Thank you.
    Ms. Jenkins.  Okay, thank you.
    Moving right down the table, I guess I will address this 
one to Mr. Herndon, but certainly if anybody has anything to 
add, please do. You mentioned in your written testimony that 
many bankers and directors of small to medium-sized financial 
institutions in the Midwest feel that they are needlessly under 
attack and many feel that they are being punished for the 
actions for which they never took and that government and 
regulators are choosing winners and losers and it seems that 
small and mid-sized banks are the losers.
    What can Washington do or could we have done differently to 
treat traditional community banks better and what can we do in 
the future to ensure that this very reliable sector of banking 
is not the recipient of further unintended consequences?
    Mr. Herndon.  It seems that every time that we mention 
that--we being small and medium-sized banks throughout the 
country--did not participate in the events that led to the 
crisis, that the response was, ``Yes, we know, you were not 
part of the problem.'' In fact, the legislation has directed 
the cure to those that were not part of the problem. We did not 
participate in those new and exotic financial instruments, most 
of them, and probably those that did create them do not 
understand the consequences.
    So, despite the fact that we were doing our jobs serving 
our communities, serving our customers, the new regulations are 
going to have a tremendous adverse unintended consequence on 
the banks of my size, in my opinion. We cannot absorb the cost 
of compliance; the burden is just too great to stay in 
business. So I think that had the direction been to those that 
were responsible instead of the easy target that we turned out 
to be, it would have been more effective.
    Ms. Jenkins.  Okay, thank you.
    Mariner, I think you mentioned in your testimony that your 
bank has expanded further into the financial services sector in 
order to hedge and diversify your profit centers. How will the 
enactment of the financial regulatory reform bill affect the 
way you and other banks do business?
    Mr. Mariner Kemper.  For the most part, our furthering of 
our diversity actually stabilizes that. It helps minimize the 
impact of the bill because most of our diversity comes from 
non-consumer oriented business lines. Most of the pain in the 
bill is directed at the products and services that we provide 
for consumers as an industry and our diversity actually moves 
us away from that. So as a particular institution, our 
diversity helps us.
    I guess my greatest concern is that the bill has moved away 
from what its intended purpose was, and that was to address 
excess in the system and ``too-big-to-fail.'' The ``too-big-to-
fail'' has many loopholes in it still. I think that would be 
something I would have you focus on, as to how you tighten--as 
Mr. Hoenig mentioned, it is going to be awfully hard to see 
what can happen over a weekend. So I think we focus on the 
``too-big-to-fail'' issue and then as it relates to the excess, 
bringing in the unregulated is great, but there are too many 
things in that bill that have absolutely nothing to do with the 
problems that came about. And I would ask that we try to 
minimize the impact of those things and focus on the crisis 
oriented issues.
    Ms. Jenkins.  Thank you, I yield back.
    Chairman Moore of Kansas.  I thank the gentlelady. The 
Chair next recognizes Congressman Cleaver for 5 minutes, sir.
    Mr. Cleaver.  Thank you, Mr. Chairman.
    Let me thank all of you for giving this kind of time to us 
today, and your testimony has been much appreciated.
    Mr. Stones, in your testimony, I agree with almost all of 
your comments, with a slight disagreement that the most misused 
word in the English language for the last 18 months is 
``banks.'' I agree we misuse it. I think the most misused word 
for the last 18 months and the last 18 centuries is ``love.''
    [laughter]
    Mr. Stones.  I defer to that, thank you.
    Mr. Cleaver.  But my concern centers on your comments on 
page 2 and they relate to the Community Reinvestment Act. The 
Community Reinvestment Act was approved long before any of us 
were here. In fact, I think most of us were just getting out of 
school when it was passed, but it was enacted because there was 
a severe shortage of credit in low- to moderate-income 
communities. And during this financial meltdown--actually 
before, from time to time, we have people who say, as did you, 
that CRA was somehow connected to the financial collapse.
    All the evidence points to the contrary. In fact, I debated 
this issue on the Floor for 1 hour, and it is one of those 
things that just continues to roll in spite of the evidence. 
The Federal Reserve conducted a study which showed that only 6 
percent of the mortgages that were made just prior to the 
collapse were made in CRA assessment areas.
    The language in the bill, and I am paraphrasing it, I did 
not know I would end up talking about it, but the language in 
the bill says something like ``and loans should be made with 
the highest possible prudence'' and so forth. In hearing after 
hearing after hearing, we have asked experts, we have asked 
Treasury Secretaries, FDIC Chairs, economists who appear before 
our committee, and we have never had anyone from the expert 
community say that CRA contributed. But it is still one of 
those things that floats around out here and is said 
repeatedly.
    So I am just curious about your comment.
    Mr. Stones.  Thank you, Representative Cleaver. I guess my 
comment is meant to talk about a broader issue. I agree with 
you, I am not convinced that Community Reinvestment Act loans 
in and of themselves were a large contributing factor to the 
crisis. The point I was trying to make was that there were laws 
and regulations put in place, like the Community Reinvestment 
Act, that took over the free market system, in that loans were 
made--and again, not necessarily created the crisis--but loans 
were made, and just one example was the CRA.
    Loans were made that would not necessarily have been made 
otherwise, that loans were made in order to comply, to make 
sure your bank complies with CRA and, as you said, low- to 
moderate-income areas, that those individuals might not qualify 
for a loan. Now if you take that out into California and 
Florida and Arizona, and I agree these were not CRA loans that 
were involved in the crisis necessarily, but they were the same 
kind of loan that were talked about by the theory and the wont 
of Administration--and the Bush Administration was part of this 
also--was that homeownership is the American dream and that 
every person should have the ability to own a home. That just 
is not going to happen in a real free market system. I saw 
evidence and stories about people making $100,000 in California 
who were purchasing $800,000 and $1 million dollar houses that 
in Kansas, there is not a bank in Kansas that would have made 
that loan. Yet, these were loans that were being made, piling 
subprime loans on top of each other to these consumers who had 
no business having those kinds of loans. And they were being 
told--and this goes to Chairman Moore's question to Ton 
Hoenig--they were told that asset value of that collateral 
would continue to grow and that even when they decided to sell, 
if they could no longer make those payments, that the value of 
that home would be high enough that they could sell the home, 
pay off the loan and still come away with some value in their 
property. When the bubble collapsed, that just went away.
    And so the general philosophical economic point I was 
trying to make is there were policies put into place that in a 
totally free--that allowed loans to be made that would not have 
been made in a totally free market system.
    Mr. Cleaver.  I would agree, everyone should not own a 
home. I think that was a big mistake. I have a cousin, Herman, 
Junior, and I would not sell him a $200,000 home for $200. So I 
agree.
    I guess my deep concern is that it has leached into the 
community that somehow poor people being addressed in CRA 
caused the collapse, and so I understand what you are saying. 
You are saying that in general, pushing toward giving everybody 
a home loan, helped. But I am just--I have been pushing back 
against this, along with other members of our committee and the 
Fed Chairman and everybody else, because the Community 
Reinvestment Act has contributed to this issue.
    And I yield back no time.
    [laughter]
    Chairman Moore of Kansas.  I have one more question. The 
other panelists up here may have another question as well, the 
other members of our committee.
    I appreciate the concern about new rules from the Dodd-
Frank Act, and one number used is that there are 250 new rules 
from it. Many of these rules relate to derivatives, securities 
and insurance regulation. Many only apply to the very biggest 
financial firms in the United States.
    Mr. Stones, most banks in Kansas are not engaged in 
derivatives or securities transactions; is that correct? So 
those rules would not apply to the smaller banks. Is that also 
correct, sir?
    Mr. Stones.  I think the rules on derivatives are one of 
the big question marks in the bill. I think you are correct 
that the majority of banks in Kansas do not deal in the kinds 
of derivatives that were addressed in the law. However--and I 
am basing this on another Wall Street Journal article which 
talked about the agricultural community that does deal in the 
kinds of derivatives that possibly could be affected. And 
those, while they are not affected directly within the bank, 
are going to affect our agricultural customers in their ability 
to address the risk within their crops.
    Chairman Moore of Kansas.  Thank you. Ms. Jenkins, do you 
have any questions?
    Ms. Jenkins.  Thank you, Mr. Chairman. If I could maybe 
just ask one more at this end of the table.
    Ms. Marsh, you expressed concern in your written testimony 
that a one-size-fits-all view towards regulation stifles our 
efforts to do what we do best, which is to provide solutions to 
meet the financial needs of our members and to help grow 
economies.
    I happen to share that concern and, in fact, that was one 
of the many reasons that I did oppose the financial reform bill 
when it was before the House. But I would like to know, and I 
am just curious, is it your belief that this Dodd-Frank bill is 
guilty of imposing a one-size-fits-all view towards credit 
unions and could perhaps provide a competitive advantage to the 
larger institutions? And then, Mr. Beverlin, if you would like 
to comment on that as well, then I would yield back. Thank you.
    Ms. Marsh.  I think that the devil is in the details and it 
will depend upon the regulations that are promulgated out of 
the law itself. It has all indications that we will have some 
negative impact, but until we see the actual regulations--right 
now, the Credit Union National Association, our national trade 
association, is saying that although there are over 200 
sections of the law that could impact financial institutions, 
just as Chairman Moore said, some of them are dealing with 
large institution issues like derivatives. We estimate that it 
is more in the 30s to 40s that will be actually directly 
impacting our credit unions.
    But there are also auxiliary issues that come out of this 
and that is, right now, you being a CPA in a former life know 
that they are looking at mark-to-market of loans. Of course, we 
were also having the impact of the OTTI for us. And so things 
that start out simple in the law have a tendency to balloon and 
even though we really do not need to have mark-to-market on our 
loans, I think that will be something that will be extended out 
on this. And the same thing will happen on other parts of the 
Dodd-Frank.
    Mr. Beverlin.  Just this morning, before heading over to 
this hearing, KCUA did put out an email that they feel that 
there are, as Marla said, about 35 areas that could affect 
credit unions. But it really does come down to what regulation 
ends up being written to impose those 35. And again, our fear 
is that we are such a small part of the market, that we will 
not be heard, we will not be looked at and how it might affect 
us versus larger financial institutions.
    Chairman Moore of Kansas.  Thank you.
    The Chair next recognizes Representative Cleaver for 5 
minutes.
    Mr. Cleaver.  I do think that we have to be vigilant now. I 
think most people--you obviously know the difference but most 
people believe that when we pass legislation, that is it. We 
pass a broad overview of the legislation and then these various 
regulators will put all of the rules together. And I think we 
have to be vigilant during that process.
    But I love to brag about UMB and Commerce in front of our 
committee and in Washington. It is a great story, I think. One 
of the responses that I have gotten from some of my colleagues 
is that the Midwest is simply more conservative and some of the 
residue from the Great Depression seems to linger around in the 
Midwest and so the truth of the matter is, they did nothing 
special, they just practiced the same conservatism and that in 
fact prevented them from experiencing a problem.
    Do you think that it was just the conservative nature of 
banks in the Midwest that enabled you to have such a good 
record? And if that is the case, how do we export it?
    Either or both of you?
    Mr. Mariner Kemper.  I will take a stab at it.
    First of all, I guess if conservative is a bad word, shame 
on me. I think that I look at it as sound business practices 
and, if not participating in subprime is somehow conservative, 
then I guess we are conservative. And if knowing that asset 
values go up and down is conservative, then we are 
conservative. Selling products we understand, if that is 
conservative, we are conservative. It is just sound business, I 
guess, and if that is Midwestern or conservative, then I guess 
that is what we are.
    Mr. Jonathan Kemper.  That is a good question. I think you 
should just go back to them and tell them that we are the 
heartland of America and they should not criticize us because 
they are criticizing what we are all about. Our basic business 
model is customer oriented, community-oriented banking. And as 
Mariner said, we handle the money as if it were our own. It is 
backed by our own capital. We do not get involved in things we 
do not understand and we stress long-term relationships. That 
may be conservative, but it also happens to be best for our 
shareholders and best for our customers and best for the 
communities we serve and we are going to make no apologies for 
it.
    Mr. Cleaver.  I am a non-conservative, and I appreciate and 
celebrate your conservative nature, and I think it has made not 
only the State and this community look good, but I think we 
have some valuable lessons for the rest of the country.
    Thank you, Mr. Chairman.
    Chairman Moore of Kansas.  Thanks to our panel and thanks 
to our members who appeared here today for this hearing.
    I ask unanimous consent that the following documents be 
made part of the hearing record: a letter from the National 
Association of Federal Credit Unions; a letter from Dennis 
McKinney, the Treasurer for the State of Kansas, who will be 
testifying at our hearing tomorrow at the Dole Institute in 
Lawrence on the topic of financial literacy; and a two-page 
document my office put together on a list of provisions where 
community banks, credit unions, and small businesses were 
shielded from excessive regulation in the Dodd-Frank Act.
    Without objection, these documents will be made a part of 
the record.
    Again, I would like to thank our first and second panel of 
witnesses for your testimony today. I know my colleagues and I 
will take what we learned from today's hearing back to 
Washington with us and share it with our colleagues.
    I also want to thank Johnson County Community College for 
being such an excellent host for us today.
    I will also want to invite everyone here to attend a second 
field hearing we are doing in Kansas this week, and that will 
be on the topic of financial literacy. The hearing is open to 
the public and will begin at 10 a.m. tomorrow at the Dole 
Institute in Lawrence, Kansas.
    Finally, the Chair notes that some members may have 
additional questions for our witnesses which they may wish to 
submit in writing. Without objection, the hearing record will 
be kept open for 30 days for members to submit written 
questions to these witnesses and to place their responses in 
the record.
    This hearing is adjourned, and again, I thank all of our 
panel members and I thank our colleagues up here. Thank you 
all.
    [Whereupon, at 10:50 a.m., the hearing was adjourned.]


                            A P P E N D I X



                             August 23, 2010


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