[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





                    LEGISLATIVE PROPOSALS REGARDING
                       BANK EXAMINATION PRACTICES

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              JULY 8, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-45










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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 8, 2011.................................................     1
Appendix:
    July 8, 2011.................................................    53

                               WITNESSES
                          Friday, July 8, 2011

French, George, Deputy Director, Policy, Division of Risk 
  Management Supervision, Federal Deposit Insurance Corporation..    32
Johnson, Simon, Ronald Kurtz Professor of Entrepreneurship at the 
  Massachusetts Institute of Technology's Sloan School of 
  Management.....................................................     9
Kelly, Jennifer, Senior Deputy Comptroller, Midsize and Community 
  Bank Supervision, Office of the Comptroller of the Currency....    34
McKillop, James H. III, President and CEO, Independent Banker's 
  Bank of Florida, on Behalf of the Independent Community Bankers 
  of America (ICBA)..............................................     6
Whalen, Michael, President and CEO, Heart of America Restaurants 
  and Inns.......................................................     7

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    54
    French, George...............................................    55
    Johnson, Simon...............................................    64
    Kelly, Jennifer..............................................    68
    McKillop, James H. III.......................................    87
    Whalen, Michael..............................................    93

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of the American Bankers Association........    96
Posey, Hon. Bill:
    Letter of support for H.R. 1723 from the Florida Bankers 
      Association................................................   102
    Letter of support for H.R. 1723 from the Independent 
      Community Bankers of America...............................   104
    Letter of support for H.R. 1723 from the National Bankers 
      Association................................................   106
    Letter of support for H.R. 1723 from the National Association 
      of REALTORS...............................................   108
    Written responses to questions submitted to George French of 
      the FDIC...................................................   109
    Written responses to questions submitted to Jennifer Kelly of 
      the OCC....................................................   120
Perlmutter, Hon. Ed:
    Written responses to questions submitted to George French of 
      the FDIC...................................................   128
Westmoreland, Hon. Lynn:
    Chart listing the 10 States that have had more than 10 bank 
      failures since 2008........................................   129

 
                    LEGISLATIVE PROPOSALS REGARDING
                       BANK EXAMINATION PRACTICES

                              ----------                              


                          Friday, July 8, 2011

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:32 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Renacci, Royce, 
Manzullo, McHenry, Pearce, Westmoreland, Luetkemeyer, Canseco, 
Grimm, Fincher; Maloney, Watt, Miller of North Carolina, Scott, 
and Carney.
    Also present: Representative Posey.
    Chairwoman Capito. This hearing will come to order.
    The purpose of today's hearing is to better understand the 
challenges the community banks are facing during bank 
examinations.
    I am going to waive my opening statement because we have 
the sponsors here of two of the pieces of legislation that we 
are considering. So I am going to give them my time.
    And with that, I am going to go ahead and recognize the 
ranking member, Mrs. Maloney, for an opening statement.
    Mrs. Maloney. I want to thank you. And I will put my 
opening statement in the record, but I just want to welcome the 
panelists today and thank you for having this hearing, and 
express my strong support for community banks and for small 
banks.
    I do have serious questions about the bill that would treat 
nonaccrual loans as if they were accrual loans, if they meet 
four criteria. I feel that a better way would be to give banks 
more time to work it out.
    I think it is important that we stay on the same GAAP 
accounting procedures that are in place. And banks should work 
with their clients to restructure the loans or put them in a 
way that will make them healthy in the future.
    We have to remember that in the past 4 years, we had one of 
the worst economic downturns in the history of our country. We 
lost well over $13 trillion in household wealth, unemployment 
shot up, and jobs became scarce. And we had to take measures, 
such as the TARP program and others to really help our 
financial institutions to recapitalize and become stable.
    Many of these causes, according to some economists, were 
due to a lack of capital standards, a lack of any limits on 
leverage.
    During these years leading up to the crisis, under Fed 
Chairman Greenspan, everyone supported--most of the regulators 
supported deregulating, lowering standards. Now, the opposite 
is in place. Most regulators are supporting strong standards 
for capital and for leverage limits and for building a stronger 
financial base.
    I believe a better way to help our community banks would be 
to give them more time to work out the challenges they have in 
this stressful economic time.
    I yield back.
    Chairwoman Capito. Thank you.
    I just would ask the members--I am going to try to be 
stringent on the time allotments for several reasons, because 
that is a fair way to do it, but also because we are going to 
have a vote that is coming up around 10:45, that is going to be 
lengthy. So, we want to move this hearing as quickly as we can 
so we can get to the witnesses.
    We are going to do opening statements by seniority.
    So, Mr. Royce is recognized for 1 minute.
    Mr. Royce. Thank you, Madam Chairwoman.
    There was a recent article in the American Banker entitled, 
``Community Bankers Face a Choice: Sell Out, Fold or Change.'' 
And that article noted that the number of banks in 2020 may be 
half of the current number because of the various factors 
working against small banks.
    Now, you would expect a certain amount of consolidation in 
a downturn, but many of the problems faced by community banks 
were inspired by Washington. And I will just go through a few 
of them.
    It was Washington that gave them hundreds of new 
regulations in Dodd-Frank. It was Washington that decided to 
enact price controls on interchange fees and limit a critical 
revenue source for these smaller firms.
    It was Washington that propped up their too-big-to-fail 
competitors, thus expanding the competitive advantage these 
firms hold in the market, thus advantaging the cost of capital 
for larger investment banks versus the smaller community banks.
    Certainly, many will add overzealous bank examiners to this 
list. Being from California, I have heard from those community 
bankers who feel hamstrung by their regulators.
    I yield back, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. McHenry, for 1 minute?
    Mr. McHenry. In the interest of time, I will yield my time 
back to the Chair.
    Chairwoman Capito. Thank you.
    Mr. Westmoreland, for 2 minutes.
    Mr. Westmoreland. Thank you, Madam Chairwoman. I appreciate 
you calling this hearing and giving me the opportunity to make 
an opening statement. And I also appreciate your willingness to 
include my bill, H.R. 2056, in this hearing.
    In my opinion, there is no greater threat to our 
communities than bank failures, especially in my State of 
Georgia.
    Since Chairman Bair last testified before this 
subcommittee, two more banks have failed in Georgia. Georgia's 
grand total is now 65 failed banks. To date, 15 banks have 
failed in Georgia just this year.
    I am here today to once again express the profound 
frustration people in my district have with the FDIC. Banks in 
Georgia, both strong and weak, big and small, are trying to 
survive in a market where government is picking winners and 
losers every day.
    The banks that are failing now are from paper losses, and 
by this I mean that banks are forced to write down assets 
because of mark-to-market and other regulations which 
immediately cause a capital call from the regulator.
    Often, this occurs on loans that are actually performing. 
But Georgia is by no means alone with the threat of bank 
failures. Ten States have had more than 10 failures since 2008. 
They are Arizona, California, Florida, Georgia, Illinois, 
Michigan, Minnesota, Missouri, Nevada, and Washington.
    Sadly, these States also have some of the highest 
unemployment and foreclosure rates in the country. The bill I 
introduced, H.R. 2056, directs the FDIC Inspector General to 
study FDIC's loss share agreements, banks failing because of 
paper losses, hardship of being able to modify loans, and the 
application of the FDIC policies by examiners in the field.
    For these 10 States, failure on the part of management to 
ensure information of policies by examiners on the ground have 
resulted in continued stagnation in the real estate industry, 
higher than average unemployment, and the steady pace of bank 
failures.
    This is why my bill, H.R. 2056, and my colleague Mr. 
Posey's bill, H.R. 1723, are so vitally important. Three years 
after the events of 2008, 2 years after the recession was said 
to be over, the regulators testifying today are no closer to 
find a solution to the bank crisis, even though you say you 
have all the tools.
    I urge the committee to continue to examine this crisis in 
our communities.
    And with that, Madam Chairwoman, I yield back.
    Chairwoman Capito. Thank you.
    Mr. Luetkemeyer, for 1 minute.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    I may be one of the few Members of Congress here who has 
been employed as a bank examiner during my career. And I 
appreciate the conversation we are having today.
    I also want to thank my colleagues from Georgia and Florida 
for the work on the bills we are about to hear about today. My 
home State of Missouri is one of the hardest hit for bank 
closures, and this is an issue that must be addressed.
    We also need to recognize that institutions should not be 
penalized for making good loans to borrowers who have never 
missed a payment. Our examination environment is an issue I 
have been concerned about for many years. I continue to hear 
from my Missouri bankers that the relationship between 
financial institutions and the regulators seems to have turned 
into a game of ``gotcha.''
    This is an issue I have raised many times with the various 
regulatory officials, but it still seems to persist. If we do 
not begin to consider proposals that will give these 
institutions targeted relief, then we will continue to see 
reduced lending and a growing number of unnecessary 
institutional failures, which will delay any hope of economic 
recovery.
    I look forward to an important discussion today, and I 
yield back, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. Canseco, for 30 seconds.
    Mr. Canseco. Thank you, Madam Chairwoman.
    Today, we have heard more sobering news about our troubled 
economy. A mere 18,000 jobs were created in June, and the 
unemployment rate is now at an unacceptable 9.2 percent.
    We were told recovery summer was supposed to be last year, 
but because of the ongoing regulatory burden on businesses 
caused by some of the confusing and conflicting regulations we 
are going to talk about today, it does not appear we are going 
to have a recovery this summer either or any summer until the 
regulatory burden is lifted off of small business and community 
banks in my district, too.
    Thank you.
    Chairwoman Capito. Thank you.
    Mr. Fincher, for 30 seconds.
    Mr. Fincher. Thank you, Madam Chairwoman.
    Community and small-town banks are major stakeholders in 
our rural economy. Farmers, small businesses, and manufacturers 
depend on loans from community banks to make payroll, hire 
employees, and invest in the equipment.
    As a co-sponsor of H.R. 1723, I look forward to hearing 
from our witnesses today about how this bill will help 
community banks better provide loans to job creators in our 
districts who are needing access to capital.
    As Mr. Canseco said, 18,000 jobs created, unemployment 9.2 
percent. We are heading down the wrong path. So thank you guys 
for coming today.
    Chairwoman Capito. Thank you.
    Mr. Posey, for 2 minutes.
    Mr. Posey. House Resolution 1723 is the jobs bill that will 
help our economy recover. It helps our local banks do what they 
were created to do: make loans to small businesses and 
homeowners.
    I was first exposed to the plight of community bankers when 
Representative Ron Klein, a former member of our committee, 
invited me to attend a bankers summit he held in Orlando.
    It was there for the first time I learned regulators were 
placing loans on a nonaccrual basis for such reasons as parents 
or others having made payments on loans while the borrowers 
were in between jobs, even though not a single payment was late 
or missed. Because performing, high-interest loans were 
modified to a more current rate even though a payment was never 
late and never missed, and because regulators felt in their 
opinion that borrowers should not have been able to make the 
loan payments that they made because the economy was late--
again, even though not a single, solitary payment had been late 
or missed.
    Such subjective overregulation makes banks less inclined to 
loan money to job creation, and results in more foreclosures, 
more layoffs, and longer unemployment lines. The traditional 
definition of a performing loan is exactly that: a loan which a 
borrower is currently repaying on the agreed terms, period. 
This legislation simply codifies that definition.
    The Common Sense Economic Recovery Act has a 2-year sunset 
provision. So unless it is extended, it is over in 2 years. But 
it would stop regulatory abuse, create jobs, and help get our 
economy back on track.
    I want to thank you, Chairwoman Capito, for calling this 
hearing and also thank the great staffs on both sides of the 
aisle for facilitating it.
    I would like to ask unanimous consent for four letters of 
endorsement to be entered into the record. I have letters of 
support for H.R. 1723 from the Independent Community Bankers of 
America, the National Bankers Association, the National 
Association of REALTORS, and the Florida Bankers Association.
    I thank you, Madam Chairwoman.
    Chairwoman Capito. Without objection, it is so ordered.
    I would also like to enter into the record a statement from 
the American Bankers Association, along with your request.
    Thank you.
    And Mr. Grimm, for 1 minute.
    Mr. Grimm. Thank you, Madam Chairwoman. Thank you for 
holding this hearing.
    Thank you for the witnesses for being here today.
    The system of credit is a big part of the life blood of our 
economy. It allows capital to officially flow from those who 
save to those looking to invest and those looking to expand 
their businesses, which ultimately creates jobs--we all 
recognize that during the previous boom, mistakes were made. 
Lending standards became far too loose and large losses 
followed.
    However, I now fear that the pendulum has swung too far in 
the other direction. I am deeply concerned that overzealous 
bank regulators are too quick to force banks to take write-
downs against loans that are currently performing. These write-
downs lower the amount of credit that these banks can extend 
into our economy.
    I am particularly concerned about the application of mark-
to-market accounting rules and how they are being applied to 
loans that are currently performing.
    The lack of credit being created by regulatory policy is 
stifling our economy's ability to create jobs, as evidenced by 
the dismal job losses that we have seen. With that, I yield 
back.
    Chairwoman Capito. Thank you, Mr. Grimm.
    And that concludes our opening statements.
    I would like to, first of all, thank the panel for coming 
today. And I would like to introduce our first panel for the 
purpose of giving a 5-minute opening statement.
    First, we have Mr. James H. McKillop--did I say that right? 
Thank you--the president and CEO, Independent Banker's Bank of 
Florida, on behalf of the Independent Community Bankers of 
America.
    Welcome, Mr. McKillop.

    STATEMENT OF JAMES H. McKILLOP III, PRESIDENT AND CEO, 
    INDEPENDENT BANKER'S BANK OF FLORIDA, ON BEHALF OF THE 
        INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

    Mr. McKillop. Chairwoman Capito, Ranking Member Maloney, 
and members of the subcommittee, good morning.
    I am James McKillop, president and CEO of the Independent 
Banker's Bank of Florida. I am pleased to represent community 
bankers and ICBA's nearly 5,000 members at this important 
hearing.
    As a banker's bank, I provide lending, investment, and 
payment services to over 300 community banks in the Southeast.
    I have a broad perspective on the challenges faced by 
community banks, which I am pleased to share with you today. 
ICBA believes that the two bills to be discussed today, H.R. 
1723 and H.R. 2056, will go a long way toward improving the 
current oppressive examination environment, a top concern of 
community banks.
    The exam environment is discouraging lending at the very 
time that bank credit is needed to sustain economic recovery. 
Specific concerns include write-downs of performing loans based 
on collateral value, despite the cash flow of the borrower, 
second-guessing of appraisals, and moving the capital goal post 
beyond what is required by regulation.
    While all banks accept the need for balanced regulatory 
oversight, the pendulum has swung too far in the direction of 
overregulation.
    What is particularly frustrating to us is that field 
examination practices are often not consistent with the 
directives from Washington, such as the November 2008 
interagency policy statement on meeting the needs of 
creditworthy borrowers.
    That directive cautions against excessive tightening of 
credit and encourages banks to practice economically viable and 
appropriate lending. Unfortunately, this policy is often 
overlooked. Good loan opportunities are passed over for fear of 
examiner write-down and the resulting loss of income or 
capital.
    ICBA supports H.R. 1723, introduced by Representative 
Posey, because it will reaffirm existing agency guidance on 
loan clarifications and bring more consistency to the 
examination process.
    The bill provides that a loan must be put on accrual status 
if it has been paid on a current basis for the past 6 months, 
among other conditions.
    Establishing conservative, bright line criteria will allow 
lenders to modify loans as appropriate without fear of being 
penalized.
    When loans become troubled in a tough economic environment, 
often the best course of action for the borrower, the lender 
and the community is a modification that will keep the loan out 
of foreclosure.
    But many examiners are penalizing modifications by 
aggressively and arbitrarily placing loans on nonaccrual status 
following a modification, even though the borrower has 
demonstrated a pattern of making contractual principal and 
interest payments under the loan's modified terms.
    I want to emphasize that H.R. 1723 is not an effort to 
rewrite accounting rules. Rather, it is an effort to bring 
examiners back into line with accounting rules.
    Specifically, agency guidance on troubled debt 
restructuring provides that a modified loan should be placed on 
accrual status when there is a sustained period of payment 
performance, generally recognized as 6 months, and collection 
under the revised terms is probable.
    ICBA also supports H.R. 2056, introduced by Representative 
Westmoreland, which would require the Inspector General of the 
FDIC to study examination resolution policies that may 
contribute to the current difficult environment for banks.
    The study would focus on many of the concerns that we have 
identified in the current examiner environment, such as paper 
losses and the cause of the institutions to raise more capital, 
commercial real estate loan workouts.
    The study would be very useful in raising awareness of 
these concerns, hopefully changing examination practices and 
giving momentum to the legislation that would directly fix 
examination problems, such as H.R. 1723.
    ICBA fully supports H.R. 2056 and believes that it might 
also be appropriate for the GAO to work closely with the FDIC 
Inspector General because the topics to be studied are common 
to all Federal banking agencies and affect all banks.
    Finally, I would like to advocate for an additional piece 
of legislation, the Communities First Act, which would improve 
the regulatory environment and community bank viability.
    Communities First would raise the threshold of SEC 
registration to 2,000 from 5,000 owners. Another provision 
would extend the 5-year operating loss carry back to free up 
community bank capital at this very point in time.
    We are pleased that the SBA has bipartisan co-sponsorship 
and look forward to its advancement in the House.
    ICBA appreciates the opportunity to testify. We encourage 
you to schedule H.R. 1723 and H.R. 2056 for consideration as 
soon as practical.
    Thank you.
    [The prepared statement of Mr. McKillop can be found on 
page 87 of the appendix.]
    Chairwoman Capito. Thank you.
    Our second witness is Mr. Michael Whalen, president and 
CEO, Heart of America Group.
    Welcome, Mr. Whalen.

   STATEMENT OF MICHAEL WHALEN, PRESIDENT AND CEO, HEART OF 
                  AMERICA RESTAURANTS AND INNS

    Mr. Whalen. Chairwoman Capito, Ranking Member Maloney, and 
members of the subcommittee, thank you for having me here.
    I represent no other institution than, I think, the people 
on Main Street. Back in 1978, right after I got out of law 
school, my law school buddies thought I was crazy when I 
started a little, 100-seat restaurant called the Iowa Machine 
Shed, in rural Davenport.
    It was with sweat equity. And it was small-town bankers who 
had a belief in my, maybe not in my balance sheet, but in my 
work ethic and our vision and what we intended to do.
    And over the course of 33 years, we have done the American 
dream. My company today has a nine-figure net worth. I am not 
here to tell you I am bragging about that, but to really kind 
of lay the groundwork for what is happening on Main Street.
    In a stabilized environment, our debt-to-value ratio is in 
the 30 percent. We are not leveraged. We are a great, great 
company to lend money to.
    And we decided, as things started to come out of the gloom 
and doom, that we are really marching to a hell with a heavenly 
cause, and start to build some new projects, including a six-
story Hilton Garden Inn with one of our giant Italian 
Bakehouses in suburban Kansas City, in Olathe, Kansas, a 
brilliant growth area and a great site, that I already owned 
free and clear.
    It was really as close to a no-brainer loan as I have ever 
had in 33 years. I thought, ``This is going to be easy.''
    And they gave us--the community gave us $12.5 million in 
Economic Recovery Zone Bonds in order to even help facilitate 
the financing. So, off we went, and met with banker after 
banker, and laid it out what our company was, laid out the pro 
forma on this thing. Seriously, this was as good as a deal as I 
have ever presented to a bank in 33 years.
    And almost--I am going to give--I have counted about 24 
banks. It continued to have the same dynamic. Enthusiastic 
reception. Wonderful when they looked at our financials. They 
would get in there, and the word came back, time after time, 
``Look, Mike, we are just really scared that if we make this 
loan, we are going to get second-guessed.''
    Now, that is the reality on Main Street.
    Another project that we are doing right now, a $20 million 
hotel in East Peoria, Illinois, I am working with a banker. 
And, basically, they are saying the same things over and over 
again, ``We are fearful that if we make this loan, even though 
it is a good, solid loan, that we are going to get second-
guessed,'' because they do not like the category.
    Now, eventually, in both those situations, I found 
financing, because our company is really strong.
    But I will tell you that if this environment had prevailed 
back in the 1970s and 1980s when I was trying to get off the 
ground, we would have been dead in the water.
    And that is why I am here. I am not here for my company. I 
am not here for community banks, but I love them, okay. God 
bless them. They have stuck with me sometimes when they should 
not have. I am here for the guy trying to do what I did 33 
years ago, which was to get started.
    Now, the other thing that I would like to say is this: I 
deal with a lot of solid banks. And I think that some of the 
trouble that occurred, particularly on the Wall Street banks 
and some of the major national banks is, let us say there are 
two kids in the backseat. One is acting up, one is raising 
Cain, and the other one is quiet.
    And I get the feeling that we are doing the situation where 
we are walking around and smacking the quiet kid and saying to 
the one that raised Cain, ``You know, you are going to get that 
if you do not settle down.''
    I think we have had really good, well-managed banks that 
have given to fear and that--Pepperdine University, I just 
happened to come across a study that indicated that they talked 
to a lot of bankers, through their representative sample study, 
found 75 percent of the bankers said that they are concerned, 
they are worried about being second-guessed by regulators.
    Sixty-one percent of those bankers said that they did not 
do a loan they thought they should do, underwriting standards 
indicated that they should do, but they are scared about 
getting second-guessed.
    And I would like to submit to you that the other 39 percent 
maybe were not as honest with the response as they should have 
been.
    So what we do have is a crisis on Main Street. And we have 
to get that straightened out. It is not because of a loan 
excess.
    I just found out--and this is kind of a piece de 
resistance, because I was calling some of my bankers, that a 
loan that I had on some undeveloped property. It is fully 
developed, but it is not, right now, developing any income 
stream, even though we have been more than capable of carrying 
the debt service because of the excess cash flow from our other 
operations, was treated as a nonperforming loan a year ago.
    I did not even know it. It was absolutely ridiculous, 
because we had more than the carrying capability. It was only 
for that reason that it did not come to a catastrophe.
    And that is the kind of thing that is killing job creation 
in this country.
    [The prepared statement of Mr. Whalen can be found on page 
93 of the appendix.]
    Chairwoman Capito. Thank you, Mr. Whalen.
    Our final witness on this panel is Professor Simon Johnson, 
the Ronald A. Kurtz Professor of Entrepreneurship at the 
Massachusetts Institute of Technology's Sloan School of 
Management.
    Welcome.

     STATEMENT OF SIMON JOHNSON, RONALD KURTZ PROFESSOR OF 
ENTREPRENEURSHIP AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY'S 
                   SLOAN SCHOOL OF MANAGEMENT

    Mr. Johnson. Thank you very much.
    I would like to make three points, if I may.
    The first is to reiterate and reinforce a point made by 
Mrs. Maloney at the beginning, which is, we should not lose 
sight of the context here. We are in the aftermath of the most 
serious financial crisis since World War II, which involved $13 
trillion of lost household wealth, as well as a 6 percent, 7 
percent drop in employment, from which we are struggling to 
recover.
    I, in that context, would emphasize what I think Mr. Royce 
said at the beginning, that the major responsibility here lies 
with the Wall Street banks, the so-called too-big-to-fail 
banks, that got massively out of control and did enormous 
damage to the rest of the economy, including to small 
businesses and to community banks.
    So I think it is very important to get that clear. And I 
hope that we can agree on this issue.
    The second point is that a core part of this banking crisis 
was due to the lack of capital and excessive leverage on the 
part of the very big banks, but, unfortunately, it has to be 
said, also on the part of some of the mid-sized and smaller 
banks that need capital as a buffer against losses.
    Personally, I would be attracted to a system in which there 
were no capital requirements, and banks could choose their own 
capital levels, because everything we know about unregulated 
systems of that kind is that banks have much more capital. They 
fund themselves with much more equity relative to debt in those 
unregulated systems than they do in our system.
    However, I do not think we can go to such an unregulated 
system, because the experience in the Great Depression with 
regard to depositor runs was so horrific that I would be 
surprised if anybody, including from my side of the table or 
from community banking or from small business would like to go 
back there.
    So, we have a regulated system. We have federally-insured 
deposits. The FDIC has a responsibility to ensure there is an 
acceptable level of capital in these banks. And if the banks do 
not have enough capital, if they run out of equity, if the 
losses swamp the equity, the bank becomes insolvent and there 
is a charge to the deposit insurance fund, which, as you know, 
is funded in the first instance by the banks themselves, but 
also draws on the credit of the United States Treasury.
    Now, I, for one, do not want us to go anywhere near another 
situation of bailouts or a TARP, Troubled Assets Relief 
Program, situation, where we are providing capital to private 
banks in an effort to prevent systemic catastrophe.
    It is therefore prudent on the part of the FDIC, the OCC 
and other bank regulators to ensure the banks have sufficient 
capital at all times, including in difficult times such as 
these.
    I have reviewed the latest situation, including the 
testimony submitted by the FDIC and by the OCC today. And it is 
my assessment as somebody who works on these issues, who has 
worked on crises around the world--I am the former chief 
economist of the International Monetary Fund, among other 
things, and I have worked on crises for more than 20 years.
    I think the rules that we have right now in the United 
States, as explained by the FDIC and the OCC, make sense. They 
are appropriate.
    I understand completely the desire to try and stimulate 
further jobs in this way. Of course, I would also like more 
jobs to come back and unemployment to come down.
    But I would caution you very strongly against this kind of 
regulatory forbearance. This leads to trouble. This leads to 
more losses. This led to much of the losses we also lost in the 
1980s that we had from the--ultimately from the S&L crisis.
    I agree with Mr. McKillop and with Mr. Whalen that the 
pendulum in such a situation can swing too far the other way. I 
do not think that has happened in this case. I do not think 
that is what is coming out of these rules, as explained by the 
FDIC.
    There is plenty of credit available in this country. There 
are also banks that are borderline insolvent. I support H.R. 
2056, in part because I think the rules have not been fairly 
applied across community banks and big banks.
    And I think the OCC should be pressed very hard on this. I 
think they have given too much forbearance to the big banks.
    I also think, by the way, the FDIC has closed not too many 
banks, but too few. I think when you are pressed for the GAO to 
be involved, which I think Mr. McKillop suggested, and I would 
support, you will find things that perhaps you did not want to 
find. So be very careful with this.
    But I think we should have transparency, as much 
transparency as possible.
    And in closing, I am afraid that I do not support H.R. 
1723. I think it will lead to more trouble down the road.
    Thank you very much.
    [The prepared statement of Professor Johnson can be found 
on page 64 of the appendix.]
    Chairwoman Capito. Thank you all.
    We will now begin the questioning portion, and I will begin 
with a question.
    Mr. Whalen, you are an entrepreneur. You have obviously 
created over 30 years a lot of jobs in your time and continue 
to do this.
    In the context of what we are talking about today, because 
I think that is the bottom line of what we are talking about, 
when you talked about your frustration of your last project on 
the commercial real estate deal, do you see this as an 
inhibitor to job creation for you and those like you that are 
well-capitalized, that have a long history of job creation and 
have been able to look at a lot of different financing arenas 
to move your companies forward?
    Mr. Whalen. Absolutely. We are kind of the canary in the 
coal mine, because we are well-capitalized, a strong company 
that has never had a real failure in 33 years. Our track record 
is outstanding.
    And if we are facing this much difficulty, this much fear 
from these bankers, then I cannot imagine somebody who is still 
struggling, but still strong to try to build a company.
    And we can sit here and we can pay hosannas to the small 
and medium-sized business people. All of us sit around in the 
hinterland and watch this from the Beltway, but then you sit 
there and say, ``Wait a minute. Where are the policies that 
facilitate all the medium-sized persons to try to get off the 
ground?''
    And, Professor, with all due deference, maybe we could have 
a debate on the macroeconomic situation and the Wall Street 
situation and the excesses of it, but I think what we are here 
talking about today is Main Street, usually smaller and 
regional banks, and the fact that, really, the medicine that 
should be applied perhaps on Wall Street is being applied in a 
double dose on Main Street.
    And so I am here to probably say what it is like walking on 
Main Street and not on Wall Street.
    Chairwoman Capito. How many people would you say you have 
employed right now, indirectly or directly, mostly, yes?
    Mr. Whalen. Somewhere between 2,500 and 3,000. These 
projects have put together hundreds of construction jobs.
    Chairwoman Capito. Is that down from a figure from maybe 5 
or 6 years ago?
    Mr. Whalen. No, we did not lay anybody off.
    Chairwoman Capito. Consistent.
    Mr. Whalen. We did not have to. We hung in there. We did 
what everybody did; we hunkered down. But as soon as we saw it 
come back, or start to come back, we went back.
    I have what I refer to as a sickness called being an 
entrepreneur, and I am going to continue to do it.
    But when I start to talk to my friends in business and I 
talk to my bankers--and, of course, none of my bankers wanted 
me to mention their name, okay?
    [laughter]
    Chairwoman Capito. For obvious reasons.
    Mr. Whalen. --a story--``Mike, I will tell you this story 
and that story, but do not mention my name.'' There is a 
genuine fear, as I said, of being second-guessed on loans.
    Here is a good example. If we start a new hotel, it is 
usually a 2- to 2\1/2\-year period while it stabilizes up and 
achieves the EBITDA level that you would normally have to have 
to service the debt on a pro forma. There is going to be a 
period, and a short-term period, where my other operations are 
going to subsidize that.
    If you came in 6 months at the end of the operation of that 
loan, and said is that on a standalone basis fully capable of 
amortizing that loan, does it meet things like debt service 
coverage ratios of 1.2 or 1.3, the answer is, of course not. It 
has never worked that way.
    And if they start to apply these draconian rules, you shut 
down small and medium-sized businesses.
    Chairwoman Capito. Thank you.
    Now, Professor Johnson, I know that there is a--we all want 
to get to the same place, I think we acknowledged that, which 
is full employment, availability of credit.
    But we do hear, repeatedly, that while we are hearing the 
President has a plan for small-business lending through the 
SBA, is that really occurring on Main Street? I think that is a 
question we need to ask.
    Or are the differences in the applications of capital 
requirements, etc., inhibiting that program from moving 
forward? A lot of banks are not even getting involved in that, 
because they do not want to touch it for reasons that the rules 
may change or that they are going to be more heavily 
scrutinized and not be able to meet up to the standards.
    So I will give you a chance to respond.
    Mr. Johnson. Thank you. These are all very good and 
appropriate questions.
    I think we have to ask, why are the banks scared? What are 
they afraid of?
    And the answer is, it must be, that they have relatively 
little capital, either because they were thinly capitalized to 
start with or they suffered losses along the way.
    I work with a lot of entrepreneurs also, as does Mr. 
Whalen. I do not think that H.R. 1723 says institutions could 
disregard currently available borrower financial information. 
That is very strange in an unregulated, private-sector context. 
You want to look at the borrower.
    Anybody to whom you have lent money, you would like to be 
able to evaluate that credit on a holistic basis. Disregarding 
whether or not they can repay you is very strange, and not a 
good business practice, and not something we should be 
encouraging.
    So I agree with your skepticism on whether the Small 
Business Administration-type loans can make a difference. I 
suspect they cannot.
    But I do not think we should be encouraging banks to adopt 
such a break with standard accounting practices actually. That 
is the FDIC and the OCC interpretation.
    I think the rules that we have right now are what we should 
be applying.
    Chairwoman Capito. All right. Thank you.
    Mrs. Maloney?
    Mrs. Maloney. I want to thank you for having this hearing, 
and to thank all of our panelists today.
    I am concerned about safety and soundness, given what we 
have just gone through and certainly the financial stability 
and the effects that it might have on classifying what 
otherwise would be a nonaccrual loan as an accrual loan under 
the terms of this bill.
    And I am concerned if this would perpetuate the practice of 
holding inadequate capital relative to risk that participated 
in and caused the financial crisis.
    So I would like to ask Mr. McKillop and go down the line. I 
am very sympathetic to the challenges that community banks, or 
some community banks, are facing. And some of them are seeking 
forbearance, a regulatory forbearance during this financial 
climate, and I am certainly supportive of it.
    I would like to know--and Mr. Westmoreland, I would like to 
be associated with your comments earlier and be a cosponsor of 
your bill. I agree that community banks are an important part 
of every community and played a critical role in our recovery.
    Are there other alternatives that could achieve the goal 
with fewer potential negative implications on safety and 
soundness and financial stability than would reducing capital 
requirements?
    Could giving more time--are there other ways that we could 
approach it that would help community banks?
    Mr. McKillop. Ranking Member Maloney, there might be. I 
have been in banking for almost 35 years, and I have been 
dealing with banks in Florida and Georgia and Alabama for all 
my life.
    And what I have seen through the 1980s period into the 
1990s and now here, 2011, is that there is an occurrence 
following a catastrophe that, by necessity, rallies all the 
troops.
    We have done a very good job in trying to focus in on Dodd-
Frank and deal with the major mountaintop issues. But community 
banks are not the Wall Street banks and the unregulated 
institutions that caused the Dodd-Frank bill to have to come 
into play.
    We do not believe, ICBA does not believe, and I personally 
do not believe that Representative Posey's bill changes 
accounting standards at all. What we are saying in the bill is, 
``pay attention to those standards, and do not go beyond them 
in a regulatory environment at the bank level.''
    I will give you a ``for instance'': When we have to 
restructure a loan for a borrower, we must put it on nonaccrual 
for 6 months. Must. No ifs, ands or buts. That will take place 
even if the loan continues today, from day one, and continues 
all the way through that 6-month period.
    Now, we hit the 7th month and we start to move into a gray 
zone. And if documentation in my files does not say that I see 
how the borrower can continue to make payments, the regulators 
have been inclined to say, ``That loan must stay on 
nonaccrual,'' even though the loan is current.
    To the degree that I can take it off of nonaccrual, I can 
put it--
    Mrs. Maloney. Let me ask, so it has to stay on the 
nonaccrual, even though they are current, and they are asking 
you to pledge that they are going to pay in the future, but you 
cannot really pledge, because you do not know everything that 
is going to happen. Is that basically it?
    Mr. McKillop. The documentation that I might have is a year 
old, from old tax returns. I am still dealing with 2009 tax 
returns. The law does not require businesses to file until 
October for 2010.
    So, the documentation that the regulators look at says this 
thing does not support the facts of the loan. And what this 
bill creates is the payment, the evidence of payment is a 
greater fact than any documentation deficiency.
    Mrs. Maloney. Thank you very much. My time has expired, but 
I would like to hear more concrete examples of how this works.
    Thank you.
    Chairwoman Capito. Thank you.
    Mr. Renacci, for 5 minutes.
    Mr. Renacci. Thank you, Madam Chairwoman.
    Thank you to all the witnesses for being here.
    I am concerned about safety and soundness also, but I am 
also concerned about jobs. And, Mr. Whalen, I appreciate you 
being here because almost 28 years ago, I started my own 
business and I created over 1,500 jobs, employed over 3,000 
people. And if some of the standards were placed on my business 
over 28 years that are being placed on businesses today, my 
business would not be here any longer. And that is a shame.
    Now, today my business has been sold and it is still 
employing over 3,000 people and it is still a success story, 
and 67 percent of employment is with small businesses like 
yours. So I thank you for what you do.
    In the testimony I heard today, it is interesting--Mr. 
McKillop, I would agree with you, you have said specifically 
about what some of the examiners are doing, requiring write-
downs or reclassification of performing loans, placing loans on 
nonaccrual, even though the borrower is current on payments. 
And I can go on and on.
    But, those are issues--I can take you back to my district 
in Ohio, and I can take you to some small businesses that have 
lost the ability to refinance their debt because of these same 
things, even though they have continued to make payments, even 
though their value, their asset value is greater than their 
loan. These are things that the examiners are continuing to do. 
So I appreciate your testimony.
    And I will go over to Professor Johnson. You testified on a 
couple of things that do concern me. And it is interesting, 
because I do believe we need--you said we need significant 
capital. I am a firm believer that we need appropriate capital 
levels.
    The question is, and the problem I have, is that the 
appropriate levels of capital are being determined by 
regulators who are making decisions in many cases that are 
dropping the capital levels down in these banks because they 
are calling loans substandard.
    So, I would question when you say ``significant,'' do you 
really believe that if a loan is being paid, if it is--if the 
value is in excess of the debt, if the loan is being paid. But 
I am going to give you an example. If the loan is up for 
renewal and cannot be paid off, is that a loan that should be 
substandard and should be classified as reclassified on a 
bank's balance sheet so that it will reduce the capital?
    Mr. Johnson. Thank you, Congressman.
    I think the rules are very clear. And I also laid out for 
you in the FDIC testimony to come shortly, and I will quote 
from that: ``If the borrower is expected to repay the loan in 
full according to its terms, there is no required write-down or 
place in nonaccrual status, regardless of any deterioration in 
collateral, for example, the point they are addressing here.''
    And on the points made by Mr. McKillop, I could link the 
two, the rules are that after a period of 6 months of 
demonstration for a modified loan that you--that the borrower 
can perform, the loan can be removed from nonaccrual status.
    I think these are very sensible rules. Even the OCC--which 
I have to tell you does not have a good reputation with regard 
to avoiding regulatory capture--says in its testimony that 
these rules--and I agree with this--would ``create regulatory 
accounting standards that are less stringent than GAAP for 
regulatory capital services.''
    I really do not think you want to go there, from a free 
market, pro-business perspective, this is not a good place to 
go.
    Mr. Renacci. The problem is, though, when they believe that 
the loan cannot be paid. And if you ever want to travel back to 
Ohio, I will take you to many small businesses who have been 
making payments for 10 years, 20 years, and just because they 
are only to pay their interest today, the loans are being 
classified, and that is a problem.
    So that is where I am saying there is overreaching, and 
some of these regulators are coming down on businesses that are 
creating jobs.
    Look, we have a problem today. You heard it this morning 
with the unemployment rate. It is small business owners like 
Mr. Whalen's business and many others that are going to be able 
to produce jobs, and I am extremely concerned that we are 
taking regulations--and, again, I would say appropriate 
capital, not significant capital. You used the word 
``significant'' a few times.
    The question of whether it is appropriate, significant or 
enough capital gets to be determined by a regulator who can 
take a loan and place it as a classified loan and reduce the 
capital in a bank. And, again, I can probably name you--I am a 
CPA also--I can take you to 10 of my clients in the past who 
have had loans that have been classified and they have not been 
able to borrow because of this situation.
    So let us be careful when we talk about significant, 
appropriate, and then how we determine what loans are 
classified or not.
    So, again, this testimony is near and dear to my heart 
because it is about jobs. I am concerned that we are taking the 
small business owners and the opportunities for them to create 
jobs away by reducing their ability to borrow.
    Thank you.
    Chairwoman Capito. Mr. Watt, for 5 minutes.
    Mr. Watt. Thank you, Madam Chairwoman.
    First of all, I want to thank the Chair for convening this 
hearing, because it is really among the most important, I 
think, and constructive hearing.
    I think all of us as Members have heard the complaints 
about policies being set at the Washington level not playing 
themselves out in the field at the examination level. And this 
is a serious concern.
    As a general proposition, I am very sensitive to the 
problem and somewhat favorably inclined to H.R. 1723, Mr. 
Posey's bill, but I think perhaps the bill may be overreacting 
too much in the opposite direction. I would say, as a general 
proposition, I am very favorably disposed to H.R. 2056, because 
I think a study of this issue would be very helpful and 
constructive in getting us to the result that we are trying to 
get to.
    My concern with H.R. 1723--and this is what I want to focus 
on in my questioning--is the part that basically forbids 
banking regulators from imposing additional capital 
requirements on loans that would be treated as accrual loans by 
operation of the bill. I think that is a step too far, because 
I think the four conditions that are outlined in the bill that 
create a so-called accrual loan are too proscriptive.
    And so, McKillop, I wanted to ask you about that in 
particular. An accrual loan under this bill would be a loan 
that is current, no payments were delinquent more than 30 days 
during the last 6 months, the loans are amortizing, and 
payments are not being made through an interest reserve 
account.
    Those are the four criteria that would qualify. And if you 
met those four criteria, as I understand this bill, banking 
regulators would be forbidden from imposing additional capital 
requirements.
    So, the question I want to focus on is, should not there be 
some kind of additional out for extenuating circumstances that 
goes beyond those four criteria? I guess that is my concern. I 
could conceive of a situation where the loan is current, no 
payments were delinquent for more than 30 days, the loans are 
amortizing, payments are not being made through an interest 
reserve account, but the borrower has robbed Peter to pay Paul, 
meeting all of those criteria, and the rest of the business is 
falling apart.
    How do we protect ourselves if we pass this legislation 
against that kind of eventuality, Mr. McKillop?
    Mr. McKillop. That is a great question, Congressman, and I 
am not sure that I can give you a full answer.
    Mr. Watt. You recognize it as a problem--
    Mr. McKillop. I recognize it as a possible problem. Yes, 
sir, I do.
    The banking regulators and the regulations that we must 
comply with prescribe standards of capitalization that we must 
live with. And as we drift to lower and lower levels of capital 
standard, the degree of our flexibility as management inside 
the bank is constrained. And at some point in time the 
regulators, just through the capital standard, can impose 
increased regulation to cease, to cause there to be a 
cessation--
    Mr. Watt. I do not mean to cut you off. I would love to 
engage in a long conversation about this, but my 5 minutes is 
going to run out.
    You have acknowledged that it is a potential problem and it 
is one that we may need to address.
    Mr. Johnson--Professor Johnson, do you acknowledge that 
this could be a potential problem also, and how might we 
address it? If you can address that quickly?
    Chairwoman Capito. You would make a quick answer there--
please.
    Sorry.
    Mr. Watt. I am sorry.
    Mr. Johnson. Of course, there is a potential problem here. 
I do not think the bill addresses it.
    I would ask, if the banks have great opportunities, such as 
lending to Mr. Whalen, why do not they raise equity? There is 
plenty of capital out there that wants to lend--
    Mr. Watt. You are answering a different question now. I am 
trying to focus on the specifics of the bill.
    Chairwoman Capito. The gentleman's time has expired.
    Mr. Watt. I have run out of time. I am sorry, Madam 
Chairwoman.
    Chairwoman Capito. Thank you.
    Mr. McHenry, for 5 minutes.
    Mr. McHenry. Thank you, Chairwoman Capito.
    Mr. McKillop, the research shows that loan balances in 10 
out of the last 11 quarters have been lower. I hear from my 
small businesses who say that their bankers will not lend to 
them. I hear from bankers who say, ``I cannot lend to them 
because of the regulators.'' I hear from the regulators who say 
they are not qualified borrowers.
    So there is a circle here. Give me your take on it. And do 
not give me the standard answer--give me something new, give me 
something interesting that I have not heard before.
    Mr. McKillop. You are not going to be caught on my watch. I 
believe that there is pressure and uncertainty in the bank 
boardroom where the examination process, probably for good 
reasons, has put the bank into a constrained management 
position.
    Loans have gone bad. In Florida and Georgia, we are dealing 
with unemployment and underemployment exceeding 15 percent. 
Loans will go bad in that environment. When a loan goes bad, 
the management mark under an examination goes down. All other 
gradings go down and many banks go under a regulatory order.
    So under a regulatory order, the board of directors is very 
reticent to move forward. They look around in their community 
and there is a community where 15 percent is either unemployed 
or underemployed. That means 20 percent or 35 percent of the 
businesses are also affected very negatively by the business 
that those people would be doing. The whole community is in a 
recessionary environment.
    Does that new loan that comes through the books satisfy the 
regulator? Maybe, maybe not. But if not, when it hits the books 
of the bank, then it is another loan that is classified. As 
classified loan volumes grow, more pressure comes on the 
banker.
    So the banker, who is trying to make that community work, 
is between a rock and a hard place. Okay? The business person 
is between a rock and a hard place. They need credit. They need 
the access to credit. In reasonable periods, the banker makes 
the decision and says, ``I will take a chance on you.'' In 
today's environment, the regulatory pressure, at least in 
Florida and Georgia, is such where the bank boardrooms cannot 
take that chance.
    Mr. McHenry. Okay. But to Mr. Whalen's point, which is--Mr. 
Whalen, I am familiar with your original restaurant. I have 
been there--fantastic food, great service. Thank you.
    But it sounds like Mr. Whalen is sure money. Explain to me 
his situation and your view. If you have a company that is well 
capitalized with the ability to pay--
    Mr. McKillop. Absolutely.
    Mr. McHenry. But a project, as these things are, takes some 
time to be profitable. So give me your take on it, then Mr. 
Whalen, I will give you an opportunity.
    Mr. McKillop. I believe that the major criteria in Mr. 
Whalen's case is a guidance issue by the regulators relating to 
commercial real estate exposure, CRE. Okay? Florida bankers and 
Georgia bankers and Alabama are very familiar with this. CRE 
exposure was guidance as it came out several years ago, many 
years ago now. I believe it was 2005, but I am not positive.
    It is now a very bright line. If a banker exceeds exposure 
to certain CRE, commercial real estate loans as a function of 
capital, a percentage of capital, and if they exceed that 
bright line, which has become a regulatory very hard line, even 
though it still says ``guidance'' in all the regulations, then 
the banker comes under increased scrutiny.
    Mr. McHenry. My time is short here.
    Mr. Whalen, I will give you an opportunity to finish up. I 
have 20 seconds.
    Mr. Whalen. Simply put, we are not necessarily just talking 
about current loans, but the chilling effect that it is having 
right now on new job creation. I think that is the concern. For 
example, if it takes a year for a new hotel to ramp up, and 
after the first year it falls short of its debt service by a 
quarter-million dollars, even though I might have $5 million of 
cash-flow on the other side, the regulators could come in and 
say, ``That loan is nonperforming.''
    And that basically ignores the way that businesses grow. 
Things do not start from day one necessarily being self-
amortizing. And that is what we are talking about. We are 
talking about the chilling effect, the fear factor of stopping 
good solid loans.
    Chairwoman Capito. Thank you.
    The gentleman's time has expired.
    Mr. Miller from North Carolina, for 5 minutes.
    Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
    I think we all recognize the importance of community banks 
and community bank lending to small business. I 
enthusiastically supported the small business lending fund. I 
offered an amendment in this committee to strengthen that 
legislation. I am disappointed that program is not really up 
and running yet and housing starts are one-third of natural 
demand--natural demand from new household formation and 
replacement of dilapidated stock, housing stock.
    And there are a few markets in the country, although we 
have an overhang of probably 11 million in the inventory, 
shadow inventory. But in those housing markets where there is 
really a demand for new lending for new housing, to loosen up a 
little bit on community banks so they can lend for acquisition 
development and construction.
    So I understand the importance of small business lending by 
community banks. I am on it.
    But all of you acknowledge that the real crisis 3 years ago 
was not community banks and there was an enormously 
concentrated banking industry; 80 percent of banking--of 
lending capacity at banks was with the 19 banks that got the 
stress test. And it appears that there is even more 
concentration now than there was then.
    It also appears that regulators have a pretty good idea of 
what is going on at the community banks. You are just not that 
complex. That is actually a compliment. But they have hardly a 
clue still, and they certainly did not know then--they did not 
know 3 years ago.
    The OCC did not know. The Fed did not know. The boards of 
directors did not know. The CEOs did not really know what all 
was going on at their banks because they were so enormous and 
so complex. They were in so many lines of business that created 
a very questionable alignment of interests, by my lights, often 
an outright conflict of interests, and that has not really 
improved.
    Dr. Johnson, I know that you have criticized the overall 
size of banks. Do you think we have a better sense--and 
generally, I have supported the idea of higher capital for 
requirements particularly for the biggest banks. But one 
criticism I have heard is that higher capital does not help you 
if you do not really know what their assets and liabilities 
are. And we still kind of do not, or at least some suggest we 
do not.
    Professor Johnson, do we have a handle yet on what is going 
on with those biggest banks? And do you think--what advantages 
or disadvantage do you see to the size and complexity of those 
banks?
    Mr. Johnson. Thank you, Congressman.
    I think that is the elephant in the room, if you like. And 
I fear that the problems of the big banks are not now behind 
us. If you look at the situation in Europe, for example, as it 
is currently developing, there are very big exposures that we 
have through Wall Street, the banks and actually the money 
market mutual funds, to some of the serious problems in Europe, 
and we do not have enough capital in that part of the financial 
system.
    Now, I take your point that we also may not know what are 
the true assets and liabilities in those banks. And I think we 
are talking today about various dimensions of collateral damage 
caused by the failure of those massive banks.
    And I think the process of that collateral damage will 
further the concentration of the system, because the more small 
community banks go out of business, really go out of business. 
They really made loans that have gone bad. There is no--
ultimately no way you can avoid that, the more concentrated the 
system is going to be at the end and the worst--the stronger 
the power of the big 19, or I would say the big six bank 
holding companies are the ones that worry me the most; and the 
more danger we are exposing ourselves and our system to down 
the road.
    Mr. Miller of North Carolina. One criticism of the too-big-
to-fail banks is they still have, despite everything we have 
done, there still is an assumption they would not really be 
allowed to fail, and they get credit on better terms because 
their creditors assume that they are going to get paid 
regardless of what happens to those banks.
    Mr. McKillop, what is the competitive effect of that? We 
may deny it, but the market still thinks it is there--the 
implicit guarantee that those banks will not be allowed to 
fail. Does that put you at a competitive disadvantage to those 
biggest banks?
    Mr. McKillop. Congressman, it definitely does. There have 
been numerous studies over the years on the effects of massive 
aggregation and huge economies of scale and whether or not that 
puts a large bank at an advantage to a small bank. A lot of 
those issues are very difficult to unwind, but if you look at 
the deposit rates that are paid by the large institutions and 
compare that against the rates that are necessary to be paid by 
the small institutions, we have found times where that 
difference widens dramatically.
    I am going from memory. This is not necessarily accurate. 
But the last study that I remember exceeded a 50 basis point 
advantage, a half-point advantage in terms of the cost of 
money. So the inference is that was an extra layer of insurance 
or too-big-to-fail. You could not fail, so they did not have to 
pay as much to get the deposit through the door.
    Chairwoman Capito. Thank you, Mr. McKillop.
    Mr. Westmoreland?
    Mr. Westmoreland. Thank you, Madam Chairwoman.
    Professor Johnson, have you had the opportunity to start 
any businesses up like Mr. Whalen has from scratch?
    Mr. Johnson. I have certainly not entered the hotel 
business. I have worked closely with business people in various 
capacities.
    Mr. Westmoreland. But not for yourself.
    Mr. Johnson. I have not--in my own business--
    Mr. Westmoreland. So you have not employed anybody?
    Mr. Johnson. I have employed people, but not in the kind of 
business that we are talking about.
    Mr. Westmoreland. Right. Have you ever made a loan in a 
bank?
    Mr. Johnson. No, I have not made a loan from a bank, 
although I have worked with bankers closely on exactly those 
kinds of situations, particularly after crises.
    Mr. Westmoreland. Thank you.
    Let me tell you a little bit about what is going on in my 
district and with the community banks. We have had banks that 
have failed that people who have gotten TARP money have come in 
and taken the banks over. We have also had acquiring banks from 
Arkansas and other places come in that have a loss-share 
agreement with the FDIC.
    When these banks come in, they will go in and do a fire 
sale and it lowers all the values in the community. We had one 
bank that got TARP money, almost $1 billion, came in, had a 
fire sale, really put it up, did not do foreclosures, put it up 
at public auction and got about 30 cents, 35 cents on the 
dollar.
    Our community banks had some construction loans in these 
same neighborhoods. Now, all of a sudden, their values were 
written down. The builders who were trying to employ people, 
make a living, were basically put out of business because this 
bank that got TARP money came in and drove all the values down.
    The same thing has happened with banks that come in with a 
loss-share agreement. The quicker they can flush those loans, 
the more reimbursement they get. And if they modify the loan, 
then that loan comes out from under the loss-share agreement, 
and that bank takes it over. So, there is no incentive to work 
these out.
    And so these community banks, through no fault of their 
own, to have performing loans, to have good loans and employing 
people, when the government has either made a deal with an 
acquiring bank to reimburse them for their losses or gotten the 
TARP money, they are the ones that have driven the market down 
and the community banks are suffering.
    So we have banks that have been too-big-to-fail, but we 
have other banks that have been too-small-to-save.
    And these community banks--and Professor Johnson--these 
community banks that you are probably aware of, the most 
prominent people in the community, even people at ours, have 
bought stock in there.
    Once these community banks are taken over, that wealth--
$15, $20, or $30 million--is flushed out of that community, 
gone forever.
    And somebody else is getting those funds, that money, and 
taking advantage of what these communities have built up.
    I have sat down with community bankers and said, give me 
some specifics.
    And, Mr. Whalen, one of the examples you have given about 
the six-story building--and I have been to Davenport, too, and 
so I want to compliment you on your food--but had an expansion 
of a business in my district.
    That was a--it had increased its employment 25 percent. It 
was a $7 million expansion. He was going to buy a million 
dollars worth of equipment.
    And his banker, whom he had been banking with for 30 years, 
said, ``We cannot do it because our commercial real estate 
portfolio is at a percentage where we cannot make you the 
loan.''
    Now, there is something wrong with that. Government is 
getting in the way of this recovery and we wonder why we are 
not creating jobs.
    Mr. McKillop, these community bankers I am talking to--and 
every time I talk to the FDIC, they say, give me specifics.
    My community bankers do not want to give me--because they 
are afraid of retaliation. Can you just say something about 
that? And is this an experience of all your community bankers?
    Mr. McKillop. Congressman, yes, it is. When an examination 
takes place, one of the issues that Congress should understand 
is that the information in that exam is confidential.
    It is--we are not supposed to talk about it, period. And 
there are legal sanctions that can be taken.
    My charter is a little different. I can step out on some 
issues and talk more clearly. But I cannot say specifically 
about another bank.
    I have seen and heard from my customers--some of my 
customers are in your district--the same thing, sir, okay? It 
is a difficult issue, and it is difficult not to generalize. So 
let us be careful about that.
    But the regulatory pressure--
    Chairwoman Capito. Let me just inform the witnesses and 
everybody in the room, the vote has been called. It is going to 
be a very lengthy series of votes.
    I would ask the first panel, when I suspend the hearing, to 
come back. I would really appreciate it, because we have a lot 
of other questioners, if that is all right.
    And I will go to Mr. Scott, and hopefully we can get one 
more person in before we suspend.
    Mr. Scott. Thank you, Madam Chairwoman.
    Let me just say briefly what is going on in my State of 
Georgia, which is ground zero for bank failures. We lead the 
Nation in bank failures.
    Just 2 weeks ago, regulators shut down the Mountain Ridge 
bank in the town of Clayton in Georgia, bringing the number of 
U.S. bank failures this year to 48. But the startling figure is 
that in Georgia alone, during this period of 48 banks closing 
all across the country, 15 of those bank failures this year 
have been in Georgia. And we are only halfway through this 
year. It is only July.
    As a matter of fact, The Atlanta Journal-Constitution said 
that the Mountain Ridge Heritage Bank was the 65th bank in our 
State to fail in the last 2\1/2\ years. So it is devastating 
there.
    And that is one of the reasons why I am proud to cosponsor 
with my good friend, Congressman Westmoreland, House Resolution 
2056, which really will get the FDIC Inspector General to take 
a look at some of the issues that have caused these bank 
failures, especially the application and effect on consent 
orders and cease-and-desist orders, and particularly orders 
that have been enforced uniform--whether or not these orders 
have been enforced uniformly across the spectrum.
    But to zero in on our smaller community banks, one of the 
real issues--and I would like to, first of all, I think, 
address this to each of you.
    But, Mr. McKillop, since you are here and representing the 
small bankers, I want to ask you about the repeal of regulation 
Q.
    There is a considerable concern within the smaller 
community banks in my district and throughout Georgia, probably 
throughout the Nation, that the new-found ability to pay 
interest on checking accounts placed them at a competitive 
disadvantage versus the larger banks.
    There is also a concern that this repeal could negatively 
affect the safety and soundness of community banks. Do you 
think that the effect of the repeal on community banks was 
adequately studied before regulation Q was inserted into the 
Dodd-Frank bill, and would you not feel and agree that a delay 
of the repeal would be a good idea in order to have time to 
fully study its impact?
    Mr. McKillop. Congressman, you bring up a very good 
question. I am not sure that I have the resources to be able to 
answer you appropriately. My bank deals with lots of small 
banks throughout the Southeast.
    And I believe that the change in Reg Q will change the cost 
of interest rates. I also remember that it was fairly well 
advertised in advance that a possible change could occur.
    So as for the timing and the degree of analysis, sir, I am 
not qualified, really, to answer.
    Mr. Scott. Does anyone else have a thought on that at all? 
Do you feel that the smaller banks, community banks, are at a 
disadvantage with the larger banks at all?
    Would anyone like to express concern about that?
    Let me ask you about 2056, then, Mr. Westmoreland's and my 
bill, and others who have cosponsored it, would you--do you 
believe that the bill would be an effective way of having the 
information necessary to eventually prevent bank failures?
    If not, in your opinion, what needs to be added to the 
topics that should be studied by the FDIC to prevent future 
bank failures?
    Does anyone have a comment on that?
    Mr. McKillop. Yes, sir. The degree of the study is probably 
the most important, sir. I am a little skeptical. I have seen 
Congress bring forward proposals to study things and ultimately 
the study is either so late or so tardy or so thin--
    Mr. Scott. Let me ask, as my time is short and I know 
others want to ask questions. I do not want this opportunity to 
pass without you giving us, as a representative of the smaller 
community bank, what do you think we can do to stop these bank 
failures?
    It is a drain in Georgia and across this Nation. What do 
you think we could do if 2056 is not the answer?
    Mr. McKillop. The ultimate fundamental is capitalization, 
sir. And if we can create an environment that says these banks 
will be stabilized into the future, they will become viable 
into the future, they will not be closed immediately, then we 
could see community banks begin to raise capital.
    Today's environment is exceptionally onerous for community 
banks that have a lot of regulatorily defined impaired or 
substandard loans.
    Mr. Royce. [presiding]. Thank you. Without objection, we 
have a statement from Chairman Spencer Bachus that we will 
enter into the record, and we will go to Mr. Luetkemeyer for 
his questions.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Mr. Whalen, I want to congratulate you. You may be the best 
witness I have ever seen in all of the few years I have been 
here in Congress.
    You bring an expertise from what you do. You are pertinent 
to the issue and your frankness is very refreshing. Thank you 
very much for being here today.
    Mr. McKillop, thank you for the kudos on the Communities 
First Act. It is a bill that I am handling, and will hopefully 
have up after the August recess here. And along that line--and 
you made several comments that are pertinent to today's 
discussion with regard to the legislative proposal regarding 
banks' examination practices as the headline for our committee 
hearing today.
    And you have nailed it when you said that the regulatory 
environment is making it very difficult to do business. Mr. 
Whalen is an example of that.
    What do you see as a--this bill that we are looking at 
today is one--and the two bills, I guess, are a couple of 
solutions that we have come up with.
    Do you have some other ideas, besides Communities First and 
some other things that we can do?
    Because I think what we have done here with these two bills 
today, we have some great ideas, I think, for ways that will 
give some forbearance to some of the activities that are going 
on.
    Mr. McKillop. Congressman, I look at Dodd-Frank, and I say 
that was a bill that had to come by, had to occur to deal with 
the too-big-to-fail issue and the problems on regulated 
institutions.
    But at the same time, I look at what is happening now and 
the trickle-down effect that will be occurring into the future, 
and I go back to prior conversations with Directors in the 
FDIC, and I believe that establishing a separate way of 
examining community banks, a separate examination standard, 
might be the only thing that we can really implement with some 
peace.
    Mr. Luetkemeyer. One of the things that I hear regularly 
from my bankers back home is that there is a huge disconnect 
between what the folks in Washington are telling us is supposed 
to be the way that banks are examined and what is really going 
on out in the field.
    I assume that your testimony lends itself to that 
direction. You agree with that statement?
    Mr. McKillop. I agree totally with it, sir.
    Mr. Luetkemeyer. Do we need to say it louder? We have some 
regulators here in the audience. Do I need to stand on the 
table today and you want to shout in your microphone to let 
them know that there is a huge disconnect between what is going 
on here in Washington and what is really going on out in the 
field?
    Mr. McKillop. Let my yes be yes.
    Mr. Luetkemeyer. Because I have met multiple times with 
regulators and it does not seem to register.
    So thank you for being here today. And, again, if we need 
to, we will sing this praise from the highest heaven here that 
this is what is going on and we need it to stop.
    But one quick question for the professor. You made the 
comment awhile ago, sir, that you said that--I would like for 
you to elaborate on it--that we really need to have no capital, 
would be a way to go. And then you turned around and said that 
we need to have no forbearance.
    Can you justify those two statements? Can you tell me how 
they are juxtaposed against each other and make sense?
    Mr. Johnson. Yes, Congressman.
    I did not say no capital, I said no capital requirements. 
But that does not make sense in a system with deposit 
insurance.
    In pure free market systems, before, for example, in the 
United States before there was deposit insurance and before the 
creation of the Federal Reserve, banks routinely had 30, 40, 50 
percent equity capital as a share of their assets. So they had 
a lot more capital.
    And one consequence that we should all recognize and--we 
actually can all agree on is because we now have deposit 
insurance, banks are able to have less capital, they are 
protected--
    Mr. Luetkemeyer. So what you are saying is we had--if we 
had no insurance we would have more capital--or should have 
more capital--
    Mr. Johnson. If you look at private banks, the non-insured 
banks, financial institutions that take the same kinds of risks 
as banks, small, medium or large, they routinely have 30 
percent capital. So that is 30 percent equity funding as a 
share of the total funding; 30 percent equity, 70 percent debt.
    That is not risk-weighted capital. There is no risk 
adjustment--pure, plain, straight numbers.
    And so, we run our financial system with very little 
capital relative to what you get when you do not have the sort 
of regulatory-related deposit insurance.
    Mr. Luetkemeyer. Fine. I do not disagree with that. I think 
that you are probably right.
    With regards to no forbearance, that is exactly what we are 
talking about here today, though, with regards to Mr. Posey's 
bill--forbearance here, to put in law that is really supposed 
to be in practice, as was said awhile ago.
    Do you disagree with this bill, then? I think you made that 
statement awhile ago.
    Mr. Johnson. Yes, I do disagree with the bill, Congressman.
    In Texas, in the early 1980s, there was a serious problem 
with commercial real estate. One response was regulatory 
forbearing, including through legislation passed by Congress.
    Now, the problem was not just in Texas. The problem was not 
just in the bank that originally had the problem. But by the 
end of the 1980s, we had what is now known as the S&L crisis 
that was large and cost the taxpayers hundreds of billions of 
dollars in order to sort out.
    That was a direct result--costs escalated because of the 
regulatory forbearing.
    Chairwoman Capito. Thank you.
    I thank you for your patience.
    We are on a vote. We have about a minute-and-a-half left 
for the vote, so I think we are going to suspend the hearing. 
We will stand in recess until after the last vote. We should be 
back here between 12:15 and 12:45. Some of the staff can give 
you a more accurate time.
    You can go to the glorious Rayburn cafeteria and enjoy a 
great a lunch.
    Thank you.
    [recess]
    Mr. Renacci. [presiding]. We are going to call the hearing 
back to order.
    Mr. Pearce, you have 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Before we were so rudely interrupted, I was going to ask--
when I am looking at Mr. Whalen's testimony, I see on page one, 
he says that the decision to make a loan will be second-guessed 
by regulators. And then he goes on to make the point that 
regulators are responsible for the failure to--for the loans to 
take place.
    Then Professor Johnson on page two, number eight, says to 
blame bank examiners for the lack of lending in a post-crisis 
economy makes no sense. And so, I would kind of like to drill 
down just a little bit deeper in that.
    Professor Johnson, do you have empirical evidence? I guess 
if I were going to look to try to figure out the difference, I 
would look at safety and soundness reviews and compliance 
reviews. That would be two vastly different approaches. One 
would be concentrating on the capital and whether the financing 
by debt or whatever. The other one might be a regulatory 
approach.
    So in your empirical evidence, have you studied the amount 
of reviews now that are compliance versus those that are 
concentrating simply on safety and soundness? Which one is 
dominating in the reviews right now?
    Mr. Johnson. Congressman, that is a very good and a very 
fair question. I do not think anybody knows that level of 
detail on the systematic data.
    We do know from the Federal Reserve's senior loan officer's 
opinion survey, and from the National Federation of Independent 
Businesses survey of small business economic trends, the 
predominant fact there is that demand for loans remains 
sluggish because of the damage to the balance sheet. So I do 
not--
    Mr. Pearce. I am hearing a completely different thing, sir, 
in New Mexico small banks. And I am hearing that there is 
evidence that--I get banks together on phone calls frequently, 
and they tell me that compliance reviews have replaced safety 
and soundness, the tediousness of it. And, in fact, those 
soundness reviews are killing the market exactly the way that 
Mr. Whalen describes.
    They, in fact, tell me that when they used to get a simple 
markup, say, a notation, a write-up for something. Now, they 
face $50,000 fines. And they tell me, ``Why would I loan money 
on a New Mexico house that I am never going to make $50,000 on 
that particular loan? Why would I risk making the loan in order 
to get possibly a write-up, because we left a comma out or 
because we did not completely fill out the flood insurance?''
    Flood insurance in eastern New Mexico is not a high 
priority item. We have not had rain since last August, and the 
State is burning up, as you can see on TV. And so, this would 
lead us to believe a little bit more that the process of 
reviews is in fact killing the market exactly like Mr. Whalen 
said.
    Now, in your verbal comments, you asked the rhetorical 
question, why are banks scared. And then you said that they 
have too little capital.
    I, in fact, am hearing from banks every day that they have 
plenty of capital, and they have loan demand, but they also 
tell me that if they make one bad loan, that their bank is 
going to be taken away from them. They point to examples in New 
Mexico where that has happened.
    So, why would a banker risk making a loan that somebody is 
going to come in and review at some later time that could cause 
them to lose their entire bank?
    I would have you look at Charter Bank and the Bank of the 
Rio Grande, both of which were operating fairly well until they 
began to come in and say, ``Well, we are going to downgrade 
this or that,'' very few non-operating loans.
    I think the next point that I would really like to ask 
about is the procyclical and countercyclical regulatory 
measures.
    Right now, I think that the regulators, and I think you 
could make a very strong point, that they are pro-cyclical. 
When things are good, they simply open the door and let them 
get better instead of trying to check the process and trying 
to--instead of saying, ``Well, let us all slow down just a 
bit.''
    And when they start going bad, then they make things go 
worse by their foreclosures, by their insistence that they 
close down loans that are still performing. Then, appraisal 
values go down, and so builders cannot get loans, because the 
appraisal values have been abnormally pushed lower by the 
actions of regulators that are calling into question loans that 
are performing every day.
    We recently had a group of--this was about a year ago, as a 
matter of fact, even before the election--Indian American hotel 
owners. All came in from a three-State region. Every single one 
of them had demand requirements that you had to provide 
$750,000 in capital to loans that had performed flawlessly, 
never missed a payment.
    Those feel like regulatory excesses that are simply doing 
what Mr. Whalen contends. And your contention, on the other 
hand, is that it is ludicrous to make that assertion. Would 
you--I tend to side with Mr. Whalen, and the evidence that I 
hear every day sides with him. Would you like to comment on 
that?
    Mr. Johnson. May I? Again, these are legitimate concerns. 
Certainly, regulators can become procyclical, as you say, 
exaggerate the boom and also exaggerate the bust. And 
certainly, there are convincing anecdotes and instances, 
examples, but systematically is this what is happening? Have 
examination standards become tighter?
    Mr. Pearce. When every banker in the State says yes, 
because I have these conference calls. Do you have any 
empirical evidence that says it is not happening, that it is 
only anecdotal? I find that pretty offensive, when you do not 
come in here with empirical evidence, and you are declaring 
what I come with, with bankers saying often. I consider that to 
be offensive that you are saying it is anecdotal.
    If you come here as a professor, you bring the empirical 
evidence for the claims you are going to make, sir.
    Thank you. I yield back.
    Mr. Renacci. Mr. Posey?
    Mr. Posey. Thank you very much, Mr. Chairman.
    Mr. Pearce, I think, if you look at the written statement, 
Mr. Johnson looks at the situation in reverse. He seems to view 
it that the regulators are the good guys and presumes that 
banks are bad guys, who just want to somehow game the system.
    The statement was absolutely silent and failed to address 
in any way whatsoever regulation, which is the point of this 
bill and the point of this hearing that we are having here.
    Mr. McKillop and Mr. Whalen, I wonder if you could each 
share with me how important you think cash flows are versus 
collateral value? Are the regulators focusing too much on 
collateral value and not enough on cash flows?
    Mr. Whalen. Yes, if we had a situation where the FASB Board 
did suggest that we would, in effect, go on mark-to-market 
rules through appraisals, if would have been the end of small 
and medium-sized businesses. It would have been absolute chaos. 
How often do you go in to get an appraisal every week, every 
month, every 6 months?
    The irony of it is, is that you can--ups and downs in 
appraisals, but cash flow is still the mother's milk of 
repaying a loan. And that is one thing that has occurred here, 
which is, I think, excessive use of appraisals. You did have 
excessive appraisals there for a while. We have swung to the 
other side.
    I had a situation where we put in $13.5 million of hard 
infrastructure into a development. Basically, the appraisal 
came back unchanged from the year before. I said, ``Wait a 
minute. I just spent $13.5 million. Here is the bill.'' ``Well, 
you know, it is a tough market.''
    The point being is I do think that this is exactly that--
way too much emphasis on what is the appraisal of the day, the 
appraisal du jour, and not enough on looking at historical and 
cash flow trends.
    Mr. Posey. Thank you very much.
    Mr. McKillop. At best, the collateral value is generally a 
secondary source of repayment. The primary source is cash flow. 
As bankers, we always look for that first.
    Mr. Posey. And is there in banking any better measure of an 
account, in your opinion, than the simple matter that the 
payments were made on a timely basis?
    Mr. Whalen. That was the old idea--borrow the money and pay 
it back.
    Mr. Posey. I get a feeling that there are two kinds of 
people in this room. There are people who see the problem of 
arbitrary overregulation, and those that do not. It is just 
really simple.
    And if you do not see the problem, then you will find all 
kinds of objections to this legislation, because it changes a 
regulatory environment that some people seem to think is okay 
and needs to be preserved for whatever reason.
    But I just do not see how letting a current debt be left on 
an accrual basis perpetually, as long as payments are made, can 
harm anybody. I think that is common-sense legislation and 
basically what it is going to take to recover.
    This is no cost at--unlike some of the big banks that got 
bailouts, the community banks got bailed on. And most of the 
community bankers that I am aware of, a majority of the 
interest in the banks are held by the officers, the directors 
of the bank, and people in the local community.
    There is not a big spread of stockholders across this 
Nation and around the world whose money they are gambling with. 
They are gambling with their own money, if they are gambling. 
They are loaning their own money, more than they are other 
people's money. And they are accountable for it.
    And given the opportunity to work with the homeowner or a 
small-business man who may be in tough times, they can bring it 
to a positive conclusion, whereas a heavy-handed, monolithic 
bureaucrat can come in there and just stomp them out of 
business.
    In my State, unfortunately, there is probably not very much 
real estate that is worth today what it was 5 years ago. And so 
if your loan is over 5 years old, and some bureaucratic 
regulator just decides they need to have a current appraisal, 
there is a good chance your property is not going to appraise 
for what it did 5 years ago.
    You could essentially take every loan on real estate in our 
State, probably, and put it on a nonaccrual basis for that 
reason.
    That is bad for Florida, that is bad for the United States 
of America, and that is bad for the taxpayers.
    Thank you.
    I yield back.
    Mr. Renacci. Thank you, Mr. Posey.
    Mr. Royce, for 5 minutes?
    Mr. Royce. Thank you, Mr. Chairman.
    I would like to ask Professor Johnson a question. And it 
has to do with a concern that you raised about the ability of 
the resolution authority that was passed last year to resolve a 
global financial institution that is in trouble.
    Can you briefly explain your concerns regarding this 
authority as it pertains to these massive financial 
institutions?
    Mr. Johnson. Yes, Congressman. I am of the view that were 
one of the largest banks in the country--Citigroup, for 
example, or JPMorgan Chase--to get into trouble, this would be 
very hard to deal with under the resolution authority that the 
FDIC now has, working with the Federal Reserve, the Treasury 
and the Financial Stability Oversight Council.
    Because there is no cross-border resolution agreement; 
there is nothing between the United States and the United 
Kingdom, nothing between the United States and other countries. 
So there is no way to agree on who has what kind of priority in 
the event of a failure.
    And that would be a source of confusion, very much like 
what we saw in the days after the failure of Lehman Brothers.
    Now, the FDIC has issued a paper of specifics on how they 
would have handled Lehman differently, and they make some good 
points in that paper. So my concerns are not so much about the 
specifics of a Lehman, but it is much more about the global 
mega banks that, unfortunately, I believe could not be handled 
through effective resolution at this time.
    Mr. Royce. One of the challenges we have is that with the 
too-big-to-fail presumption and with the legislation that we 
have passed in Dodd-Frank, the implied subsidy or benefit in 
the market, the lower cost of capital, keeps compounding.
    It used to be that the studies showed it was about a 100 
basis point advantage for large banks over smaller banks. Now, 
we have the Kansas City Fed president saying maybe, by today's 
standards, it has 360 basis points more.
    And if you look at the consequences of that, we have a 
situation now where 2 percent of the industry controls 78 
percent of the assets. Before we went into this conundrum, we 
had 33 percent of the assets concentrated in the big investment 
banks in the 1990s.
    So it seems as though one of the disadvantages for 
community banks is this lower cost of capital that exists 
because of the implied government backstop and because of the 
various actions we took.
    And now, with Dodd-Frank, because it is apparently believed 
out there in the market, and if the Kansas City Fed's right, it 
has compounded the problem, all of this leading to the question 
that if this plays out over time, then, as I said in my opening 
statement, we are going to just continue.
    And with it, would not there come an overleveraging, 
logically, of the largest financial institutions unless 
something is done along the way in terms of regulation which 
tried to capture that implied advantage, government backstop 
advantage.
    And if we assume that the reason we are in this is because 
of that--let me let you--I am going to run out the clock here. 
Go ahead.
    Mr. Johnson. I agree with everything you have said. I think 
that is a completely accurate and sobering assessment.
    There are various tools available under Dodd-Frank, 
including the so-called living will provision. So the FDIC 
does, in principle, have the power to force big banks to become 
smaller.
    But we have seen no indication that they have done that, 
and I would be skeptical that there will be political support 
for them taking those actions.
    And, as you say, if we could find a way to remove the 
funding advantage--I do not think it is quite as big as Tom 
Hoenig is saying, but it is big, and as Mr. McKillop said it is 
at least 50 basis points. That is probably closer to 75. That 
is a big deal in this market.
    If you can find a way to tax that or remove that funding 
advantage, that would be good. But it is very hard to do. And 
the result almost certainly will be an overleveraging of the 
too-big-to-fail banks, because of the government backstop, and 
further financial crisis that will damage, massively, both 
community banks and small business.
    I think nothing could be more important than dealing with 
the risks to the system posed by today's mega banks.
    Mr. Royce. Thank you.
    Thank you, Mr. Johnson.
    Mr. Renacci. Thank you, Mr. Royce.
    Mr. Manzullo, for 5 minutes?
    Mr. Manzullo. Thank you for coming to this hearing. It is 
unfortunate that we could not have one panel where the 
regulators sit with the regulated, to have more interaction 
than is going on.
    I am very disturbed over what the regulators are doing. The 
area I represent in northern Illinois is heavily involved in 
manufacturing. And I have had manufacturers come to me with an 
order in their hands from a major, major contractor--an order 
in hand, wanting work to be done locally.
    With the manufacturer going to the bank and asking just for 
enough money to buy the raw materials, it is called 
``factoring.'' And with factoring, the banks have absolute 
control, because they would write the check to the vendors to 
the small manufacturer and actually receive the check coming 
back from the large manufacturer that ordered parts from the 
intermediary.
    And every time this happens, I sit there and I ask myself, 
why do we work so hard to return manufacturing to America, when 
the Federal regulators hate manufacturers?
    I am going to say that again. The Federal regulators hate 
manufacturing. They do not trust it. They think that is going 
to--things are going to fold up, and they actually do not 
believe that manufacturing is that important.
    This is reflected in some of the idiotic statements made by 
the examiners who, when two of my constituents were turned down 
on a loan, said to the bank, ``You cannot continue the line of 
credit because those two brothers do not have any reserves left 
in their sub-S corporation.''
    That is how stupid the examiners were. You do not have 
reserves in a sub-S corporation. You distribute the money in a 
pass-through, the same as an LLC.
    And the bank said, ``Our hands are tied.'' I am talking 
about a 30-year long commitment.
    And, Mr. Johnson, when you say in your statement that you 
cannot blame the examiners--``to blame bank examiners for the 
lack of lending in a post-crisis economic--economy makes no 
sense''--you are wrong. The reason that you are wrong is the 
fact that most of my work is done in manufacturing, probably 70 
to 80 percent of time as a Member of Congress.
    I talk with these guys every single day. And I also talk to 
the banks, and I have also talked to the regulators.
    And then one day, I talked to the heads of the Fed, the 
FDIC and the OCC. And here is what they said: ``We have not 
changed policy,'' which is true. And each one invited me--said 
if you have a particular loan that you think should have been 
given, I will look at it personally.
    They were not stroking me. The problem is the bank. Every 
time, the bank refuses to take them up on it because they are 
fearful of retaliation coming from the examiners.
    Now, this stuff has to stop. And it has to come from the 
top. And I just want to throw that out to you and see if 
anybody there thinks I am nuts or if you want to agree with me 
or, Professor Johnson, the--I think you probably agree with my 
answer, because the pressure is coming from the top and not 
just the examiners themselves. Would that be correct?
    Do not take all my time. We have two other guys I want to 
hear from.
    Mr. Johnson. I think you are raising very serious questions 
that deserve careful examination, to be sure. I have not seen 
evidence of this intimidation by regulators to which you--
    Mr. Manzullo. I have. It exists. You cannot deny that it 
exists. The banks are being hammered by it.
    Mr. Johnson. I have not seen that evidence myself--
    Mr. Manzullo. Anybody else? Mr. McKillop? Anybody?
    Mr. McKillop. Your premise, I think, is right on target. I 
am obviously not aware of the banks in northern Illinois, but I 
see similar sorts of things occurring in other aspects of 
regulatory pressure on community banks quite often.
    Mr. Manzullo. Mr. Whalen?
    Mr. Whalen. You hit it right on the head. I have businesses 
in your district, by the way.
    Mr. Manzullo. Yes, the machine shop. Good chicken.
    Mr. Whalen. Thunder Bay.
    But, I had a banker and he has been in the business for 
multiple decades. He said, ``Mike, I am going to lend this 
money to your business, but I know next year they are coming in 
and they are going to put this--have some kind of a watch list, 
but I do not care.'' But he is one of the few who was not 
intimidated.
    Mr. Manzullo. The--I am over?
    I yield back. Thank you.
    Mr. Renacci. Thank you, Mr. Manzullo.
    Again, I want to thank the first panel for your testimony, 
and at this time, you are dismissed.
    I would also like to call up our second panel of witnesses.
    Good afternoon. At this time, I want to introduce 
individually for the purpose of giving 5-minute opening 
statements our second panel. Our first panelist is Mr. George 
French, Deputy Director, Division of Risk Management 
Supervision, Federal Deposit Insurance Corporation.

 STATEMENT OF GEORGE FRENCH, DEPUTY DIRECTOR, POLICY, DIVISION 
   OF RISK MANAGEMENT SUPERVISION, FEDERAL DEPOSIT INSURANCE 
                          CORPORATION

    Mr. French. Good afternoon, Chairman Renacci, and members 
of the subcommittee. I appreciate the opportunity to testify on 
behalf of the FDIC on the condition of the banking industry, 
our approach to supervision, and some concerns we have 
regarding H.R. 1723.
    The banking industry today continues to face challenging 
conditions. Loan demand is weak and for some banks problem 
assets are at high levels. Nevertheless, a number of indicators 
show signs of a turnaround and the FDIC is cautiously 
optimistic regarding the outlook for bank performance.
    The 4,400 community banks that we supervise continue to 
play a vital role in credit creation across the country, and 
especially for small businesses.
    Now, before addressing H.R. 1723, I would like to make a 
few observations about our supervisory process. The FDIC 
attaches great importance to taking a balanced and fact-based 
approach to supervising banks in this challenging environment. 
In reviewing banks' loan portfolios, we rely significantly on 
validating banks' own credit risk management processes, and 
most often examiners agree with a bank's assessment of loan 
quality.
    We do not micromanage banks in how they deal with 
individual customer relationships or how they manage their loan 
portfolios. The FDIC does not require banks to write-down loans 
based solely on a decline in collateral values. And in fact, as 
long as the borrower is expected to be able to repay the loan, 
no loss on the loan should be recognized.
    Another misconception is that once a loan is placed in 
nonaccrual status, it is stuck there until the next examination 
regardless of any work-out arrangements. In fact, when a 
borrower has demonstrated the ability to pay for 6 months, the 
loan can be returned to accrual status.
    We have joined several interagency efforts to clarify these 
points and to encourage banks to originate and restructure 
loans to creditworthy borrowers. We have heard from bankers 
that these statements have helped clear up misconceptions and 
helped them to become more comfortable extending and 
restructuring soundly underwritten loans.
    I also want to emphasize that to carry out our statutory 
responsibilities for supervision, we need accurate information 
about problem assets. We expect the financial statements 
prepared by banks to adhere to the standards prescribed by the 
accounting profession for problem loan accounting and loss 
recognition.
    And this is the source of our concern about H.R. 1723. 
Under that proposed legislation, as long as an amortizing loan 
is current and has performed as agreed in the recent past, 
institutions could disregard currently available borrower 
information indicating that it is improbable that the loan 
would be repaid in full. This would enable institutions to 
include accrued but uncollected interest income in regulatory 
capital when collection in full is not expected.
    Information about the borrower's ability to repay the loan 
would be disregarded for purposes of placing loans in 
nonaccrual status and measuring capital, including for purposes 
of prompt corrective action determinations.
    This would result in an understatement of problem loans on 
banks' balance sheets and an overstatement of regulatory 
capital. Compromising the quality of information about 
nonaccrual or troubled loans or preventing supervisors from 
acting on such information would detract from supervisors' and 
investors' ability to properly evaluate the safety and 
soundness of banks or require corrective action as needed.
    Such regulatory capital forbearance would detract from 
investors' confidence in the reliability of all banks' 
financial statements. Moreover, experience has been that 
policies that delay the recognition of bank losses can 
ultimately increase losses to the FDIC deposit insurance fund 
and the costs that healthy banks pay for their deposit 
insurance premiums.
    In closing, I would like to reemphasize that the FDIC 
recognizes the challenges facing banks and their borrowers in 
this difficult environment and encourages banks to prudently 
originate new credits and work with distressed borrowers. At 
the same time, we believe that accurate financial reporting is 
critical to maintaining a safe and sound banking industry.
    With respect to H.R. 2056 directing the FDIC I.G. to study 
the issues relating to bank failures, I would just like to say 
that we are always glad to work with our I.G. We value their 
input. They are an independent organization and I believe they 
may be in contact with some of your offices regarding their 
views and specifics on that view.
    I would be glad to answer any questions from the committee.
    [The prepared statement of Mr. French can be found on page 
55 of the appendix.]
    Mr. Renacci. Thank you, Mr. French.
    The next witness that I would like to introduce for a 5-
minute opening statement is Ms. Jennifer Kelly, Senior Deputy 
Comptroller for Midsize and Community Bank Supervision, Office 
of the Comptroller of the Currency.

STATEMENT OF JENNIFER KELLY, SENIOR DEPUTY COMPTROLLER, MIDSIZE 
 AND COMMUNITY BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF 
                          THE CURRENCY

    Ms. Kelly. Chairman Renacci, and members of the 
subcommittee, I appreciate this opportunity to explain the 
OCC's approach in assessing the condition of banks' loan 
portfolios, including determining whether individual loans 
should be classified or placed on nonaccrual, and to offer the 
OCC's views on H.R. 1723 and H.R. 2056.
    Access to credit plays a vital role in restoring economic 
growth and supporting jobs in our communities and we share the 
subcommittee's view that banks should not be unduly constrained 
from meeting the needs of creditworthy borrowers.
    We are committed to balanced and fair supervision of the 
financial institutions we regulate and I believe our examiners 
are striking that balance. OCC examiners assess the quality of 
a bank's loan portfolio during each examination cycle. The goal 
of our reviews is to confirm the accuracy of bank management's 
own assessment of credit quality, not to second-guess or 
supplant their judgments with ours.
    When a borrower's ability to repay a loan becomes impaired, 
we expect the bank to classify the loan to recognize the 
increased risk. Examiners confirm management's assessment 
through transaction testing of specific loans or loan 
portfolios. Where weaknesses are found, examiners direct bank 
management to take corrective action.
    To provide consistency in the examination process, the OCC 
and other banking agencies use a uniform risk rating scale to 
identify problem credit. This regulatory classification system 
consists of four levels of designation that identify different 
degrees of credit weaknesses.
    We have a variety of mechanisms in place to help ensure 
that OCC examiners apply our policies in a consistent and 
balanced manner across institutions. And we spend considerable 
time and resources providing training and guidance to our 
examiners on evaluating credit risk.
    Loan analysis and accounting principles are focal points of 
every new examiner's classroom and on-the-job training. One of 
our primary regulatory objectives is to ensure that the call 
report a bank is required to publish each quarter accurately 
reflects the condition of the institution at that point in 
time.
    Accurate and transparent financial statements are essential 
to allow investors, creditors, and regulators to evaluate a 
bank's financial condition. Congress recognized the importance 
of this when it passed FDICIA in 1991. Section 121 of FDICIA 
requires that the accounting principles used for regulatory 
reporting should be no less stringent than GAAP in order to 
facilitate prompt resolution of troubled institutions.
    When a borrower shows signs of trouble, banks and examiners 
must consider whether the loan warrants criticism or 
classification, then whether the loan should continue to accrue 
interest. And finally, if the loan is subsequently modified, 
does it need to be reported as a troubled debt restructuring.
    The banking agencies' policies for these and other loan 
accounting issues are detailed in the instructions that banks 
follow when preparing their quarterly call reports.
    Consistent with GAAP, the call report instructions that a 
loan be put on nonaccrual status when payment in full of 
principal or interest is not expected, or when principal or 
interest has been in default for a period of 90 days or more, 
unless the asset is both well secured and in the process of 
collection.
    As a general rule, a nonaccrual loan may be restored to 
accrual status when none of its principal and interest is due 
and unpaid, and the bank can reasonably expect repayment of the 
remaining contractual principal and interest, or when it 
otherwise becomes well secured and in the process of 
collection.
    With this background, let me briefly offer the OCC's 
perspectives on H.R. 1723 and H.R. 2056.
    H.R. 1723 would permit certain loans that would otherwise 
be treated as nonaccrual loans to be treated as accrual loans 
for the purposes of calculating regulatory capital.
    We are concerned that legislation proscribing specific 
regulatory accounting that is less stringent than GAAPs could 
mask troubled assets and overstate a bank's capital ratios.
    This type of forbearance could diminish investor confidence 
in banks and undermine a primary objective of the prompt 
corrective action regime.
    H.R. 1723 also requires the Financial Stability Oversight 
Council to study how to prevent contradictory regulatory 
guidance on loan classifications and capital requirements.
    The OCC shares Congress' interest in assuring that 
assessments are fair, balanced, and consistent over time and 
across institutions.
    For this reason, we generally coordinate with our 
regulatory counterparts on the issuance of regulations and 
supervisory guidance on matters such as capital and capital 
requirements and loan classifications.
    As previously noted, the criteria for loan classifications 
and loan accruals are set forth in the interagency guidance and 
the call report instructions.
    H.R. 2056 would require the FDIC's Inspector General to 
study the effects of certain policies that may also pertain to 
institutions directly supervised by the OCC.
    As such, we believe it would be appropriate for the OCC to 
be given an opportunity to provide comments before the study is 
finalized. Thank you.
    [The prepared statement of Ms. Kelly can be found on page 
68 of the appendix.]
    Mr. Renacci. All right. At this time, we are going to 
recognize members, and I will yield 5 minutes to myself at this 
point.
    I know that both of the organizations do not get up every 
morning and try and figure out ways to slow down banking and 
slow down jobs. But that is actually what is happening in the 
real world out there.
    We heard testimony from the bankers earlier. We heard 
testimony from an independent owner of a business.
    And I think I told you my personal experience as a CPA and 
also a business owner, that the regulators out there are 
overreaching.
    They are doing everything that I know you have said in your 
conclusion that they are not trying to do and that you do not 
want to do. But, there is overreach.
    And if you came back to my district in Ohio, I could take 
you to six, seven, eight different businesses that would tell 
you that I have paid my loans on time. The value of the 
property is there.
    And as a CPA, I have had the opportunity to see those 
things. So, it is not like they are just telling me that. I 
have actually had the opportunity to see it, and understand it.
    So tell me, from both your perspectives, how do you make 
sure that this is not happening? You could say here today that 
your goals are for it to not happen.
    But if I was able to take you out into my district to five 
or six businesses and show you that it is happening, tell me 
what you do, from each organization, to try and make sure that 
this is not happening? Because it is. So I would like to hear 
what your thoughts are on that.
    Mr. French first.
    Mr. French. I would like to start by saying that I think, 
overall, most community banks today--
    Mr. Posey. Can you pull the microphone closer?
    Mr. French. Most community banks today do have a lot of 
capital, I would say. The typical community bank has more than 
twice as much capital as it needs to be well capitalized, 2\1/
2\ times its minimum.
    So I think, in many cases, the banks are waiting for a 
return to robust loan demand. That is what we are hearing from 
the bankers who come in to meet with us regularly--
    Mr. Renacci. I hate to interrupt you, but I have had 11 
bankers in my office who all told me they have the dollars and 
the demand, but the regulators have--they are concerned about 
overreaching because of what the regulators are saying.
    Mr. French. We would certainly be concerned as well. We 
want our banks to lend. We want them to make good loans.
    We are not out there looking to close banks. So, what we do 
is we have our examiners--they have comprehensive training 
programs.
    We go out, on a quarterly basis, to our regional offices 
and to Washington executives, talk to them about 
professionalism in dealing with banks.
    Mr. Renacci. Again, but is anybody going out to Main 
Street, America, and seeing what the actual regulators are 
doing to some of these small businesses? Because so far, I have 
not heard that.
    Mr. French. We take great interest in this. We have a small 
business lending hotline at the FDIC.
    We have received about 500 or 600 calls where we 
investigate, find out what is going on behind those.
    We have it processed in our exams, where every risk 
management exam, we have a structured dialogue with the bankers 
about obstacles that they are seeing to credit creation.
    And we keep track of the answers. And we hope, hopefully, 
over time, this will help us to get a better sense of where 
some of the concerns might be--
    Mr. Renacci. But it does sound like you are not testing or 
sampling. You are waiting for people to come and call the 
hotline. The problem is most of these individuals are 
concerned.
    Most of these banks are concerned about calling the 
hotline, because then they are going to be--they know they are, 
in many ways, they feel they are going to be punished.
    Mr. French. Yes--
    Mr. Renacci. I am--I know we are running out of time.
    Ms. Kelly?
    Ms. Kelly. I would say that we do a tremendous amount of 
outreach to bankers in terms of getting out there, talking to 
them, hearing some of the comments that you are relating to us 
here as well.
    And they do share specifics with us, and we talk through 
it. We also have an ombudsman, an independent ombudsman at the 
OCC. Banks can file a formal appeal, if they really disagree 
with us.
    But more often than that, the ombudsman has many 
conversations with bankers to help better understand what the 
issues are and get their side of the story and try and resolve 
things on the supervisory side.
    So it is encouraging that dialogue. I hear all the comments 
you are relaying to me about retaliation. But I can tell you 
there is an extensive dialogue.
    The other thing we have done is quite a few Members of 
Congress have asked us to participate in different local forums 
with small businesses and bankers. We always are willing to do 
that.
    We have found those sessions to be very helpful as well in 
terms of keeping us informed of what the issues are, what the 
concerns, and trying to be responsive to that.
    Mr. Renacci. But, again, it does not sound like either 
organization is actually sampling or testing or going out in 
the field.
    Ms. Kelly. I am sorry, I did not speak to that directly. 
Yes, we do. I have designated credit experts, who are spread 
across the country. They do quality assurance reviews on a 
sampling basis.
    And when we have a problem bank, a bank that has particular 
credit problems, we will send those experts in to take a closer 
look at the work that the examiners are doing.
    So that gives us a good sense of how well the examiners 
understand the policies, and are they applying them 
consistently.
    Mr. Renacci. Thank you. And just in closing, I can tell you 
that it sounds like you are trying, but it is not working.
    And we really do need--there are business loans out there 
that are--and businesses who are not able to employ people 
because their credit has been shrunk, even though they have 
made payments, their assets are there.
    So I hope we can do a little better job in the future, 
because this is all about jobs and making sure that these 
businesses have that opportunity.
    All right. I am going to recognize Mr. Westmoreland for 5 
minutes.
    Mr. Westmoreland. Thank you, Mr. Chairman, and I have a 
chart I am going to ask to be put up on the board there.
    Mr. French, have you ever worked in a bank?
    Mr. French. No, sir.
    Mr. Westmoreland. Have you ever been in business for 
yourself?
    Mr. French. No, I have not.
    Mr. Westmoreland. Ms. Kelly, have you ever worked in a 
bank?
    Ms. Kelly. No.
    Mr. Westmoreland. Okay. Have you ever been in business for 
yourself?
    Ms. Kelly. No.
    Mr. Westmoreland. Mr. French, in kind of relationship to 
what the chairman was asking, does the FDIC do any postmortem 
after these closings to review what may have caused the 
closing?
    Mr. French. Yes. There are a number of things that we do. 
But we certainly have the Inspector General material loss 
reviews after closings that, where the loss exceeds a certain 
threshold.
    We also have, for any bank that is in a problem status or 
about to be put into a problem status, the level of internal 
review required for that to happen escalates to the regional 
director level. And--
    Mr. Westmoreland. I am talking about banks that have 
closed.
    Mr. French. Yes.
    Mr. Westmoreland. Do you go in and do a--
    Mr. French. We--
    Mr. Westmoreland. --postmortem review of what caused it?
    Mr. French. We do both formal and informal lessons learned.
    Mr. Westmoreland. Okay.
    Mr. Westmoreland. And how about the OCC?
    Ms. Kelly. Yes. The Treasury Inspector General does their 
own review, and we do an internal review as well. We look at 
not only what caused the failure, but more importantly, our 
supervision and do a lessons learned from that, based on the 
history and the benefit of hindsight, and what we could have 
done differently.
    Mr. Westmoreland. So I would not have any problem getting 
copies of the postmortem reviews of the 65 banks that are 
closed in Georgia?
    Ms. Kelly. The I.G. reports?
    Mr. Westmoreland. Your report. Does the OCC not do a 
report, the I.G. does the report?
    Ms. Kelly. The I.G. does the report that is a public 
report, yes.
    Mr. Westmoreland. So you do not actually go in and look at 
them yourself? Or you just read the report?
    Ms. Kelly. We do. But those are internal documents.
    Mr. Westmoreland. Okay. But do you go in yourself and 
actually do an interview with the bankers or try to find out 
what happened?
    Ms. Kelly. We are working with the bankers all the time up 
to the closing. So we are having constant communication with 
the bankers up until then.
    Do you mean going back and talking to them afterwards?
    Mr. Westmoreland. Yes.
    Ms. Kelly. I would agree with what--
    Mr. Westmoreland. After it is closed, you might get a 
different opinion than when they are in fear of being closed.
    Ms. Kelly. Okay. But I would agree with what Mr. French 
said about the levels of review and as the problems progress--
    Mr. Westmoreland. Trust me. It is a different environment 
after the banks close than it is when they are trying to fight 
for their life. The attitude is probably a little bit 
different.
    The information you get will probably be a little bit 
different.
    And, Ms. Kelly, let me say that the most complaints that I 
have gotten have been about the OCC regulators, very arrogant, 
almost threatening, almost calling people crooks.
    The fact that somebody would get A's on their report cards 
and talk about how well the bank was managed and then at the 
next review get F's and talk about how crooked all the 
directors were, and here again, from both of your standpoints, 
we have trouble getting a lot of these people to come forward 
because they are afraid of retaliation.
    To me, that is not good. But let me draw your eyes to the 
chart up here. These are the top 10. And we have been told many 
times that the reason that we have had so many bank closings is 
because we have too many banks. And Professor Johnson kind of 
alluded to that, that there are possibly too many banks.
    If you look at the number of banks that we have in Georgia, 
261, we have had 65 bank closings. And if you look at our 
population and the number of banks that we have and compare it 
to some of the other States, I do not know that we have too 
many banks.
    We have 159 counties in Georgia. And you would assume that 
at least every county may have at least their own community 
bank, although I have four counties in my district right now 
that do not have a community bank because they have been 
closed. They do not have one.
    They have banks from Arkansas and other parts of the 
country that have come in and assumed these banks that know 
nothing about the community, and were really sent there to 
flush some of these loans down.
    But I would just like--if you look at Nevada, 45 percent of 
their banks have been closed. And look at the unemployment 
rate, look at the serious delinquencies, and their does not 
seem to be a pattern.
    It seems like there would be some type of pattern as to why 
these banks were being closed. And I do not understand in 
particular the--why as a result of the banks that have gotten 
TARP or the loss share agreements going in and destroying the 
markets in these communities and then the banks that have been 
there providing for the communities suffer because of the 
things that those other banks did. They are having to write 
these loans down.
    I will give you another example of government intervention, 
and let me just close with this. The community--not the 
community redevelopment, but the stabilization program. I had a 
call today from a builder. A county had gotten money for the 
stabilization program to stabilize the neighborhoods. He is 
building in the subdivision. There are also homes that is 
already been purchased in this subdivision.
    The county came in and bought lots from a bank with this 
revitalization money, and they are selling the houses for 
$20,000 less than what they sold for. And the bank has called 
him and told him that he is going to have to put up more 
collateral because the values of the homes are less.
    Does that make good sense to you? Really, how would the OCC 
and the FDIC look at that when they go into that bank and the 
guy cannot put up more collateral, he has paid his interest, he 
has the same things he has been doing when government 
intervention has caused that loan to call for more collateral. 
That is inexcusable.
    Mr. Renacci. Thank you, Mr. Westmoreland. And I yield 5 
minutes to Mr. Luetkemeyer.
    Mr. Luetkemeyer. Do you two understand the reason for Mr. 
Posey and Mr. Westmoreland's bill here today--bills, from the 
standpoint that they are both the results of the frustration 
with examiners and the fact that things are not changing? You 
understand that? You understand why those bills are out there, 
why we are here today?
    Ms. Kelly. Yes.
    Mr. Luetkemeyer. I made the comment in the previous 
hearing, I can bring Bill Gates here, I can bring in 100 
business people just like Mr. Whalen, I can bring in 100 
bankers just like Mr. McKillop and they can testify to the same 
thing.
    And I have, over the past 2\1/2\ years I have been in 
Congress, met with the FDIC, the OCC, and the Fed on an annual 
basis till this year because--nobody will listen anymore and 
presented the same problem, that there is a huge disconnect 
between what you think is going on in the field and what is 
really going on in the field.
    I will give you an example. I have a banker--he is not in 
my district, but he is in my area--who was put on the problem 
list. His bank was on the problem list. It had never been on a 
problem list in the history of this bank--never had problems 
with earnings, never had problems with capital, never had 
problems with past due. Yet, he happened to be the next bank 
that was examined after an examiner got ripped for not catching 
some stuff in the previous exam.
    The next day, his was the next bank, and he was put on the 
problem list. And ever since he has been on the problem list he 
has never still had a problem with his capital, past due, 
earnings, whatever.
    That is what is going on. And you guys are blind to this. I 
hope that you understand how significant this problem is, 
because it is affecting the people who--Mr. French, you made 
the statement awhile ago that you do not micromanage banks. But 
do you really understand the effect that you have with the 
interpretation of the laws, the recommendations that you make 
and the exam that you have on communities?
    Do you understand that?
    Mr. French. We do understand, sir. That is part of why we 
really want to emphasize to our examiners the importance of 
taking a balanced and reasoned approach and--
    Mr. Luetkemeyer. How are we going to solve this problem?
    Mr. Posey and Mr. Westmoreland are trying to find a way to 
solve the problem here today. You guys do not agree with this 
approach, obviously.
    What is your solution for how we can find a way to allow 
the banking community, especially community bankers, because 
they are the ones that really help our small business and local 
communities fund the businesses that make this country work.
    How do you--what is your solution if you do not like these 
two bills today?
    Mr. French. Like I said, I think we have a very sluggish, 
still, a very sluggish economy. And we had a lot of banks with 
a lot of capital, very liquid balance sheets now after going 
through this crisis for 3 years, 4 years.
    So we do have to keep reinforcing the message that we want 
banks to make prudent loans. And we do not want--we want to 
keep pressing the point with our examiners, as we have been 
doing, that you do not write down a loan based solely on the 
collateral if the borrower's making his payments. And I think 
we just need to keep that up.
    Mr. Luetkemeyer. Ms. Kelly what do you think?
    Ms. Kelly. Yes, my response would be that a key to economic 
recovery is making sure that we have a strong banking system. 
And our responsibility as regulators is to ensure that banks 
maintain their safety and soundness.
    And so it is important when banks are experiencing trouble 
that they identify those issues and they deal with them early 
on when there is still flexibility, they still have to work 
with borrowers who are experiencing some problems, possibly 
restructure the loan--whatever is the right thing to do.
    I would go back to the comment that Ranking Member Maloney 
made earlier about whether there is a way we can just give 
people more time. So the earlier that there is a recognition of 
a potential problem, and the borrower and the banker come 
together and talk about how there could be a problem with 
repayment and how can we work through it, the better.
    Mr. Luetkemeyer. I understand that. I have been on your 
side of the table too.
    Ms. Kelly. Yes
    Mr. Luetkemeyer. I have been on both sides of the table. I 
am kind of unique around here.
    But by the same token, you have to understand from your 
side of the table what the people on the other side of the 
table are going through and understand that their long-time 
working relationship with those customers, they know those 
people. You do not. And yet, you are telling them how to 
micromanage--whether you like it or not, you are telling them 
how to micromanage their business. And I think that is 
unfortunate.
    One more question I want to ask you.
    Professor Johnson made a comment that the FDIC is closing--
is not closing--you are not closing too many banks. You need to 
close more, closing too few.
    What do you think about that comment?
    Mr. French. I do not think we are anxious to close more. I 
think we are taking them as they come, one bank at a time. And 
we really--we try to avoid a failure whenever we can. We try to 
work with the bankers to help them to--in their efforts to 
reach out, get investors, deal with the issues that they have. 
But the failure is the last resort, and it is not a good thing.
    Mr. Luetkemeyer. I realize we are--you know--I am hammered 
on. You get a chance to hammer on him. But thank you very much.
    Thank you, Mr. Chairman.
    Mr. Renacci. Thank you, Mr. Luetkemeyer.
    I now recognize Mr. Pearce for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Ms. Kelly, you have said that bankers have the right to 
file an appeal whenever there is some write-down, is that 
correct?
    Ms. Kelly. If they choose to do that--
    Mr. Pearce. If they choose to do that.
    Does the borrower have that same right?
    I find that the banks are more than willing to comply 
because They are pretty much afraid of the regulators. So they 
comply. But does the borrower have the right to make an appeal 
when you do that?
    Ms. Kelly. To the OCC?
    Mr. Pearce. To anybody. Can they appeal to God, even? Do 
you you have a process for them to appeal? Because I think that 
is where the pressure comes in the situation. I assume that is 
a ``no?''
    Ms. Kelly. We have a consumer complaint department that 
they could go--
    Mr. Pearce. How strong is it? Can the consumer complaint 
department overturn the regulator?
    Ms. Kelly. The bank makes the decision about whether or not 
to make the loan--
    Mr. Pearce. No, the regulator makes the decision and the 
bank says, ``Yes, we are afraid of you and we are going to do 
what you said.''
    So is anybody--does the borrower have the right to appeal 
your decision to you?
    I guess that is a ``no.''
    Ms. Kelly. But it is not my decision.
    Mr. Pearce. The--I would follow up with Mr. Westmoreland's 
questions. Can I get a copy of the postmortem on Charter Bank 
in Albuquerque? I would like to see that. Is that information 
available to me--your process, your demand?
    Ms. Kelly. I would have to check with our attorneys--
    Mr. Pearce. That is a formal request. I would like for you 
to check with your attorneys.
    Ms. Kelly. Absolutely.
    Mr. Pearce. Is that process transparent? That process of 
closing banks, is it transparent?
    Ms. Kelly. What about the process?
    Mr. Pearce. Is it transparent? Do you have it available to 
people? Is it something that you are proud of? Is it something 
that you would share readily?
    Ms. Kelly. I do not understand what you mean by process. If 
you could clarify for that.
    Mr. Pearce. The process of closing a bank.
    Ms. Kelly. The decision to close--
    Mr. Pearce. The decision and the process.
    Ms. Kelly. Our enforcement actions are public.
    Mr. Pearce. Is that transparent?
    Ms. Kelly. They are public.
    Mr. Pearce. Then why do you have a gag order on Mr. 
Werthheim and all the Charter board members? Why did you come 
in and threaten him that if he did not sign a gag order that 
you were going to prosecute him? Why do you have a gag order on 
a simple closing of a bank?
    Ms. Kelly. I--
    Mr. Pearce. I would like an answer to that also.
    Ms. Kelly. I will have to follow up later--
    Mr. Pearce. I would like an answer to that in writing.
    Ms. Kelly. --have to follow up with you on that.
    Mr. Pearce. Mr. French, you declare on page 4 that there 
are common misconceptions. One is that the regulators require 
the write downs of loans to creditworthy buyers.
    If I provide you one, two, three--if I provide you three 
people who say that their creditworthy loan was written down 
because of a regulator, will you retract your statement 
publicly that it is a misconception?
    Mr. French. I guess we would have to see what--
    Mr. Pearce. No, I am asking if I bring them to you and I 
provide them to you to talk to you, will you recant this 
testimony? Because I do not think it is a misconception. I 
believe that they are a write down. I do not think those groups 
of three States of Indian hotel owners came and asked me to 
meet with them in El Paso, Texas, a year ago to complain that 
they had never missed a payment, and yet you--somebody had 
caused their loans to be written down. I do not think they were 
misleading me, not every single one of them.
    Mr. French. My understanding, sir, is that there could be 
situations, for example, where there is the projects, lending 
project. Maybe the borrower, his tenants are behind on their 
rent--
    Mr. Pearce. Every single one of them has--
    Mr. French. --the borrower may come to the bank and say, 
``I am not going to be able--''
    Mr. Pearce. Yes, I find your comments to be quite hedging, 
much more hedging than your testimony here.
    I go on and read here, ``The agencies look to the ability 
of the borrower to repay.'' What criteria do you use to 
determine if a loan is going to be repaid?
    Mr. French. That is a fact-specific and individual--
    Mr. Pearce. Do you actually use that the payments are 
received on time and never missed? Is that one of the criteria 
fact-specific?
    Mr. French. Of course. That is one of the major--
    Mr. Pearce. And each one of these hotel owners had never 
missed a payment, and they were being asked to come up with 
$750,000 more capital for a $3 million hotel, and you are 
telling me that it is not good enough that they have never 
missed a payment, that there is something else.
    And I will tell you that something else had to be the mark-
to-market, it had to be the fact that they were being 
downgraded, exactly what you tell me is not occurring that you 
describe as a misconception in your report. And I would like to 
bring enough pressure on you to where you actually acknowledge 
that there are questions on the other side because your report 
simply declares it a misconception, you dismiss it.
    Mr. French. I certainly want to acknowledge the serious--
    Mr. Pearce. You mean, you have never heard one person tell 
you publicly or privately, personally, that their loan was 
written down? You have never heard that? Never? You have never? 
Never? You say it is a misconception.
    Mr. French. I have certainly heard of loans being written 
down.
    Mr. Pearce. But you do not believe them, it is a 
misconception, you declare it is a misconception.
    I would like to continue the discussion in my office some 
day if you get the chance.
    Thank you. I yield back, Mr. Chairman.
    Mr. Grimm. [presiding]. The gentleman's time has expired.
    Mr. Manzullo, you are recognized for 5 minutes for 
questions.
    Mr. Manzullo. Thank you. I would yield to you, Mr. 
Chairman, for 30 seconds.
    Oh, I am sorry, Mr. Renacci is not there, right? I do not 
know what happened to him.
    Mr. Grimm. I appreciate it anyway--
    Mr. Manzullo. Thank you.
    Ms. Kelly, I discussed with Mr. Renacci, would you be 
willing personally to meet with the applicants for loans who 
were turned down? Would you be willing to go out there and 
personally meet with these people face to face?
    Ms. Kelly. Sure. Yes, I would be happy to.
    Mr. Manzullo. Good. I knew you would say that, because the 
disconnect is so extreme here. If we could find people acting 
in bad faith, then you can point the finger.
    The regulators acted in good faith. The examiners are 
acting in good faith. The bankers are acting in good faith. And 
the consumers are acting in good faith. So this is not a matter 
of good versus evil. It is not ``Spy vs. Spy'' out of MAD 
Magazine. It is a matter of the system is not working.
    Let me give an example, Ms. Kelly. On page 11 of your 
testimony you state, way at the bottom, ``Examiners are 
criticizing or borrowers simply''--``Examiners are criticizing 
loans or borrowers simply because the current market value of 
their collateral has declined are forcing bankers to write down 
loans to current distressed market values.''
    You were a bank examiner, I believe, for 27 years.
    Ms. Kelly. Yes.
    Mr. Manzullo. When you--if you went into a bank yourself 
and looked at their portfolio, and let us say somebody has a 
million dollar loan on a business and the property value has 
fallen from a million dollars, say, to $700,000, but the person 
is otherwise current, what would you do in that case, as the 
bank examiner?
    Ms. Kelly. I would have to look at the specifics of the 
loan and the borrower's financial information--
    Mr. Manzullo. Let us just say that everything is fine, the 
loan is fine, the cash flow is fine.
    Ms. Kelly. Okay. There is clear information supporting the 
fact this borrower is going to be able to repay the principal 
in full.
    Mr. Manzullo. That is correct. No default.
    Ms. Kelly. Then I would not write the loan down.
    Mr. Manzullo. Then you need to talk to your examiners, 
because what they are doing is they go in, in a situation like 
this, and the examiners are forcing appraisal after appraisal 
after appraisal. These commercial appraisals are 
extraordinarily expensive. And the value of the property keeps 
on going down, but the borrower is in business, he is making it 
through, he is slugging it out, and then all of a sudden, he 
gets pressure from the bank. And the bank is saying, ``Well, 
you have--we are going to call your loan, even though you are 
current,'' and they blame it on the examiners.
    I was going to ask the question, do you understand the 
frustration going on here, but it is obvious that you do.
    Ms. Kelly. I do. I absolutely understand. Bankers are in 
very difficult times, borrowers are in very difficult times. 
And bankers have to manage their risk.
    And this is why someone made the comment about all the 
heads of the agencies have said, ``If you want to bring us an 
individual loan, then we will look at it.'' Because when you 
tell me this is a creditworthy borrower, I accept you at face 
value. But, I have not looked at the financial information to 
determine that, based on that person's financial situation 
today, that their financial statements support their ability to 
repay the loan.
    Mr. Manzullo. If I could follow up on Mr. Pearce's 
question, if an examiner comes in, tells a bank that this loan 
is risky, and the bank ends up--and the examiners end up 
classifying the loan, now in that case, where the bank has 
acted in direct response to the statement of the examiner, does 
the consumer have recourse against the FDIC or the OCC to 
reverse that decision?
    Ms. Kelly. But the classification of a loan simply reflects 
the risk that is associated with that asset on the bank's 
balanced sheets at that time. It does not preclude the banker 
from continuing to carry that loan, from continuing to work 
with the borrower. We encourage that. It is just a way for us 
to reflect the current condition.
    Mr. Manzullo. But it causes the bank to have to put up more 
reserve capital.
    Ms. Kelly. Yes, because it is reflecting the fact that 
there is greater risk associated with that--
    Mr. Manzullo. And that makes the bank want to get out of 
that whole transaction altogether.
    Ms. Kelly. It may. But if they believe it is someone who 
has been a customer for a long time and they are going through 
tough times--
    Mr. Manzullo. But the question was, if that was reversed 
and the bank does not have to put up more reserve capital, the 
bank can keep on going and making further loans. So there is no 
appeal system.
    Ms. Kelly. But if there was greater risk associated with 
that credit and the bank does not reserve for it properly, then 
it weakens the condition of the bank because if that person is 
not able to repay the loan the bank has less of a cushion to 
absorb that loss.
    Mr. Manzullo. Okay. Thank you.
    Mr. Grimm. The gentleman's time has expired.
    The gentleman from Delaware, Mr. Carney, is recognized for 
5 minutes for questions.
    Mr. Carney. Thank you, Mr. Chairman.
    And first, let me apologize for missing the bulk of this 
hearing, so I am coming into this conversation at the very end.
    I have heard considerable frustration from Members about 
things that are happening with folks trying to get loans in 
their States and I have heard, not just today but other days, 
testimony from the gentleman from Georgia, Mr. Westmoreland, 
about some of the bank failures in his district. I have quite a 
bit of sympathy for that. And I want to congratulate him for 
bringing the resolution forward to look at that issue.
    But, I am kind of caught betwixt and between because we 
have testimony about a lot of banks failing, and obviously that 
is the case, and I hear the same thing from small-business 
owners in my State, which is my district, the whole State of 
Delaware, that they are not able to get loans for working 
capital, that they have performing loans that are being called, 
and a whole range of things similar to what you are been 
hearing from members on the other side.
    And we had the distinguished professor from MIT here this 
morning who talked about the need to be careful about what we 
would do here with H.R. 1723.
    So I think the challenge is really to strike some balance 
where banks are making prudent loans. Sheila Bair was here not 
long ago for incredible testimony where she said that they were 
encouraging banks to make good loans because that is the way 
banks make money.
    What is your perspective on what needs to be done at this 
point in time, whether the pendulum has swung back too far the 
other way, what you are seeing in the field. We are still, I 
suspect, seeing banks that are under stress. And is this second 
resolution, 1723, as Mr. Johnson said, going too far? How would 
you characterize that?
    Mr. French. Let me start. We are seeing some signs of 
improvement in banking performance, looking at it as a whole, 
in terms of the level of nonperforming loans, while still high, 
is starting to come down, earnings starting to improve, 
provisions for loan losses starting to come down, percentage of 
profitable banks increasing.
    We are seeing some peaking of the problem bank list that we 
have, it is starting to plateau and perhaps looks like it is 
going to start inching downwards.
    We have about 12, 13 percent of the FDIC-supervised banks 
that are considered problem banks.
    Mr. Carney. Say that number again.
    Mr. French. About 12 or 13 percent. So 87 percent are not.
    So, I think there is a tendency for--when you get to a 
turning point in the economy it tends to come--you always think 
you are at the--things cannot get any worse, and that is when 
they start getting better.
    So--
    Mr. Carney. So as my time is running--sorry for cutting you 
off, but do you have a view of H.R. 1723?
    Mr. French. Sir, yes, I am sorry. We do not support that 
because we think it will require us to have regulatory capital 
that is less stringent than GAAP. And so we do not support that 
aspect of it.
    Mr. Carney. So that would be going too far the other way.
    Mr. French. That is our view.
    Mr. Carney. And it is just not good accounting from your 
perspective?
    Mr. French. That is correct. We think that it would 
basically require us to have--that banks have regulatory 
capital that was less stringent than what they are required to 
count as capital under GAAP. And we do not think that is a 
good--
    Mr. Carney. We heard earlier this morning from a very 
successful business person from Iowa, I believe, who talked 
about the difficulty he had and talked about his financials, 
his balance sheet, which sounded very strong to me. But he had 
been turned down by, I think he said 12 or 13 banks.
    Is there any way to--obviously, I do not know the details, 
but could you comment on a situation like that, obviously, 
anecdotal? I hear the same thing again from borrowers in my 
district. But, as somebody who represents these folks, it gets 
your attention.
    Mr. French. I would imagine it would. And that gets our 
attention, too, believe me. And we--
    Mr. Carney. Sheila Bair said, then let us know who they 
are. Yes, banks should be making those kinds of loans.
    Mr. French. We have the hotline that I mentioned for 
borrowers. Business borrowers can call and let us know what is 
happening out there, what their concerns are. And, hopefully, 
we will get a better understanding of what the issues are. It 
is just--
    Mr. Carney. Thank you.
    And I want to thank the Chair--I guess the acting Chair; 
the Chair is not here--for calling the hearing today.
    Mr. Grimm. Thank you.
    And the Chair recognizes Mr. Posey for 5 minutes for 
questions.
    Mr. Posey. Thank you, Mr. Chairman.
    The first thing I would like to do is set the record 
straight a little bit. This bill has been mischaracterized as 
changing accounting standards. And late last night, I received 
correspondence from the American Institute of CPAs, and I want 
to quote from this correspondence: ``It does not legislate 
accounting standards. You are dealing with regulatory capital 
issues.''
    So, for everyone who has alleged that this changes 
accounting standards, it is just not true, if you have any 
respect for the CPAs. And I think they are the authorities on 
that issue far and away.
    Everything would be good, if out in our districts reality 
reassembled even remotely the picture that you have painted 
about regulation. Saying that this would preclude you from 
being able to examine or monitor loans, if you could not put 
them on nonaccrual basis, it is just not wrong and it is just 
not true.
    You could still monitor. You could still prosecute for 
fraud. You could prosecute for abuse. There is nothing that 
would stop you from doing that at all.
    And this is not forbearance, if we statutorily define 
performing loan as a historic performing loan. Too many people 
want to paint this as forbearance so they can tar and feather 
it in a public arena. And that is just underhanded and 
dishonest in my humble opinion.
    I agree with you that accurate reporting is critical. And 
that is accurate both ways. Again, I think it is atrocious that 
a regulator can say, ``Well, we are going to put this on 
nonaccrual, because we do not think he should be able to make 
the payments in this economy.''
    Maybe they did not calculate it that the people are eating 
beans or rice or doing whatever it takes to make their payment. 
But I think that is pretty sad.
    You pretty much describe the current state of affairs of 
regulation being fair, balanced, and realistic. And I think it 
is just the opposite. You have painted a picture that 
regulators are all perfect, and everything is in perfect order. 
Nothing can be done to help create jobs and stop people from 
having their property foreclosed on.
    And I think I just have to disagree with you there. I 
wonder what testimony of the previous witnesses or the other 
members of this committee you particularly disagree with or 
think it is misleading or dishonest, because you speak to us 
like none of the things they have said is true. And I am 
inclined to believe it is just the opposite.
    We know about the hotlines. We know about the ombudsmen. If 
you have a problem with the regulator, call the ombudsman. But 
what happens when a bank calls an ombudsman? He tells the 
ombudsman how unfairly he is being treated. And the next call 
made is the ombudsman calling the regulator saying, ``Guess 
what jerk idiot just called me today to complain about you?''
    There is retribution out there in our homeland. Trust me. 
Ask any banker. They will not want to come up here and get more 
retribution, but it is out there. They have all testified to 
that pretty much already.
    We all know what some of the most fearsome words are to 
Americans across this great country: ``I am from the 
government. I am here to help you.'' And some of the reasons 
people fear that have been expressed very clearly today here.
    It is disappointing to me that you fail to acknowledge even 
remotely that there is even the minutest problem anywhere and 
that there is any solution that is needed other than more 
regulation--regulate them more--and that there is an abundance 
of capital.
    Why weren't these loans being made that people talked about 
today, if there is an abundance of capital just looking for 
good loans? It is because they fear the overregulation.
    How do you close a bank that has significantly greater 
assets than it does liabilities? We are probably going to run 
out of time before you have time to answer that, and with the 
chairman's permission, I would like to request that you respond 
to that in writing.
    Give me a couple of scenarios as to how you close banks 
with more assets than liabilities. And do not fail to mention 
how much of the assets have been put on a nonaccrual basis so 
that they could not use them to operate the banks.
    I want to know how many regulators you have. And I would 
like to know how many have ever been disciplined for abusing 
their regulatory authority, if any. What kind of grading do you 
do on the regulators to make sure that they are fair and 
balanced?
    I hope that you can work out some way to support this 
solution or another one internally if--
    We have run out of time. The bottom line is that if, in 
fact, you continue just to dispute the findings that have been 
clearly been put forth by our witnesses and members of this 
committee, it is just personally very disappointing.
    Thank you, Mr. Chairman.
    Mr. Renacci. The gentleman's time has expired.
    The Chair is going to make a recommendation, Mr. Posey, 
that you maybe put those questions, all of them, in writing, so 
that they can be responded to in writing, because you have gone 
pretty quickly, and we want to make sure all those questions 
are answered. So thank you very much.
    The Chair recognizes the gentlewoman from New York, Mrs. 
Maloney.
    Mrs. Maloney. I thank the Chair for yielding and I 
apologize. It is a busy, busy day with the unemployment numbers 
coming out, the debt ceiling debates, and all kinds of policy 
decisions being made, which brings me to a question related, 
really, to the stagnant economy that we are having.
    There has been an austerity program, where there have been 
many cutbacks. The economy is not growing. We just created 
18,000 jobs, similar to last month. To what extent do you think 
the lack of the loans are people are not applying in this 
stagnant economy, number one?
    And number two, under the Basel program we are now calling 
upon Europe and other countries to have more stringent capital 
requirements. That is part of what Chairman Bernanke and our 
entire economic team is working for. To what extent would 
relaxing our risk weighting of nonaccrual loans, as this bill 
would permit, be inconsistent with and undercut those efforts 
that we have on our national level?
    Lastly, I am very sympathetic to the financial crisis that 
many of our community bankers are facing. Are there other ways 
that regulators could accommodate time for them to get their 
house in order or to re-capitalize without moving into close a 
bank, but working with them to become solvent, so they can 
become strong and serve the communities?
    Thank you. And thank you for your service and for being 
here today. Thank you.
    Mr. French. Thank you, Congresswoman.
    We are--the FDIC is a strong supporter of the effort to 
basically increase the overall capital requirements of the 
banking industry, as you know. So we agree with the thrust of 
what is going on in the Basel process, and we think it is very 
important for the banking industry to have a solid base of 
capital that will enable it to be a source of credit to the 
economy through good times and bad times.
    So one of the issues with, as you allude, with 1723 is that 
it, for a certain class of loans, it says that certain losses 
that would otherwise be recognized for accounting purposes 
would not be recognized for capital regulation purposes. And 
that is inconsistent with the overall direction of where we 
would like to go in terms of capital.
    So in terms of what else we can do, giving banks more time, 
I think that is very appropriate. The prompt corrective action 
system really kicks in for a pretty small group of banks. As I 
said before, most of our banks are not in problem status. Most, 
when you look at their balance sheets and financial reports, 
purport very strong capital ratios.
    But when that is not the case, we have the prompt 
corrective action system, where we work with them, hopefully, 
as early as possible, to address capital--
    Mrs. Maloney. But as I understand it, the prompt corrective 
action gives them 90 days to correct their situation. And given 
the fragile economy, that may not be enough time for a good 
community bank that really would need more time to 
recapitalize.
    So I am wondering, is there flexibility to extend that 
time, or is it a 90-day cutoff?
    Mr. French. There is flexibility. And I would also 
emphasize that it is a very small number of banks that ever 
gets to dealing with that 90-day issue. That is a really low 
level of 2 percent capital. But once we get that--
    Mrs. Maloney. But when I talk to the gentleman who was 
speaking earlier from Georgia, he was talking very passionately 
about 65 banks that have been closed in his great State. And I 
would assume all 65 of them went through prompt corrective 
action, right?
    And I know that in my State, there have also been a number 
of community banks and large banks that have closed. So they 
all went through prompt corrective action. So it is not a small 
number, when you are representing a community that has one of 
those banks that is affected. And in some cases, it may be the 
only bank in the community, so it is really very, very 
important.
    How do you get an appeal from the 90-day to extend? Would 
you have to legislate that, or can you--is that a discretion 
of--
    Mr. French. It is built into the statute. And if we think 
that the bank has a prospect--if we think it is in the best 
interest of the insurance fund and that the bank is expected to 
be able to raise the capital, that would have to be something 
that we really--looks like it is going to succeed.
    If it is just a matter of, we are still looking around, and 
we have been doing that for years and it has been--at some 
point, you have to make a judgment as to what has the most 
cost-effective approach.
    Mrs. Maloney. Is it appealable, if a judgment is made to 
close a bank? Can a bank appeal to a higher person?
    Mr. French. Not being a lawyer, I would want to get back to 
you on that.
    Mr. Renacci. The gentlewoman's time has expired, but if Ms. 
Kelly would like to give a response?
    Ms. Kelly. I just wanted to add something--I would agree 
with everything that Mr. French said, but just to add the point 
that the 90 days is really the very end of the process. If you 
look at some of the I.G. reviews that have been done at various 
closings, you will see that our regulatory interaction with a 
bank that is developing problems starts very early.
    And this goes back to the point I made earlier about the 
sooner that a bank recognizes its problems and starts working 
constructively on them, the more time and more flexibility they 
have to solve it.
    Mr. Renacci. Thank you, Ms. Kelly.
    The gentlewoman's time has expired. The Chair will yield 5 
minutes to himself for questioning.
    First of all, thank you, Mr. French and Ms. Kelly. We do 
appreciate your time in coming to testify. It has been a robust 
discussion so far.
    There is one thing, though, I think we walk away. There 
cannot be any question or ambiguity in your minds at this point 
that there is certainly a disconnect somewhere. The passion in 
the Members is coming directly from the people they represent, 
our constituents, many of whom are the hard-working people who 
have created the jobs for decades. And we had a gentleman, I 
believe his name was Mr. Whalen, who was testifying earlier 
today, that over 33 years, he built a company, a solid, solid 
company. And one of his loans on a project that he was doing 
was written down, even though he made every payment and made 
every payment on time.
    Regardless of how bad the meltdown was, regardless of what 
we have been through, the pendulum has swung way too far. When 
that is happening for a successful entrepreneur like Mr. 
Whalen, and it is a story we are hearing consistently through 
every part of the country from New York to Iowa to 
Pennsylvania, Indiana, Florida, throughout the country, we 
cannot put our heads in the sand and ignore it.
    There is a disconnect. Every banker I have spoken to says 
they are afraid of their regulators. They are saying that loans 
they would normally--that do fit the guidelines, but they are 
just not willing to go for it. So when I hear things like, 
``there is capital out there,'' they are absolutely right. They 
are just not lending it.
    We heard before bankers are in difficult times. Borrowers 
are in difficult times. That is accurate. That is true. But I 
submit to you that the regulators are making it worse, instead 
of better. And I, for one, completely agree that we need to 
have strong rules to prevent another financial breakdown or a 
meltdown or a crisis. But there is a tipping point and we have 
tipped.
    And I do not think that you can have so much consistency 
among the members of what they are hearing from their 
constituents without recognizing we have a serious problem. And 
if it continues we are going to see what we have seen today: 
unemployment increase yet again.
    Something is not working. Something is broken. And it 
certainly is not the entrepreneurial spirit of the American 
workforce. It is not the relentless work ethic that built this 
country. It is the fact that we had some problems, and what the 
government does to address them is always over-address. We have 
seen this time and time again.
    But I think there is another problem that I have seen as 
someone who worked in the Federal system for 16 years. I have 
seen it myself. When there is a problem, those at the top do 
not want that problem to happen again no matter what because it 
is their watch. ``Not on my watch is that going to happen.''
    So they do everything they can, and this in all sincerity, 
with all good intentions not to allow that to happen again. And 
they get so focused on making sure it does not happen again 
that those under them are told in no uncertain circumstances we 
better not have a pattern of defaults or problems or anything. 
So everyone goes into CYA mode and everyone clamps down. And 
what happens is you create an environment that no business can 
be done.
    And the reality is if no business is done, from a 
regulator's point of view, you will not have any problems. It 
is very true. But that is not sustainable for our overall 
economy. It is not even close to sustainable.
    And what is happening now is the frustration level of those 
who have worked their tails off to build businesses and are 
passing those businesses on to their children, are seeing it 
dwindle away and circle the drain. And that is reflected every 
single day in all the economic forecasts and it is seen in the 
unemployment rate.
    If we do not alleviate and get out of our own way, and 
allow these entrepreneurs and innovators to access the capital 
they need, to grow their business, to expand their business, to 
start their new businesses, I submit to you that we can never 
recover from this recession.
    I would just ask in closing that as you leave here today, I 
think you have the most noble of intentions. I really do. But I 
think in the interests of ensuring that we never have another 
calamity, we have become so laser-focused on the problem that 
we have restricted business to a point that you are right, we 
will not have any more financial meltdowns, but we will not 
have any finances to worry about.
    So, I would please ask you to really reflect on that and 
work with your regulators that are out there making life very 
difficult for a prosperous economy to grow and to be robust in 
this country.
    And with that, I thank you for your time and your 
attention, and we will close up.
    The Chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    The hearing is adjourned.
    [Whereupon, at 12:14 p.m., the hearing was adjourned.






                            A P P E N D I X



                              July 8, 2011








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