[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                      STATE OF COMMUNITY BANKING: 
                       IS THE CURRENT REGULATORY 
                    ENVIRONMENT ADVERSELY AFFECTING 
                   COMMUNITY FINANCIAL INSTITUTIONS? 

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

                          AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 113-9

                               ----------
                         U.S. GOVERNMENT PRINTING OFFICE 

80-875 PDF                       WASHINGTON : 2013 



                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             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            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

SEAN P. DUFFY, Wisconsin, Vice       GREGORY W. MEEKS, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
GARY G. MILLER, California           MELVIN L. WATT, North Carolina
PATRICK T. McHENRY, North Carolina   RUBEN HINOJOSA, Texas
JOHN CAMPBELL, California            CAROLYN McCARTHY, New York
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              NYDIA M. VELAZQUEZ, New York
    Pennsylvania                     STEPHEN F. LYNCH, Massachusetts
LYNN A. WESTMORELAND, Georgia        MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         PATRICK MURPHY, Florida
MARLIN A. STUTZMAN, Indiana          JOHN K. DELANEY, Maryland
ROBERT PITTENGER, North Carolina     DENNY HECK, Washington
ANDY BARR, Kentucky
TOM COTTON, Arkansas



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 20, 2013...............................................     1
Appendix:
    March 20, 2013...............................................    43

                               WITNESSES
                       Wednesday, March 20, 2013

Brown, Richard A., Chief Economist, Federal Deposit Insurance 
  Corporation, accompanied by Doreen R. Eberley, Director, 
  Division of Risk Management Supervision, Federal Deposit 
  Insurance Corporation, and Bret D. Edwards, Director, Division 
  of Resolutions and Receiverships, Federal Deposit Insurance 
  Corporation....................................................     7
Evans, Lawrance L., Director, Financial Markets and Community 
  Investment, U.S. Government Accountability Office..............    10
Rymer, Hon. Jon T., Inspector General, Federal Deposit Insurance 
  Corporation....................................................     8

                                APPENDIX

Prepared statements:
    Evans, Lawrance L............................................    44
    Joint FDIC statement.........................................    62
    Rymer, Hon. Jon T............................................    84

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Letter from the National Association of Federal Credit Unions 
      (NAFCU), dated March 19, 2013..............................    91
Maloney, Hon. Carolyn:
    Letter to Federal Reserve Chairman Ben Bernanke, FDIC 
      Chairman Martin Gruenberg, and Comptroller of the Currency 
      Thomas Curry from Representatives Carolyn Maloney and 
      Shelley Moore Capito, dated February 19, 2013..............    97
Westmoreland, Hon. Lynn:
    Written statement of Representative Tom Graves...............    99
Evans, Lawrance L.:
    Written responses to questions submitted by Representative 
      Capito.....................................................   101
    Written responses to questions submitted by Representative 
      Posey......................................................   102
    Written responses to questions submitted by Representative 
      Westmoreland...............................................   104
FDIC witnesses:
    Written responses to questions submitted by Representative 
      Bachus.....................................................   117
    Written responses to questions submitted by Representative 
      Capito.....................................................   118
    Written responses to questions submitted by Representative 
      Pearce.....................................................   123
    Written responses to questions submitted by Representative 
      Westmoreland...............................................   125
Rymer, Hon. Jon. T.:
    Written responses to questions submitted by Representative 
      Posey......................................................   141
    Written responses to questions submitted by Representative 
      Westmoreland...............................................   142


                      STATE OF COMMUNITY BANKING:
                       IS THE CURRENT REGULATORY
                    ENVIRONMENT ADVERSELY AFFECTING
                   COMMUNITY FINANCIAL INSTITUTIONS?

                              ----------                              


                       Wednesday, March 20, 2013

             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 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the subcommittee] presiding.
    Members present: Representatives Capito, Miller, McHenry, 
Campbell, Pearce, Posey, Fitzpatrick, Westmoreland, 
Luetkemeyer, Duffy, Stutzman, Pittenger, Barr, Cotton; Meeks, 
Maloney, Watt, McCarthy of New York, Green, Capuano, Murphy, 
Delaney, and Heck.
    Ex officio present: Representative Hensarling.
    Chairwoman Capito. The subcommittee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time. Also, without objection, members 
of the full Financial Services Committee who are not members of 
the subcommittee will be allowed to sit on the dais and 
participate in today's hearing. Without objection, it is so 
ordered.
    This morning's hearing is the first hearing for the 
Financial Institutions and Consumer Credit Subcommittee in this 
Congress. I would like to welcome our new members to the 
subcommittee, as well as the new ranking member, Mr. Meeks. I 
think we will work very well together.
    As chairman, I intend to highlight the many challenges 
being faced by our community financial institutions and the 
communities they serve across the country. This should not be a 
partisan issue. It is my goal to work with the ranking member 
to identify areas of agreement for fostering a regulatory 
environment for community financial institutions that promote 
economic growth and access to a wide range of consumer credit 
products.
    The focus of this hearing--I forgot to yield myself 3 
minutes. So, the focus of this morning's hearing is on three 
important studies on the state of community banking. Two of the 
studies were products of legislation that Mr. Westmoreland of 
Georgia authored last Congress.
    As many of my colleagues know, the State of Georgia led the 
Nation in the number of bank failures between 2008 and 2011. 
Mr. Westmoreland and Mr. Scott, also from Georgia, have been 
tireless advocates for the struggling financial institutions 
and their districts in the State of Georgia and the communities 
that have been adversely affected.
    At the behest of Congress, the Inspectors General of the 
FDIC and the GAO conducted studies on the FDIC's handling of 
the failed community banks and lessons from community bank 
failures. This subcommittee first began examining these issues 
at a field hearing in Mr. Westmoreland's district in Newnan, 
Georgia, in August of 2011. And I look forward to learning more 
about the progress being made by the regulatory agencies to 
mitigate the adverse effect of community bank failures on local 
communities.
    The third study to be discussed this morning is a study 
that is a thoughtful contribution to the discussion that we 
began in the last Congress on the importance of community 
financial institutions and how the current regulatory 
environment affects the viability of community financial 
institutions and their role--and their model. We heard 
countless anecdotal stories last Congress from community 
bankers expressing despair and frustration about the future 
prospects for a vibrant and diverse financial services system 
that features community banks.
    The FDIC study highlights many areas that demonstrate the 
importance of community banks to the U.S. banking system. The 
study points out that in many rural areas, such as the one I 
represent, local community banks are the only source of banking 
services for members of the community.
    Although larger institutions may choose to enter these 
markets, they will not maintain the same level of personal 
service and understanding that the community--the local 
community banks can offer. This element of relationship banking 
is critical in rural communities like those I represent in West 
Virginia. Lenders not only know their customers, but they know 
their extended families and the businesses they operate in 
these communities.
    It is this level of understanding that allows the lender to 
sit down with the borrower and develop alternative financial 
strategies when economic downturns occur, or if there is a 
life-changing event that might impact the borrower in some way. 
Rural communities will not be well-served if the current 
regulatory environment forces lenders to move away from 
relationship banking and make decisions on a one-size-fits-all 
form of regulation and compliance.
    The FDIC study also attempts to quantify the growing burden 
of complying with the myriad of financial regulations for 
community institutions. I think we found in the study it is 
difficult to quantify. In January of 2001, just 6 months after 
Dodd-Frank, we learned from a community banker in West Virginia 
that they have already had to hire an additional primary 
compliance officer.
    I understand that it is a difficult figure to quantify, but 
we must keep up the discussion amongst policymakers, 
regulators, and community bankers about ways to reduce this 
growing burden. We need to have safely run financial 
institutions in our local communities. But we must ensure that 
any cost of compliance does not outweigh the benefits and the 
regulations emanating from Washington.
    I would like to thank our witnesses for being here this 
morning to update the subcommittee on these important studies, 
and at this time I would like to recognize the ranking member, 
Mr. Meeks, for 3 minutes for the purpose of giving an opening 
statement.
    Mr. Meeks. Thank you, Madam Chairwoman, for holding this 
hearing today. And as you have indicated, this is the first 
hearing of the Subcommittee on Financial Institutions and 
Consumer Credit during the 113th Congress.
    I want to express how pleased I am to be working with the 
chairwoman on this subcommittee. I know that we will find areas 
of cooperation, and I look forward to collaborating with the 
Chair on many areas of common interest, including regulatory 
relief for smaller banks and credit unions and mobile payment 
services, and the associated electronic payments field and many 
other consumer protection issues. And I know that we are going 
to be working very closely together.
    While it is not explicitly the topic of today's hearing, 
but since this is our first hearing of the subcommittee, I want 
to state now that I am concerned about the impact that Basel 
III can have on community banks. Previous iterations of Basel 
have excluded smaller institutions from their capital 
requirements, which are better designed to address the risk 
portfolios of larger financial institutions. And of course, 
smaller institutions must have adequate capital for their 
activities. But it appears that Basel III takes a one-size-
fits-all approach.
    I am concerned that Basel III is too complicated and does 
not offer the appropriate risk ratings to different classes of 
assets. For example, it would apply a discount to any asset 
that isn't sovereign debt in the U.S. Treasuries or cash.
    This means a bank that specializes in mortgages, for 
example, may have to hold a lot more capital against those 
mortgages to satisfy minimum capital requirements. However, I 
would think that we learn to start to make sure capital 
requirements don't stifle small banks in even medium-sized or 
regional banks institutions that don't engage in the exotic 
activities that some of the larger institutions do.
    As we learned in the FDIC's Community Banking Study, 
smaller and regional institutions are the engines of economic 
growth in this country because they lend to their neighbors in 
their communities to keep their farms or their small businesses 
going, or to hire employees. In fact, the study noted that 
though community banks hold only 14 percent of the banking 
industry's assets, they make 46 percent of the smaller 
denomination loans to farms and small businesses.
    Along with credit unions, they are often the sole source 
for mortgage financing and therefore the lifeline of the 
housing industry in our communities. It was not their activity 
that blew up the global banking system. And I think the capital 
requirements we place on banks should recognize that. I want to 
work with the chairwoman on that issue.
    A concern that I often hear from my community banks is the 
lack of certainty. And much of this arises from the timing of 
rules on which the argument about uncertainty has credence. I 
would hope that we would make sure that we start and do not cut 
off funding for regulators, including the SEC, the CFTC, and 
the CFPB, all of which creates additional regulatory 
uncertainty.
    A common complaint I hear from businesses when I am in New 
York is on the timing of rulemakings. Businesses in the market 
will adjust to rules and regulations, but they need to know 
what they are. It is time to fully fund our regulators so they 
can complete the process of implementing Dodd-Frank and 
therefore restore confidence to the marketplace.
    I look forward to hearing about the other issues that are 
the focus of this hearing, including what I hope is a robust 
discussion on the good things that the FDIC is doing in 
protecting the Deposit Insurance Fund, and therefore taxpayers.
    In reviewing the FDIC's programs in preparation for this 
hearing, I was pleased to learn of some of the efforts the 
agency has made to engage in mortgage modifications, something 
I hope the industry proactively addresses further. And I also 
hope we can explore some of the recommendations of the FDIC 
Inspector General and how the FDIC is implementing them.
    I look forward to the testimony. Thank you, Madam 
Chairwoman.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Duffy for 1\1/2\ minutes for 
the purpose of an opening statement.
    Mr. Duffy. Thank you, Chairwoman Capito. I appreciate you 
calling this very important hearing. And I appreciate the panel 
for coming in and talking about our community banks and their 
health, and how we can make sure we have a strong community 
bank system throughout our country.
    Many of us know that our small community banks or credit 
unions are the lifeblood of economic growth in our small 
communities across this great country. And it is those very 
institutions that get capital out to our small businesses which 
are starting up or that small business or that manufacturer 
which is going to expand their business and create jobs across 
the country. They are the institutions in rural America which 
get dollars out to our families who are going to buy a home or 
buy a car; and if our community banks are failing, so too are 
our small communities.
    So I am pleased that the OIG and the GAO studies address 
some of the issues that we have known for quite some time 
affect our small community banks. Clearly, they face a lot of 
challenges in this hyper-regulatory environment. And small 
banks are constantly being forced to deploy resources, money, 
time, and personnel towards regulatory compliance instead of 
focusing on their traditional role of lending and serving our 
customers.
    I look forward to your testimony and the conversation we 
are going to have today about the health of our small financial 
institutions. I yield back.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Westmoreland for 2 minutes.
    Mr. Westmoreland. Thank you, Madam Chairwoman. I would like 
to ask for unanimous consent to enter into the record a 
statement from Representative Tom Graves, and some written 
questions for the witnesses.
    Chairwoman Capito. Without objection, it is so ordered.
    Mr. Westmoreland. I want to thank the chairwoman for having 
this hearing. This hearing is especially important to me 
because I and others worked hard to authorize it last Congress.
    I read the studies with interest, but unfortunately they 
seemed to raise more questions than answers. I think the 
biggest thing to come from these studies is finally an 
admission that what my Georgia banks have been saying is true, 
that acquiring banks will maximize their expiring loss share 
agreements for commercial assets.
    Unfortunately, the studies show the FDIC has no plan for 
dealing with the potential new bubble in the commercial real 
estate market. I am hearing from acquiring banks that they 
really don't know what to do with their expiring loss share 
agreements. I am also hearing stories from borrowers in Georgia 
whose acquiring bank will not negotiate reasonable modification 
terms.
    This is a special concern since the studies also noted 
examiners' ongoing failure to follow the spirit of the 2009 
guidance on commercial loan modifications. And as if these 
problems were not enough, the GAO study recognized that bank 
examiners negatively classify a collateral-dependent loan 
simply because the value of the collateral has declined.
    Further, there are serious problems in the way appraisals 
are handled by examiners and the application of impairment 
accounting standards in the examination process. The IG found 
examiners do not properly document appraisals or evaluation for 
the best use of the underlying collateral. To me, this is code 
for examiners to be able to do what they want in terms of 
valuing collateral, but not having to justify it to the bank or 
their bosses.
    The FDIC IG found examiners do not have the necessary 
training or background in appraisals, yet are relying on their 
experience in this field during bank exams. The studies make it 
very clear that the FDIC, the OCC, and the Federal Reserve have 
had trouble handling the boom-and-bust cycles over the last 25 
years. They are repeating the same patterns over and over, but 
expecting different results.
    And again, I would like to just thank the chairwoman for 
having this hearing. It is very important to the constituents 
and the bankers in Georgia.
    Chairwoman Capito. I am glad you got that last line in.
    I would like to recognize Mr. Watt for 1 minute.
    Mr. Watt. Thank you, Madam Chairwoman. I want to join the 
other members of the subcommittee in applauding you and the 
ranking member for convening this hearing. This is a subject 
that all of us are hearing about regularly. And I especially 
want to applaud the composition of this panel, because we hear 
the community banker side, and I am sure that is an important 
perspective.
    But it is also important to hear the perspective of the 
regulators and to understand whether what we are hearing from 
the banks is a regulatory matter or whether it is a matter of 
legislative significance. When it is our responsibility as 
legislators, we need to know that. And when we can push the 
regulators to be more prompt as regulators in promulgating 
rules, we need to push that. So, it is especially important and 
I appreciate the opportunity to express that. I yield back.
    Chairwoman Capito. Thank you. I would like to recognize Mr. 
Miller for 1 minute.
    Mr. Miller. Thank you, Madam Chairwoman.
    The environment within which the regulators work today 
should basically encourage innovation and growth rather than to 
stifle it, but that is not what is happening. The government is 
acting to help banks. But what they should do is serve their 
customers. Instead, banks are having an onslaught of new 
regulations they are having to deal with. We certainly need a 
well-functioning regulatory system, but it should facilitate 
growth, not stifle it.
    We are starting to see a basic turnaround in the housing 
market today. But what is stifling that ability to get loans? 
AD & C loans are just not available to many builders today, 
especially the smaller builders. Banks are being held back from 
doing what they want to do. And because of regulations placed 
upon them, you are seeing a certain group in the marketplace 
who are just avoiding getting involved.
    Representative Carolyn McCarthy and I introduced the Home 
Construction Lending Regulatory Act today that addresses 
overzealous regulators. It lets you do your job, lets you make 
loans to well-qualified builders who have good projects but are 
being held back today. And it is an issue I think we need to 
bring up in this committee to basically turn the economy 
around. And it is an issue I think is important to banks and to 
builders. I yield back.
    Chairwoman Capito. The gentleman yields back.
    Mr. Fitzpatrick for 1 minute.
    Mr. Fitzpatrick. Thank you, Madam Chairwoman. First of all, 
I want to say I am looking forward to being a part of this 
subcommittee in the 113th Congress. Among the important 
responsibilities of the subcommittee is to work with consumer 
financial institutions to find ways to provide credit for small 
businesses and families who inject capital into our 
communities.
    In just the first few weeks, this Congressman made a point 
to meet with representatives from some of the financial 
institutions that serve my district in Pennsylvania. On a 
recent conference call with community bankers, I was reminded 
again about the grinding process and progress of our economy 
and of the housing market, and how those factors more than any 
others are dragging our communities down and causing high 
unemployment in the communities.
    And of course, I heard about regulations and financial 
supervision, which are onerous and burdensome. We all agree 
that we need oversight and regulation of financial 
institutions. But the point is to be smart about it and not to 
stifle economic growth. And this is, of course, why we are here 
today. So I look forward to the hearing, and I yield back.
    Chairwoman Capito. The gentleman yields back. I believe 
that concludes our opening statements. So, I would like to 
welcome our panel of distinguished witnesses.
    My understanding is that Mr. Brown will give the statement 
from the FDIC, and then Ms. Eberley and Mr. Edwards will be 
here to answer questions for us. So, I appreciate that. I will 
introduce all three of you, and then let Mr. Brown make the 
statement.
    Mr. Richard Brown is the Chief Economist and Associate 
Director of the Division of Insurance and Research for the 
FDIC. Ms. Eberley is the Director of the Division of Risk 
Management Supervision, welcome. And Mr. Bret Edwards is the 
Director of the Division of Resolutions and Receivership. 
Welcome.
    Mr. Brown?

STATEMENT OF RICHARD A. BROWN, CHIEF ECONOMIST, FEDERAL DEPOSIT 
   INSURANCE CORPORATION, ACCOMPANIED BY DOREEN R. EBERLEY, 
  DIRECTOR, DIVISION OF RISK MANAGEMENT SUPERVISION, FEDERAL 
 DEPOSIT INSURANCE CORPORATION, AND BRET D. EDWARDS, DIRECTOR, 
  DIVISION OF RESOLUTIONS AND RECEIVERSHIPS, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Mr. Brown. Chairwoman Capito, Ranking Member Meeks, and 
members of the subcommittee, I appreciate the opportunity to 
testify on behalf of the FDIC regarding the FDIC Community 
Banking Study. This research effort was begun in late 2011 to 
better understand the changes that have taken place among the 
community banking sector over the past quarter century. The 
effort was motivated by our sense of the importance of 
community banks to small businesses and to local economies in 
every part of the country, and by our understanding that 
community banks face some important challenges in the post-
crisis financial environment.
    Our research confirms the crucial role that community banks 
play in our financial system. As defined by our study, 
community banks make up 95 percent of U.S. banking 
organizations. It has been mentioned that they hold 14 percent 
of U.S. banking assets, but make 46 percent of small loans to 
farms and businesses.
    While their share of total deposits has declined over time, 
community banks still hold the majority of bank deposits in 
rural and other non-metropolitan counties. Without community 
banks, many rural areas, small towns, and urban neighborhoods 
would have little or no physical access to mainstream banking 
services. The study identified 629 counties where the only 
banking offices are those operated by community banks.
    Our study examined the long-term trend of banking industry 
consolidation that has reduced the number of banks and thrifts 
by more than half since 1984. But the results cast doubt on the 
notion that future consolidation will continue at the same 
pace, or that the community banking model is in any way 
obsolete.
    Since 1984, more than 2,500 institutions have failed, with 
most of the failures taking place during 2 crisis periods. To 
the extent that future crises can be avoided or mitigated, bank 
failures should contribute much less to future consolidation.
    About 80 percent of the consolidation that has taken place 
has resulted from eliminating charters within bank holding 
companies or from voluntary mergers. And both of those trends 
were facilitated by the relaxation of geographic restrictions 
on banking that took place in the 1980s and the early 1990s. 
The pace of the voluntary consolidation has slowed over the 
past 15 years as the effects of these one-time changes were 
realized.
    The study also showed that community banks which grew 
prudently and which maintained either diversified portfolios or 
otherwise stuck to core lending competencies exhibited 
relatively strong and stable performance over time, including 
during the recent crisis. By comparison, institutions which 
pursued more aggressive growth strategies underperformed.
    With regard to measuring the cost of regulatory compliance, 
the study noted that the financial data collected by regulators 
does not identify regulatory costs as a distinct category of 
non-interest expenses. As part of our study, the FDIC conducted 
interviews with a group of community banks to try to learn more 
about regulatory costs.
    Most of the participants stated that no single regulation 
or practice had a significant effect on their institution. 
Instead, most said that the strain on their organization came 
from the cumulative effects of a number of regulatory 
requirements that have built up over time.
    Several of those interviewed indicated that they have 
increased staff over the past 10 years to support their 
responsibilities in the area of regulatory compliance. Still, 
none of the interview participants said that they actively 
track the various costs associated with compliance, citing the 
difficulties associated with breaking out those costs 
separately.
    In summary, despite the challenges of the current operating 
environment, the study concludes that the community banking 
sector will remain a viable and vital component of the overall 
U.S. financial system for the foreseeable future. The FDIC's 
testimony today also summarizes the congressionally mandated 
studies by the GAO and the FDIC Office of Inspector General. 
These studies provided valuable information on the causes of 
the recent crisis and the FDIC's response.
    The Inspector General also made several useful 
recommendations that are highly relevant to the FDIC's efforts 
to address the issues arising from the crisis. The FDIC concurs 
with all of the OIG recommendations, and is now in the process 
of implementing them.
    I am joined today by Doreen Eberley, Director of the FDIC 
Division of Risk Management Supervision; and Bret Edwards, 
Director of the Division of Resolutions and Receiverships, who 
can address your questions about how the FDIC is implementing 
these recommendations. Thank you for the opportunity to 
testify, and we look forward to your questions.
    [The joint prepared statement of Mr. Brown, Ms. Eberley, 
and Mr. Edwards can be found on page 62 of the appendix.]
    Chairwoman Capito. Thank you, Mr. Brown.
    Our next witness is the Honorable Jon T. Rymer, the 
Inspector General for the FDIC. Welcome.

  STATEMENT OF THE HONORABLE JON T. RYMER, INSPECTOR GENERAL, 
             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Rymer. Thank you, Madam Chairwoman. Madam Chairwoman, 
Ranking Member Meeks, and members of the subcommittee, I 
appreciate your interest in the study conducted by my office as 
required by Public Law 112-88. I ask that the report entitled, 
``Comprehensive Study of the Impact of the Failure of Insured 
Depository Institutions,'' issued on January 3rd of this year, 
be made a part of the hearing's official record.

    The report may be accessed at the following link:
http://www.fdicoig.gov/reports13%5C13-002EV.pdf

    In the wake of the financial crisis of the 1980s, the 
Congress passed two laws: FIRREA, passed in 1989; and the FDIC 
Improvement Act, passed in 1991. These laws drove the closure 
and resolution processes used in the most recent crisis.
    Taken together, these laws amended the FDI Act and 
required, among other things, that: (1) financial institutions 
maintain minimum capital levels; (2) regulators promptly close 
critically undercapitalized institutions; and the FDIC resolve 
banks in the least costly manner. In response, banking 
regulators issued rules, regulations, and policies that 
pertained to many of the topics discussed in our report. In my 
time today, I would like to highlight the two overarching 
conclusions we reached, and then talk about four specific 
observations.
    The events leading to the financial crisis and the 
subsequent efforts to resolve it involve the dynamic interplay 
of laws, regulations, and agency policies and practices with 
the real estate and financial markets. Banks expanded lending 
using rapid growth in construction and real estate development.
    Many of the banks that failed did so because management 
relaxed underwriting standards and did not implement adequate 
oversight and control. For their part, many borrowers did not 
have the capacity to repay the loan, and sometimes pursued 
projects without properly considering risk.
    During the financial crisis, the regulators generally 
fulfilled their responsibilities by using risk-based 
supervision to react to a rapidly changing economic and 
financial landscape.
    Chairwoman Capito. Excuse me. Pull the microphone just a 
little bit closer.
    Mr. Rymer. Yes, ma'am.
    Chairwoman Capito. Our ears are getting old up here.
    Mr. Rymer. Yes, ma'am.
    That said, however, most material loss reviews conducted by 
the three banking regulatory IGs found that regulators could 
have provided earlier and greater supervisory attention to 
troubled banks and thrifts.
    The four specific observations I mentioned earlier are as 
follows.
    First, the FDIC's resolution methods, including the shared 
loss agreements, were market-driven. Often, failing banks with 
little or no franchise value and poor asset quality did not 
attract sufficient interest from qualified bidders for the FDIC 
to sell the bank without a loss share guarantee. The FDIC used 
these agreements to leave failed bank assets in the banking 
sector, thereby supporting asset value and reducing losses to 
the Deposit Insurance Fund, or DIF.
    Second, most community bank failures were the result of 
aggressive growth, asset concentrations, deficient credit 
administration, and declining real estate values. These factors 
led to write-downs and charge-offs on delinquent loans and non-
performing real estate loans.
    Third, we found examiners generally followed and 
implemented longstanding polices related to problem assets, 
appraisal programs, and capital adequacy. We also found that 
examiners did not always document the examination procedures 
that they performed.
    And fourth, the FDIC has investment-related policies in 
place to protect the DIF, and to assure the character and 
fitness of potential investors. By their nature, such policies 
are going to impact FDIC decisions on proposed private equity 
investments.
    Finally, I would like to express my appreciation to the 
regulators for making their staffs and the information we 
requested readily available to us. I would also like to thank 
those in my office who contributed to this study for their 
dedicated efforts to comply with the law.
    That concludes my prepared statement. I look forward to 
answering your questions. Thank you.
    [The prepared statement of Inspector General Rymer can be 
found on page 84 of the appendix.]
    Chairwoman Capito. Thank you very much.
    And our next witness is Mr. Lawrance L. Evans, the Director 
of Financial Markets and Community Investment at the U.S. 
Government Accountability Office. Welcome.

STATEMENT OF LAWRANCE L. EVANS, DIRECTOR, FINANCIAL MARKETS AND 
  COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Evans. Thank you. Chairwoman Capito, Ranking Member 
Meeks, and members of the subcommittee, I am pleased to be here 
this morning as you examine issues related to bank failures in 
community banking.
    Between 2008 and 2011, over 400 banks in the United States 
failed. Almost all of these failures involved smaller banks 
which had less than $10 billion in assets and often specialized 
in providing credit to local communities. My remarks today are 
based on our January report, and I will briefly share some of 
the key findings.
    First, failures of small banks were associated with high 
concentrations in CRE and ADC loans. These loans grew rapidly 
as a percentage of total risk-based capital and exceeded the 
regulatory thresholds for heightened scrutiny by a significant 
margin. Heavy ADC and CRE concentrations were often associated 
with aggressive growth, poor risk management, weak credit 
administration, and the use of riskier funding sources, namely 
broker deposits.
    Second, we found that fair value losses related to some 
mortgage-related assets were a factor in a limited number of 
failures. But overall, fair value accounting standards were not 
a major driver. In fact, our analysis found that most of the 
assets held by failing institutions were not subject to fair 
value accounting. The biggest contributor to credit losses at 
failed institutions was non-performing loans recorded at 
historical costs.
    However, declining collateral values related to these non-
performing loans contribute to credit losses and surfaced 
issues between examiners and some bankers over appraisals and 
the classification of certain loans. Following accounting 
rules, regulators will require that impaired collateral 
dependent loans be written down to the fair value of the 
collateral.
    State banking regulators in bank associations we spoke with 
said that given the significant decline in real estate values, 
these impaired loans resulted in significant reductions to 
regulatory capital. Two State banking associations maintained 
that the magnitude of these losses was exaggerated or 
exacerbated by Federal bank examiners' adverse classification 
of performing loans, and by their challenging of appraisals 
used by banks. This is at odds with regulatory guidance issued 
in 2006 and clarified in 2009.
    Third, loan loss reserves were not adequate to absorb 
credit losses, in part because the current accounting model for 
loan loss provisioning is based on historical loss rates or 
incurred losses. As a result, estimated losses were based on 
economic conditions that understated default risk and led to 
insufficient reserving. This left banks vulnerable to the 
sustained downturn that began in 2007 as credit losses ate 
through reserves and depleted regulatory capital.
    A more forward-looking model that focuses on expected 
losses could reduce the need to raise capital when it is most 
difficult to do so and encourage prudent risk management 
practices. Accounting standard-setters are taking important 
steps in this direction, and GAO will continue to monitor 
development in this area.
    Fourth, driven by market conditions, FDIC resolved nearly 
70% of bank failures between 2008 and 2011 using shared loss 
agreements to minimize the cost to the DIF. While estimated 
losses are expected to be roughly $43 billion, FDIC estimates 
that loss share agreements saved the DIF over $40 billion when 
compared to the estimated cost of liquidating the banks.
    Lastly, we found that the impact of failures on communities 
may have been mitigated by the acquisitions of failed banks by 
healthy institutions, although significant negative effects are 
likely in a few areas of the country. Bank failures, by their 
very nature, can impact consumers who rely on local banks 
through their effects on the costs and availability of credit.
    Our analysis of market concentration in geographic areas 
that experience failures found that only a few local markets 
raise these concerns. Some of these areas were rural counties 
which were serviced by one bank that was liquidated or where 
few banks remain.
    Our econometric analysis found that failing small banks 
extended progressively less credit as they approached failure, 
but that acquiring banks generally increased credit after the 
acquisition, albeit more slowly. Several acquiring and peer 
banks we interviewed in Georgia, Michigan, and Nevada noted 
that conditions were generally tighter in the period following 
the financial crisis, making it difficult for some borrowers to 
access credit, particularly in CRE and ADC markets.
    Econometric analysis also shows that on average, bank 
failures in a State were more likely to affect housing prices 
than unemployment or personal income. These results could be 
different at the local level and do not capture any changes in 
the patterns of lending or philanthropic activity that might be 
material for a community.
    That concludes my opening statement. I will be happy to 
answer any questions that you may have.
    [The prepared statement of Mr. Evans can be found on page 
44 of the appendix.]
    Chairwoman Capito. Thank you. I would like to thank the 
witnesses. And I will begin the questions with Mr. Brown.
    We talked about relationship lending, how it defines what a 
community bank is, and how important it is to certain areas. I 
fear that as the CFPB drafts more regulations, this type of 
relationship lending will cease to exist. I am already 
concerned that the recent QM rule that the CFPB promulgated 
will be unworkable for many of our rural lenders. And they will 
get out of the mortgage business, which will cut out a lot of 
our constituents from being able to obtain a mortgage.
    What steps are you taking as a regulator to ensure that 
these rules are workable for smaller institutions?
    Mr. Brown. Madam Chairwoman, your sense of the importance 
of relationship lending to community banks is something that 
was borne out in our study. They do lending on a completely 
different business model in terms of how credits are evaluated, 
and I think that will remain their niche, their specialty in 
the future. That is the thing that our study points out to us 
most clearly of all.
    In terms of rules coming about through Dodd-Frank, there is 
concern that has been expressed by community banks in some of 
the roundtables that we have conducted and the interviews that 
we have conducted about rules in certain areas, including 
mortgage rules. And I think that there are some community 
bankers who have expressed that they might not plan to go on in 
those lines of business, depending on how those rules are 
promulgated.
    So I do think that taking care to make sure that those 
rules do not disadvantage community banks and their particular 
business model, their way of doing business, is something that 
is very important and that the regulators are taking into 
account as the rules move forward.
    I will allow my colleagues to chime in if they have 
something to add.
    Chairwoman Capito. Did you have a comment, Ms. Eberley?
    Ms. Eberley. Sure. We can just add that we did have the 
opportunity to consult with the CFPB on the rulemaking process. 
And we were able to share the concerns that we heard from 
community bankers through our Community Bank Initiatives 
Roundtables and other venues. And we do believe that had an 
impact on the final rule.
    Chairwoman Capito. Are you presently using the FDIC's 
Advisory Committee on Community Banking as a liaison to the 
CFPB? Is this an ongoing relationship? Or is this just kind of 
one phone call and then back to your relative responsibilities?
    There is an advisory committee on community banks within 
the FDIC. Are they coordinating with the CFPB and others to 
show the effects that these regulations are having on our 
smaller institutions?
    Ms. Eberley. Our Community Bank Advisory Committee does not 
coordinate directly with the CFPB, but they do inform us of 
concerns that we share with the CFPB. So we essentially serve 
as the liaison with the CFPB--between community bankers and the 
CFPB.
    Chairwoman Capito. Did you have a comment? Yes?
    Mr. Rymer. Yes, ma'am. I would just like to add one thing. 
We, at the OIG, do have some concerns. I want to make sure that 
there is not overlap between the FDIC's Division of Consumer 
Protection and the CFPB. Some of the initial work we will be 
doing in the Division of Consumer Protection will be to try to 
identify overlap.
    Chairwoman Capito. I welcome that. I think that was one of 
our ongoing concerns with the creation of the CFPB. At the 
beginning, it was supposed to rid the silos and all the 
prudential regulators were supposed to cede this authority. And 
I think in actuality that is not occurring, which bears out in 
your report.
    Let's get to the cost of compliance. I know it is hard to 
quantify. That is in your reports. But anecdotally, whether it 
is hiring a single compliance officer in the smaller 
institutions, maybe your chief lending officer, your HR person, 
your vice president for community affairs, whatever officers 
you have there, and having to devote more of their time to the 
issue of compliance, is there anybody at the FDIC who looks at, 
as the regulations come forward, the cost to the community 
institutions?
    Mr. Brown. During the process when the regulations are 
considered and promulgated, the FDIC solicits input from the 
industry on the costs of implementing the regulations. And also 
about alternatives, different ways that the regulations could 
be devised or implemented that could mitigate those costs.
    And so that is a dialogue that happens not just through our 
more informal processes such as our roundtables, and our 
Advisory Committee on Community Banking, but specifically 
during the rulemaking process. And we receive thousands of 
letters on that topic that are carefully considered during the 
rulemaking process.
    Chairwoman Capito. My last question--or my last comment 
because I have only 12 seconds left--would be that no new bank 
charters were chartered in 2012, according to the FDIC. We have 
seen all the closures. We have talked about how important to 
the fabric of lending to small businesses and farmers and the 
agricultural community and rural areas, and that these 
institutions do for our constituents.
    I would just launch a concern. When you see everything 
closing and nothing opening, that to me is a red flag which we 
need to monitor. And I hope that you will join us in that 
effort.
    I will now go to Mr. Meeks for questions.
    Mr. Meeks. Thank you, Madam Chairwoman.
    Let me start with, I guess, Mr. Brown.
    As I stated in my opening statement, that community bank 
study showed that community banks hold 14 percent of the 
Nation's banking assets, while they offer 46 percent of small 
business and farming loans. So would you agree that it seems as 
though community banks are playing an outsized role in terms of 
the impact on the economy? Please give me your thoughts on 
that.
    Mr. Brown. Yes. I think that is our clear sense. It was our 
sense going into the project that obviously small businesses 
are very important to job creation, creating two-thirds or more 
of new jobs. Small businesses were hit hard by the recession, 
and they depend on community banks as a source of credit.
    Surveys over time have shown that small businesses prefer 
to do business with small banks who understand their needs, can 
customize their products, that sort of thing. So, that tight 
connection between small businesses and and community banks was 
borne out, I think, by the data that you are citing.
    Mr. Meeks. And so now we are trying to make sure, I think, 
that we get this balance right with reference to regulation in 
this sector. Clearly, there is some compliance cost to 
regulation. But what would you think the marketplace looks like 
for consumers without regulations such as the Equal Credit 
Opportunity Act, or similar fair lending bills?
    Mr. Brown. Part of the stability of the banking industry is 
a regulatory environment that maintains safe and sound banking 
and that maintains fair treatment for consumers.
    The confidence that bank customers have in their 
institutions comes about in part because of standards that the 
institutions follow for fair business practices, disclosure, 
things that give consumers and borrowers confidence in that 
institution. And so, safety and soundness and consumer 
protection are really two sides of the same coin, and it is 
something that is a strength of the banking industry.
    Mr. Meeks. Let me ask Mr. Evans, one of the criticisms of 
the shared loss agreements, one of the shared loss agreements, 
really quick, is that banks are incentivized to dump assets 
which allegedly depress housing and commercial real estate 
markets. Did either the GAO study or the FDIC IG study turn up 
any evidence of that occurring, to your knowledge?
    Mr. Evans. I think--
    Mr. Meeks. Mr. Edwards? Okay.
    Mr. Evans. The FDIC IG's study covered those issues in much 
greater depth. All we can say is what we heard. We talked to 
some banks and they were concerned that was occurring. But we 
also heard from acquiring banks who said something different. 
But that is about the extent of what we did in that particular 
area, so I guess I will just--
    Mr. Meeks. Mr. Edwards?
    Mr. Edwards. Sure. Of course we are concerned any time we 
hear that. We believe the way we structure the agreements 
incentivizes the banks not to do that, and in fact there are a 
lot of controls in place, including regular compliance reviews 
by our contractors and our staff, to ensure that kind of thing 
is not happening.
    The premise for these shared loss agreements really was to 
allow the private sector, i.e., the banks that are acquiring 
these failed banks, to work these assets appropriately and 
maximize the value of the assets. And specifically, we have 
provisions in the agreement that if an acquiring institution 
wants to do a single note sale, they have to get our 
permission.
    And certainly if they want to attempt to do any bulk sales, 
they have to get our permission. But our intent was for them to 
work these assets, and we believe, especially early on in the 
crisis, that we did not want these assets put out for sale 
because we felt they were trading below their intrinsic value.
    Mr. Meeks. Have the shared loss agreements saved the 
Deposit Insurance Fund any money, and ultimately the taxpayers, 
over the course of liquidation? And if so, what is your 
estimate today?
    Mr. Edwards. The estimate is a little over $40 billion, as 
was noted earlier. And what that is, at the time that we do a 
cost test, when we bid the failed bank out, we are required 
under the statute to resolve the bank in the least costly 
manner to the DIF. So the baseline case is if we had to 
liquidate the bank, pay out all the deposits, and take all the 
assets back ourselves. That is one cost. That is generally the 
worst-case scenario.
    Any other deal we have, i.e., a whole bank transaction 
where we sell the failed bank to an acquiring institution with 
a loss share agreement, if that saves us money then we count 
that as a savings. So when you added up all the savings, it was 
about $40 billion, because liquidating a bank and paying out 
the deposits and putting the assets in the government's hand is 
always going to be the worst-case scenario.
    Chairwoman Capito. Thank you.
    I now recognize Mr. Miller for 5 minutes for questions.
    Mr. Miller. Thank you very much.
    I enjoyed your presentation today. If you look at 2008 to 
2011, lenders went through a very, very tough time, especially 
rural banks. If you look at their AD & C loans, when the 
regulators were forced to apply mark-to-market and the SEC 
would not modify it, you put many of these loans in a poor 
asset quality category and they were forced to sell them off.
    It is sad because most of those loans are probably worth 3 
times today in value than what they had to sell them off for, 
and it is really sad to see. But it doesn't seem like after the 
economy really got to where it was starting to pick up again, 
and builders were starting to build again, which is going to 
take builders putting houses out that will help the economy 
return, it doesn't seem like the banks are being allowed to 
make the loans they should.
    Mr. Brown, what is your assessment of the current state of 
lending for the construction industry today?
    Mr. Brown. Real estate construction lending has declined. 
The volume outstanding has declined quite a bit during the 
crisis. And the loan charge-offs in that sector have exceeded 
$70 billion since the end of 2007 to the present. So there have 
been heavy losses in that area really associated with the large 
declines in the market value of residential and non-residential 
real estate assets.
    Mr. Miller. No, I understand. That was what I said in my 
statement. We have gotten to the bottom. Those assets have been 
sold off. Those banks have taken a hit. Many of them are gone 
today. But the market is starting to build again. We are 
dealing with today. What do you see occurring today and in the 
future? We know it has been bad. We know it has been awful. We 
are past that.
    Mr. Brown. Right. We are seeing some rebound in prices in 
some of the formerly hard-hit markets like Phoenix, Las Vegas, 
and Atlanta, where we saw a double-digit increase according to 
the Case-Shiller Home Price Indices last year. But those market 
prices, those indices remain far below their peaks from before 
the crisis.
    Mr. Miller. Yes. But what we are seeing out there is the 
regulators are basically requiring banks to go above required 
capital as far as lending. If you take the system that they 
face today, say a bank had $50 million in deposits, required 
reserves of $1,500,000, they are not allowed to lend about $3 
million to $800,000. And that is about--that is 100 percent, 
and it used to be 300 percent.
    Ms. Eberley, how would you say that is working today in the 
system?
    Ms. Eberley. In our guidance, we encourage banks to make 
loans to creditworthy borrowers, including homebuilders. And 
there is no prohibition on making loans in the Acquisition, 
Development and Construction sector. The thresholds that you 
cite, the 100 percent and 300 percent, appear in guidance that 
we issued in--
    Mr. Miller. Well, 300 percent was before, but the 
regulators today are not allowing anybody to exceed 100 
percent. And that is stifling the industry.
    Ms. Eberley. So we don't have any rules like that.
    Mr. Miller. But the regulators are--there are no rules, but 
the regulators are applying this in the banks. I have talked to 
too many banks that keep coming back and saying the same thing. 
And I think the regulators are being overly restrictive because 
of the market situation in 2008-2011, which I am not saying 
wasn't bad. It was horrible. Banks lost tremendous amounts of 
money.
    But you are seeing throughout different regions in this 
country that the markets coming back. People are buying new 
homes. When they buy new homes, the current value of existing 
homes is going up with them. But builders who have qualified 
credit and good projects can't get lenders to lend above this 
100 percent because the regulators won't allow them to do that.
    Ms. Eberley. I can just tell you that we do not have a 
prohibition for institutions to make acquisition development 
loans above 100 percent of their capital. To the extent that 
you have an institution that is doing that or an examiner who 
is telling an institution to do that, we would of course be 
interested in hearing the specifics on that.
    Mr. Miller. I probably have a room full of bankers who can 
give you specifics on that. And that is the problem we are 
facing. It seems like we are forcing and mandating a 
restriction on lenders that currently does not exist in law. 
And I understand the regulators are being cautious because of 
what many banks went through. If we would have modified mark-
to-market, a lot of those banks would still be out there today.
    If we would have modified mark-to-market and not forced 
them to take respective losses, many of those banks could have 
held those loans, and today, in a better marketplace, could 
have sold those off. I am not blaming you for that. We did 
nothing to modify it. I got language to the SEC to have them 
look at that issue and they came back and did nothing.
    So I am not blaming you. We didn't do our job to allow you 
to do your job. But what we are facing out there to ensure that 
bank examiners on the ground know that they are not empowered 
to enforce that I think is something we need to work on 
internally because it is occurring.
    There is no doubt that it is occurring. And there is no 
doubt that it is not restricted and regulated by law for them 
to do that. But when you look at the situation they were 
allowed, going to 300 percent of that and now they are forcing 
the 100 percent guidelines as a standard and not letting people 
exceed that.
    It is just something that I--we introduced a bill to 
directly deal with that. But it would be nice if you could 
internally look at that and understand that system doesn't work 
in a recovering market. And the market is recovering.
    I see my time has expired, and I thank the chairwoman for 
her generosity.
    Chairwoman Capito. Thank you.
    Mr. Watt for 5 minutes.
    Mr. Watt. Thank you, Madam Chairwoman. I am always 
interested in some of the unintended consequences of the 
decisions we make here. I noticed that Mr. Brown, and I think 
Mr. Evans, talked about how the bulk of the failures that we 
have experienced, or a large part of them, resulted from 
aggressive expansion. And I think Mr. Brown testified about a 
change we made in the law at some point which made it easier 
for community banks to expand by lifting geographic 
restrictions.
    First of all, Mr. Brown, tell me again what that change was 
and when we made it.
    Mr. Brown. Yes. Traditionally, there were restrictions on 
branching at the State levels. Some banks were in unit banking 
States. They really couldn't have branches. And those were 
relaxed at the State level in the early 1980s and early 1990s, 
allowing some banking organizations then to consolidate their 
charters and run them as branches.
    Moreover, restrictions on interstate banking at the State 
level were essentially undone or relaxed through the Riegle-
Neal Act of 1994, and after that interstate banking became much 
more prevalent. And both of those deregulation events 
facilitated the consolidation of charters within bank holding 
companies and also voluntary mergers across State lines.
    Mr. Watt. And of course, I was here in 1994, so I am sure I 
supported that change. So, an unintended consequence of that is 
aggressive mergers, aggressive growth, and aggressive growth is 
what led to a number of the bank failures during the economic 
downturn. I want to pick up on that.
    Tell us again what part of these failures and forced 
consolidations resulted from larger banks acquiring or other 
banking groups acquiring those failed banks' assets. What part 
of that resulted, based on your study, from aggressive growth?
    Mr. Brown. First, it was really the non-community banks, 
the 558 charters in 2011 that did not meet our community 
banking definition. They held $12 trillion in assets. They had 
gained $6 trillion in those assets through direct acquisitions, 
almost 2,500 acquisitions. So, they really grew their share of 
industry assets to 86 percent through acquisitions and through 
retail lending and consumer lending for the most part.
    Community banks, on the other hand, tended to grow more 
organically--
    Mr. Watt. And which ones of those had been community banks 
before that as opposed to the category that you just described?
    Mr. Brown. I am not sure if I have that information at my 
disposal. We probably could calculate it from the data that we 
collected.
    Mr. Watt. Mr. Evans, you referred to something called 
``forward-looking'' rather than retrospective accounting. How 
would that look? What kinds of things are the accounting 
standards people are talking about that would allow us to be 
more forward-looking in the accounting principles that are 
applied?
    Mr. Evans. Right. So, instead of estimated losses being 
based on historical losses or losses that have been incurred to 
date, you would consider current market conditions and other 
factors--
    Mr. Watt. How can an accountant do that? I guess I think of 
accountants as being--they keep track of the numbers as they 
are. What would be the theory on which an accounting standard 
change would address that issue?
    Mr. Evans. The accountant would be doing the auditing and 
the attestation. This is what bankers would be doing who have 
knowledge of what current conditions look like and what they 
anticipate going forward. It would be embedded in the updated 
standards that will allow them to do that.
    Mr. Watt. So you are talking about the audit standards as 
opposed to actual accounting standards then?
    Mr. Evans. That is right.

    [Mr. Evans submitted the following clarification for the 
record: ``This is an update of current accounting standards.'']

    Mr. Watt. My time is about to expire, so I will yield back.
    Chairwoman Capito. Thank you.
    Mr. Campbell for 5 minutes.
    Mr. Campbell. Thank you, Madam Chairwoman.
    I want to step back and do a little 20,000-foot kind of 
view here. It seems to me, and I will ask you to comment on 
this, that there are two problems facing community banks. One 
is the squeeze on margins, which has to do with monetary 
policy, which has nothing to do with any of you at that table 
or any of us up at this dais.
    And in recent testimony before this committee or 
subcommittee, other subcommittees that are a part of this 
overall committee, even those who advocate the current loose 
monetary policy would agree with it and admit that there is a 
tremendous pressure and squeeze on margins at the community 
bank level because larger banks can borrow from the Fed under 
the Treasury and make a spread that is completely without risk. 
And that is limiting margins at the community bank level.
    Then on the other end, we have this increase, although 
unquantifiable, so it seems. But this increase in cost at the 
community bank level due to regulatory restrictions.
    So, if you look at that, if you have declining margins and 
increasing costs, we see this reflected in very few new bank 
charters and consolidations at the community bank level.
    And so from where I sit I look and I say all right, we 
actually have a current regulatory environment that is damaging 
the very sector that we are supposed to be protecting, that is 
causing there to be a shrinkage and, sure, maybe not failures 
in the classical sense of failures, but a failure of the 
overall sector because they just can't make it with increasing 
regulatory costs and shrinking margins. Would any of you like 
to comment on that?
    Mr. Brown. The importance of net interest income to the 
earnings of community banks is absolutely an accurate 
assessment. We have looked at changes in their efficiency ratio 
over time, that is, the ratio of their overhead expenses to 
their revenues. And it has deteriorated over the last 15 years. 
But more than 70 percent of that deterioration came about due 
to a shrinking of net interest income. And only a small 
portion, 20 percent, came from higher expenses. Those are 
expenses of regulatory and non-regulatory. We can't separate 
those out.
    The community banks fund themselves through deposits. That 
is a very good funding model during periods of normal interest 
rates. High interest rates you can get some discounts there, 
but during a period of low interest rates, it is not 
necessarily the cheapest source of funds for them.
    Mr. Campbell. Other comments? Mr. Rymer?
    Mr. Rymer. Yes, sir. I would just like to point out that 
there is some cyclicality to this. Prior to the crisis, there 
was an extraordinarily large number of de novo banks, new banks 
formed. Unfortunately, I think the crisis certainly has 
dissuaded potential bank investors from investing in new banks 
at this point in the cycle. But prior to the crisis, 
particularly in Georgia and California, lots of new banks were 
formed.
    Mr. Campbell. Okay. So the monetary policy as we discussed 
the shrinking margins is the two-thirds or three-quarters of 
their problem. But the regulatory costs are still part of the 
problem.
    Do you all believe, and I only have a minute or so left, 
that we can--I could rattle through, they are all in here, all 
the different regulations that we have passed just in the last 
10 or 15 years, many of which are overlapping or duplicative. 
Do you all believe that we can relieve this regulatory--that 
there is a way to pull this stuff back in order to give some 
relief to this sector so that the regulation isn't forcing the 
sector down without adding significantly to the failure risk?
    Ms. Eberley. I might just say that what community bankers 
have asked us to do is to help them in understanding the 
regulatory environment and framework. So through our Community 
Bank Initiative, there were a couple of very specific requests 
that were made for us to help reduce burdens at community 
banks.
    One was to increase our outreach and training. Our 
Director's College Program and other outreach was cited as 
being very valuable to bankers. They use it to help train their 
staff, make sure their directors understand their roles and 
responsibilities. And they have asked us to expand those 
opportunities where possible, including the ways that deliver 
the programs. And so, we are working on that.
    The second was to give them line of sight for the 
regulations coming down the pike. So what is out there, what is 
proposed, does it apply to them, how would it apply to them. 
And we have developed a Web-based tool to bring all of that 
together and help community bankers gain an understanding.
    Mr. Campbell. Thank you. My time has expired.
    Chairwoman Capito. Thank you.
    Mrs. McCarthy for 5 minutes.
    Mrs. McCarthy of New York. Thank you. And thank you for 
having this hearing. I find it fascinating.
    I want to follow through a little bit with what Mr. Miller 
had started to talk to you about. We have been looking at the 
GAO report and we know that many residential builders in this 
are small businesses owners who rely on the community banks to 
finance their acquisition, development, and construction 
activities.
    The financing options are tight and sometimes nonexistent 
that we have seen, and I have seen it in my own area in New 
York. But looking at the GAO report, commercial AD & C 
financing combined with weak underwriting, insufficient 
capital, and high concentration have proven to be risky and 
have led to some bank failures. If the oversight and the 
prudent management were in place, what, if anything, could make 
commercial AD & C loans risky?
    Ms. Eberley. What makes acquisition, development, and 
construction loans risky is the length of time before the 
project comes to completion and it is the risk of economic 
changes during that time when the construction is taking place.
    But you raised a couple of interesting points. Our 
Inspector General conducted an evaluation and issued a report a 
little bit earlier this year that covered institutions that did 
have concentrations that exceeded the thresholds that are 
included in our regulatory guidance, at which point we expect 
heightened attention and risk management practices by 
institutions.
    And so, there were institutions that exceeded these 
thresholds, but weathered the crisis in good shape. There were 
other institutions that got into trouble, but managed their way 
back out without failing. And the principles that you outlined 
were the ones to which they actually adhered.
    They had strong risk management practices in place. They 
paid attention to market fundamentals, and when their market 
appeared to be overheated, they pulled back. And they had 
strong board governance around their credit administration 
practices. So those were the things that made a difference for 
institutions that were concentrated at high levels that made it 
through the crisis okay.
    Mrs. McCarthy of New York. From what I understand, 
obviously with the commercial loans the banks took, which are 
usually higher amounts of loans and there is a certain limit on 
what banks would possibly put out there for what they might 
consider a risky loan, that kind of left our smaller 
residential builders with no place to go. Am I correct in 
interpreting it that way?
    Ms. Eberley. I am not sure I understand your question.
    Mrs. McCarthy of New York. From what I understand, the bank 
has a--if they are going under risk management and if they are 
looking at how many loans they have out there and they have a 
lot of commercial loans, which usually are large pieces of 
property, more expensive to build. And if they start to go 
under, as we saw going back a few years ago, there wasn't any 
money left over for the small businesses.
    That is what we are trying to look at, how we can make sure 
our small businesses that are residential builders, that don't 
need as much money as the commercial. And once they reach that 
limit, there was nothing left for the small businesses to get.
    Ms. Eberley. Again, I would just say that our guidance 
doesn't set limits on commercial real estate lending or 
acquisition, development, and construction lending. It sets 
thresholds beyond which we expect institutions to have 
heightened risk management practices.
    So that means our expectations about how the banks are 
going to manage that portfolio, we expect to see more due 
diligence around it. We expect to see greater levels of 
understanding of the marketplace fundamentals, monitoring of 
the marketplace fundamentals, stress testing of the portfolio 
to determine impacts on capital or borrowers, or changes in 
interest rates or changes in economic fundamentals.
    So, that is our expectation. We don't place limits on the 
amount of lending an institution can do in a portfolio like 
that.
    Mrs. McCarthy of New York. I have a few more questions, but 
I don't think I can get them answered in 46 seconds, so I yield 
back. I will ask for written responses to my--
    Ms. Eberley. Oh, certainly. Certainly.
    Chairwoman Capito. Mr. McHenry for 5 minutes.
    Mr. McHenry. Thank you. And I want to thank all of you for 
your service to our government and to our people.
    Now look, I have met with a lot of community bankers, as 
most members of the committee have. And they tell me stories 
about an inconsistent, overly stringent examination process; 
that this is a hyperreaction by the FDIC to the crisis, an 
overreaction, in their words. Now certainly, they are 
regulating, but it is consistent with the FDIC study that we 
are talking about today.
    You have also reached out to various consultants and 
contractors for these community banks. And I know the FDIC is 
in an ongoing process of doing that. But I wanted to share with 
you a couple highlights of criticisms of the FDIC that I have 
which they don't receive:
    ``We have received examination criticisms that were 
inconsistent with what prior examiners found, inconsistent with 
what was found in prior examinations by the same examining 
body, and inconsistent with guidance from our regulator. The 
inconsistency of the examination has made it extremely 
difficult for us to understand what is expected of us and to 
comply with expectations of our examiners.''
    Another one, ``My financial institution has not tried to 
appeal a decision from our regulator. The appeals process does 
not appear to us to be independent. The appeals process appears 
to be similar to being bullied in elementary school and your 
only appeal is to the bully's mother.''
    ``Typically, in the past, if the examiners found areas of 
concerns they would identify the area of concern and make 
suggestions on how to improve in these areas. Now minor 
infractions are met with severe criticisms and/or penalties.''
    Likewise another one, ``Our exam this past summer was a 
dual exam. The exam included compliance, CRA, and fair lending. 
The exam lasted 4 to 5 weeks, and the number of people ranged 
from six to eight. We had an excellent rating prior to this 
exam. The compliance examiners came in with unlimited budgets 
and correspondingly unlimited time to search our files for 
errors to prove exactly what?''
    I had another banker say that your agency used to be one to 
fix problems and to repair wounds, but that has changed to a 
mindset of bayoneting the wounded. Now, I understand there is a 
reaction to lax exams prior to the crisis. But this 
overreaction leads me to ask one simple question.
    I will begin with you, Ms. Eberley, because exam process is 
certainly key to this. How are community banks expected to 
exist under this hostile regulatory environment?
    Ms. Eberley. I would start by saying that we expect our 
examiners to examine banks in a fair and balanced manner, and 
to remain professional throughout all of their dealings with 
institutions. I take great pride in the professionalism of our 
examination staff and I do believe that we have a number of 
programs in place to ensure that we have consistency on a 
nationwide basis.
    We have a national training program for examiners and a 
stringent commissioning process. We undertake internal reviews 
of our examination program through each of our regional 
offices. And we engage in extensive--
    Mr. McHenry. So things are good?
    Ms. Eberley. I would just tell you that we work very hard 
to--
    Mr. McHenry. No, I appreciate you working very hard. I 
acknowledge that. And I certainly appreciate your service. But 
these are the criticisms I am receiving and I am hearing. Are 
they wrong?
    Ms. Eberley. They have not come to me. I would ask that--
    Mr. McHenry. Right. So they are going to come to the 
regulator. They are going to come to, in these words, this 
appeals process which they think doesn't work.
    Let me just ask another question. At the November meeting 
of the FDIC Advisory Committee on Community Banks, there was a 
question on the ongoing examinations and reports and after-
examinations. Have you implemented any policies or procedures 
to improve this process?
    Ms. Eberley. We have undertaken a number of initiatives. We 
did engage in training with our entire examination workforce in 
2011, I believe, about the examination approach.
    In terms of communication with institutions, we issued a 
Supervisory Insights Journal article last year talking about 
the risk management examination process and what bankers should 
expect in terms of communication throughout the process. We 
issued a financial institution letter in 2011 reminding bankers 
about examination processes again, and the appeal programs.
    We do encourage institutions to try to resolve issues while 
the examination is open, with the examiners. But if that can't 
be done, we can disagree professionally. And we encourage 
bankers to talk to us. We don't know that there is a problem 
unless there is a communication of the issue. And so they can 
talk to the field supervisor, regional office management, and 
me. I have a dedicated mailbox that is listed out in that 
financial institution letter.
    One of the things that we are going to do through the 
Community Bank Initiative Project is institute an information 
packet, essentially, for community banks that will be mailed 
out to all of the community banks that we regulate, reminding 
them about all of these processes and encouraging them to take 
advantage of the process. I mean that with all sincerity that 
we want to communicate. We want to know if there are issues. 
And we want the opportunity to fix them if that is the case--
    Chairwoman Capito. I am going to step in here, because the 
gentleman's time has expired.
    Ms. Eberley. I apologize.
    Chairwoman Capito. And we will move on to the next 
questioner, Mrs. Maloney.
    Mrs. Maloney. I would like to thank Ranking Member Meeks 
and Chairwoman Capito for calling this really important hearing 
on the status of community banks in our financial system and 
its service in our communities.
    I am pleased to have joined Mr. Westmoreland in support of 
his two studies, and in support of really looking at ways we 
can help community banks. They are critical. And I would say 
regional banks too. They are critical to our financial system, 
and really unique in America.
    In many of the foreign countries, they have very large 
banks. They don't have community banks. And my first concern 
was on the Basel III capital requirements.
    Chairwoman Capito and I wrote a letter to the regulators, 
Mr. Bernanke, Mr. Curry, and others, expressing our concern 
that the requirements for international global banking, huge 
banks, were the same for the community banks. Community banks 
are not involved in global financing. And the requirements in 
Basel III, according to many community banks in the district I 
am privileged to represent, would force them to merge or 
literally go out of existence.
    So I am going to be reworking this letter. I would like 
unanimous consent to place it into the record. Many Democrats 
have come to me and asked to go on it. Since we already sent it 
out, I think we should work on another, so that others can 
express their concern. And so I ask--
    Chairwoman Capito. Without objection, it is so ordered.
    Mrs. Maloney. I also want to reference the chairwoman's 
mention about how important community banks are to rural areas. 
I would say they are just as important in urban areas. During 
the financial downturn, when many of our extremely important 
financial institutions that were larger were facing great 
stress, the only service that was there for the community in 
any type of loan and bank processing were regional and 
community banks.
    They would continue to do the mortgages. They would 
continue to do the small loans. So they are absolutely critical 
to our banking system, and to services in many areas.
    Constituents would come to me and say, ``My rating is 
perfect, I am making zillions of dollars, but I can't refinance 
my home, I can't take out a mortgage. What do I do? I have been 
to every major bank in New York.''
    I would say, here is a list of community banks, regional 
banks, try them. And they would be able to get the services 
they needed. So I think that supporting them is very, very, 
very, very important.
    And in that vein, the chairwoman and I introduced a bill 
last year that responded to some of the concerns that community 
banks brought to our attention. And we are working on 
reintroducing it over this break. I hope that our staffs can 
meet with the FDIC.
    The FDIC was not supportive of the bill. I am very 
supportive of regulators. And I certainly want regulators to 
support efforts that we have. And we need to do it in a 
reasonable way.
    But one of the areas was the appeal process where they feel 
that their appeals are not listened to, they are not taken into 
consideration. And often I feel a disconnect when I talk to 
regulators, whom I respect. They say, we are there, we are 
helping, we are doing everything.
    And then you talk to community banks that because they are 
in the community, you know what they are doing, you know them, 
they know all the communities, just really know your customer. 
They know your customers and the customers know them. And they 
were saying that they did not feel that their appeals were 
listened to or that they were treated fairly.
    I feel that this is an area where we have to work together 
to make it work better. We are unique in having the community 
banking system. It is not the same in Europe. And that is why 
Basel III is not sensitive to the community banks.
    I personally think that community banks should be exempted 
from the Basel III requirements or have a different standard 
because they are not global competitors. They don't need to 
have the same standard as a global competitor. They are not 
global competitors. They are community banks helping 
communities.
    I just have great respect for them because they are there 
for the communities I represent. And people tell me, thank God 
for bank such and such, a little community bank that was there 
to help them.
    So, what my basic question is that I would like to submit 
to the FDIC, and I see the panel is basically all FDIC 
primarily, the bill that we did, and have your input on it. 
Because I think that we do need to have some relief for the 
community bankers. And my first question is on Basel III.
    Chairwoman Capito. Your time has expired.
    Mrs. Maloney. Okay.
    Anyway, I will give you a copy of it and the letter and I 
would love to see any comments that you have. But I think this 
is a very important hearing. I want to thank the ranking 
member; I know he pushed hard for it, and thank the chairwoman 
for having it.
    Chairwoman Capito. Thank you.
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. Thank you, Madam Chairwoman.
    I will actually follow up on that question and ask Mr. 
Brown or Ms. Eberley, do you agree with the gentlelady's 
assertion or question that community banks should be exempt 
from Basel III?
    Ms. Eberley. I would say that we received more than 2,500 
comments from community banks about the Basel III and the 
standardized approach capital rulemakings that we put out for a 
notice of proposed rulemaking. We are in the process of 
considering those and take very seriously the comments and 
concerns that community banks have raised. It is not our intent 
to have an unintended consequence on the community banking--
    Mr. Fitzpatrick. So what are those comments indicating? And 
what is your position on that question?
    Ms. Eberley. We are in the rulemaking process, so we can't 
talk about our position.
    But the comments that have been raised fall into three 
areas primarily. One has already been mentioned, and it is the 
implications for mortgages. It is the risk weighting for 
mortgages through the standardized approach. Another is the 
treatment of trust preferred securities. And a third would be 
the treatment of accumulated other comprehensive income, which 
is a fancy way to say depreciation or appreciation on 
securities.
    So, those were the three primary issues that were raised. 
We are taking all of the comments into account. We are reading 
every comment letter and working with the other agencies as we 
go through the process to come up with a final rule.
    Mr. Fitzpatrick. Mr. Brown, you indicated in your written 
testimony--I think you may have been quoting the FDIC community 
banking study--that the surveys of the community bank 
presidents indicated that it wasn't a cost of any single 
regulation that was going to break the bank, but that it was a 
cumulative cost of everything put together, which is exactly 
what I am hearing from the community banks in my district in 
Pennsylvania, especially around Bucks and Montgomery Counties.
    They are saying that they have to hire compliance people 
that they didn't have a couple of years ago, they need to train 
their employees. They are now responsible for outside 
consulting fees, bringing folks in, increased costs of both 
internal and external auditing. And of course, all this is 
taking away from their ability to make the loans and their 
ability to have the capital to make those loans. It is a 
distraction.
    What is your plan over the course of the next year to 
address those issues? And when might this subcommittee hear 
back on that plan?
    Mr. Brown. Our entire Community Banking Initiative is 
designed to learn more about these issues. Those were some of 
the things that we have learned thus far. And on the 
supervisory side, to try to address them through some of the 
technical assistance and other initiatives that Ms. Eberley has 
described thus far.
    Ms. Eberley, I don't know if you want to elaborate on some 
of the steps in the Community Banking Initiative that we are 
undertaking.
    Ms. Eberley. The ones that I mentioned were bankers who did 
ask us for more technical assistance. They expressed that they 
valued the director's colleges that we put on. These are 
training sessions that we offer through trade associations in 
each of our regions for bank directors to participate in and 
learn about emerging issues. We host teleconferences. We have 
had workshops where we will focus on a specific topic like 
allowance for loan and lease losses, and troubled debt 
restructuring.
    Those have received high praise. And we have been asked for 
more and we have committed to do more. We are trying to look at 
ways to make those offerings available more broadly, like a 
Web-based offering so that it could be available on-demand, in 
order to provide that kind of training so that institutions 
don't have to rely on outside assistance to get that.
    Mr. Fitzpatrick. Is there a specific work plan for this 
year, for 2013, to address the cumulative impact of all those 
regulations on community banks?
    Ms. Eberley. The specific work plan that we have in place 
is geared toward the technical assistance offerings, and we do 
have a work plan, yes.
    Mr. Fitzpatrick. I agree with what Mrs. Maloney indicated 
that during those very difficult economic times this past 
couple of years, it was community banks that were literally 
holding the communities together. They were the ones that were 
making the mortgage loans. They were the ones making the small 
business loans.
    What do the statistics show during those last couple of 
years in a number of those small community banks, the charters 
have gone out of business versus new startups? Are we seeing 
more community banks go out of business and fewer starting up?
    Ms. Eberley. We have seen that. And that is consistent with 
the economic cycle. We saw it during the last crisis as well. 
We are starting to hear discussions from consulting groups that 
are representing groups of organizers that are interested in 
chartering community institutions.
    Mr. Fitzpatrick. What are you doing to encourage more 
charters?
    Ms. Eberley. To encourage more charters? We are open to 
receiving applications for deposit insurance. It really is more 
of an economic fundamental and we are waiting for groups to 
come forward. We try to be supportive of the banking industry 
through our Community Bank Initiative and our other outreach 
efforts.
    Chairwoman Capito. Thank you. The gentleman's time has 
expired.
    Mr. Scott for 5 minutes.
    Mr. Scott. Thank you. Let me start, first of all, because 
my colleague from Georgia, Congressman Lynn Westmoreland, and I 
put forward a very important bill that I think you all are 
aware of. Are you not? You are not aware of the bill we put 
forward? I certainly hope that you will soon become aware of it 
because you all are the source of this bill. I am surprised 
that you do not know of our work, which begs the question as to 
why community banks might be suffering unnecessarily.
    Just to refresh your memory, Congressman Westmoreland and I 
represent the State of Georgia. And Georgia has unfortunately 
led this Nation in bank closures. Many of us feel that some of 
those bank closures were not necessarily caused by the external 
strong winds of the economy, but in many respects by not the 
proper type of regulation, perhaps overaggressive regulations.
    In other words, we wanted to find out why these banks 
failed. And you all play a very important role in that. So you 
can see why I am very disappointed that you all have no idea of 
this law and this bill that we passed.
    Let me refresh your memory just for a second to explain to 
you what it is so you understand my very serious 
disappointment. We introduced Public Law 112-88 to address the 
concerns that our constituents in Georgia have that they are 
facing not only more regulations, but more aggressive 
enforcement, not being sensitive to those situations.
    They have had increased costs unnecessarily. So we wanted 
to take a look at it, and we directed the Office of Inspector 
General of the FDIC--are you here?
    Mr. Rymer. Yes, sir. I am right here.
    Mr. Scott. All right. So this law affected you. And the 
GAO, are you here? Okay. To thoroughly study, which obviously 
you have not done, and report on a wide range of policies and 
procedures used by the FDIC in its supervision of troubling and 
failing institutions.
    We specifically instructed you to address the following: 
the effect of loss sharing agreements; the significance of 
losses; the consistency of procedures used by examiners for 
appraising collateral values; the factors examiners consider 
when assessing capital adequacy; the success of FDIC field 
examiners in implementing the FDIC guidelines for commercial 
real estate workouts; the impact of cease-and-desist orders on 
troubled institutions; the FDIC's procedure for evaluating 
potential private investment in insured depository 
institutions; and the impact of the FDIC's policy on private 
investment in insured depository institutions.
    This is serious. Our community banks deserve better. They 
only control 14 percent of the total banking assets in this 
country. But yet they account for 46 percent of all of the 
small business loans, all of the farmer's loans.
    So you can see why this is serious business to us in 
Georgia. And we don't just sit here to pass these laws like 
this that are directed towards you to respond to. And so I 
certainly hope, with all due respect, that you will find the 
time to look at the legislation that my colleague, Mr. 
Westmoreland, and I worked so feverishly on, and to try to 
examine.
    I yield back, Madam Chairwoman.
    Chairwoman Capito. The gentleman yields back.
    I ask unanimous consent to insert into the record a letter 
from the National Association of Federal Credit Unions. Without 
objection, it is so ordered.
    Mr. Westmoreland for 5 minutes.
    Mr. Westmoreland. Thank you, Madam Chairwoman. And I want 
to personally thank Mr. Edwards and his staff for the 
accessibility that they have given me and my office to address 
our constituents' questions and concerns. We haven't always 
agreed, but we have had some great conversations. And I want to 
thank him publicly for that.
    Ms. Eberley, let me say that I got a call from one of my 
community bankers who said he had been in the banking business 
for 35 years. He is going through an examination. He said he 
had never really had an examination like this that was more 
nitpicking, with incompetent regulators. Yet, he did not want 
to come forward because of fear of retaliation.
    And so, I think that is something that you need to look at. 
And the fact that this bank is finally making money, but it 
said it seemed like the regulators wanted to look in the 
rearview mirror rather than looking forward into what they had 
done to actually begin making money in saving their bank. So--
    Chairwoman Capito. Will the gentleman yield?
    Mr. Westmoreland. I will.
    Chairwoman Capito. I want to underscore what he is saying 
because I think it is a very serious issue. And when I would 
talk to banks, and as I understand it we cannot appeal to you 
for an individual bank, we can only appeal in a policy way, 
that is why we wrote our letter, or rather our bill. Many of 
them would say they couldn't appeal because they were afraid of 
retaliation. They feel that if they raise something, they are 
going to be punished. And I think we have to get rid of that. 
Anyway, I yield back.
    Mr. Westmoreland. Yes, but--
    Chairwoman Capito. Your point is a very important one.
    Mr. Westmoreland. Reclaiming my time, I guess this would be 
to Mr. Brown or anybody from the FDIC who wants to take it. 
Coming from the State of Georgia, and even despite the crisis 
that we have had, we are still one of the fastest-growing 
States in the Nation. And to accommodate that growth, it is 
important that we do have the financing in place to develop 
real estate.
    Leading up to the downturn, the community banks, as you 
probably know, paid the largest amount of attention to being 
able to lend so we could develop. But because a lot of these 
real estate loans tanked, the economy tanked. They were having 
to write down these loans immediately, and acquire more 
capital, which was hard to do.
    But the studies showed that the construction activity is 
essential to economic activity, and I think Mr. Evans will 
agree with this, in your community. It is certainly true in my 
district. And the further research--you have to establish a 
balance between the social benefits and the social costs of the 
commercial real estate.
    We are beginning to see the first signs of some new 
construction activity in my district. And my fear is that the 
examiners will not allow these community banks to participate 
in this economic comeback that we are having in Georgia, 
especially in my district. So, could you describe any new 
guidance that you might have that you could provide to these 
banks to help them, and to give us the assurance that they can 
get back into this type of lending?
    Ms. Eberley. I think that probably falls more in my camp. 
We don't have any new guidance planned, but I would say that 
the existing guidance that we issued throughout the crisis 
stands. And we have encouraged institutions to make loans to 
creditworthy borrowers.
    We have issued a couple of different statements in that 
regard, in addition to encouraging institutions to work out 
credits with troubled borrowers. So, we keep repeating that. I 
can reemphasize it with the staff in the Atlanta region, and I 
am happy to do that, and in fact the staff nationwide. But that 
is our policy.
    Mr. Westmoreland. Thank you.
    The other thing I hope that you all will look at is the 
appraisal situation, because if you look at the loss share 
banks and they get an appraisal, it is far lower than what a 
non-loss share bank appraisal would get because that means that 
loss share bank would get more reimbursement from the 
government, which is really costing the taxpayers money.
    And we have appraisal problems that go far beyond that, 
though, in the fact that we are now having to use appraisers 
from different parts of the State. As you know, real estate is 
location, location, location. And if these appraisers aren't 
familiar with the location and the benefits that it has, then 
they really can't do a firm appraisal. So I hope that the FDIC 
in total will look at the appraisal process and some of the 
problems that are coming from it.
    With that, I know I am over my time, and I yield back.
    Chairwoman Capito. Thank you.
    Mr. Green for 5 minutes.
    Mr. Green. Thank you, Madam Chairwoman. And I thank the 
ranking member as well. I think this is a very timely hearing. 
I thank the witnesses for appearing today. We all have 
community banks in our districts, and sometimes we call them 
neighborhood banks. They are referred to as small banks. We 
have many names, and I am not sure that we all have the same 
thing in mind when we use this terminology.
    So let me, if I may, bring us to a more mundane question. 
There are a lot of lofty ideals to be considered today, but 
there is something as simple as, how do you define a community 
bank so that I may understand that you and I are thinking of 
the same institution when we use the terminology?
    Mr. Brown, you have said that they have created a niche for 
themselves. You indicated that they have a different business 
model. So would you kindly give us your definition of a 
community bank, as we have been discussing things today, 
please?
    Mr. Brown. Yes, Congressman. Previous studies have tended 
to just rely on asset size as a definition of community banks. 
We thought that did not quite capture their nature as 
relationship lenders.
    Mr. Green. Let me quickly intercede and ask this: In terms 
of asset size, because that was one of the things I was going 
to inquire about, what is the asset size of a community bank?
    Mr. Brown. Many studies use an asset size of $1 billion and 
below as the definition of a community bank. But we went beyond 
that to look at their lending and deposit gathering activities, 
and the scope of their geographic footprint to try to come up 
with a better definition of a community bank.
    Mr. Green. Could you give us a little bit more information 
on it, please?
    Mr. Brown. Yes. We excluded institutions that had no loans, 
no core deposits, that were specialty banks or that had foreign 
operations greater than 10 percent of assets. We then included 
institutions that had loans to assets greater than a third of 
the portfolio, core deposits greater than half the portfolio, 
had fewer than 75 offices, no more than 2 large metropolitan 
areas where they did business, and no more than 3 States where 
they did business, and no single branch more than $5 billion.
    So, these tend to look at the activities of the 
institution, look at the geographic spread of the institution, 
and try to capture its local nature and its relationship nature 
through those attributes.
    Mr. Green. Would anyone else like to comment on the 
definition of a community bank? Or have you all agreed that 
this is the definition that we should work from? Thank you. It 
is nice to see that there is agreement on something today.
    I will be meeting with community bankers. And I, like other 
members of the subcommittee, hear quite regularly this notion 
that we are inundated with paperwork; and I am simplifying what 
they say. Permit me to ask you to tell me what I should ask 
them when I talk to them, given that they will surely bring 
this up.
    I plan to have them take me through the bank, show me 
whatever it is that they want me to see, because I want to 
clearly hear and understand their side of this. When they come 
into my office here in Washington, D.C., we have extensive 
conversations. But I think it is time for me to go out and have 
a firsthand look at community banking. And I have asked that 
this be accorded me. And I have been told that this is 
something that I can do. So, what should I ask? What should I 
say to them pursuant to what the regulators think? Here is 
something that I would like for you to explain to me.
    Mr. Brown. In the roundtables conducted as part of the FDIC 
Community Banking Initiative, we talked to the bankers about 
their view of the future of the industry, its future viability 
in their mind, its connection to small business lending, how 
they view their niche in the financial industry, and also how 
they view loan demand, how their customers are doing, and how 
the state of their customers has changed over the course of the 
recession.
    In addition, we talked a lot about the regulatory side, 
some of the concerns they had about regulation and about their 
perception of the cost of regulation. Those are very important 
issues.
    Mr. Green. With the little time that I have left, about 29 
seconds, what is the smallest bank that we have? How many 
employees does the smallest bank have?
    Ms. Eberley. I believe I am aware of a $4 million 
institution and it has 4 employees, I believe was the number.
    Mr. Green. Four. With four employees, is Basel III or let's 
just say a small number of employees, is it difficult to 
comprehend and work through these regulations when you have few 
employees? Let's not use a number, but few?
    Ms. Eberley. That is certainly what bankers have told us, 
that it is the breadth of regulatory requirements and rules and 
regulations that is very difficult for them to absorb. And they 
have asked for our assistance.
    Mr. Green. Do we have a means by which we can accord 
assistance to these banks such that they know that there is a 
space or place that they can tap into?
    Ms. Eberley. Yes. We have established a Web tool to help 
institutions manage rules and regulations that are coming down 
the pike. And we have also committed to expanding our 
educational offerings for community banks to assist with 
training on existing rules and regulations.
    Mr. Green. Thank you, Madam Chairwoman. I will yield back, 
and simply say that I will probably have more questions after I 
have talked to my community bankers. Thank you.
    Chairwoman Capito. Thank you.
    Mr. Duffy for 5 minutes.
    Mr. Duffy. Thank you, Madam Chairwoman.
    I would join Mr. Green, Ranking Member Meeks, Mrs. Maloney, 
and Mr. Fitzpatrick in piling on my concern with Basel III. I, 
too, hear constantly from my community banks what impact this 
potential rule will have on them. And I guess first off, do we 
have a timeline of when we think the rule is going to come out?
    Ms. Eberley. We are working diligently with the other 
regulators to finalize the process as soon as possible. We know 
what the uncertainty of delays means to institutions.
    Mr. Duffy. Do you have anything more specific than, ``We 
are working on it?''
    Ms. Eberley. I do not.
    Mr. Duffy. Fair enough. And I know you are not going to 
comment on the rule. I think it was Mr. Fitzpatrick who talked 
about exempting our community banks, which I think is 
reasonable. But if it is not an exemption, maybe a tiered 
structure would at least be considered for smaller community 
banks.
    Just one other point: if you look at the conversation we 
are having today, the difficulty of our community banks with 
the burdensome regulations that are being piled upon them, and 
we look forward to Basel III and QM, the burden isn't getting 
lighter. It is getting heavier. And so hopefully, you will all 
take that into consideration as we try to make sure we have a 
structure in place that allows a healthy and vibrant community 
bank structure across the country. So, I didn't want to pile 
on, but I guess I did.
    I want to quickly move over to new charters. I know it was 
touched on, I think by the chairwoman. But listen, we haven't 
had any new charters in 2012, right? In 2011, we had three, and 
in 2010, we had nine.
    So as we move away from the financial crisis, we did have a 
bottom and then it started to recover. We actually have 
continually gone down since the crisis. Is there an explanation 
for why that is taking place, why we haven't bottomed out and 
come up since the crisis?
    Ms. Eberley. I would say that the industry lags the 
economy, in terms of its overall condition and performance. And 
so I think that is what you are seeing is that we have hit 
zero. And we would anticipate that we would move up from here. 
As the industry is starting to improve, we would expect to see 
additional activity or new activity.
    Mr. Duffy. And if you look at the recession in the early 
1990s, we never bottomed out--never came to zero. Maybe there 
is a difference between a recession and a financial crisis. Is 
that the answer?
    Mr. Brown. Yes. Just that the new charters have always been 
highly cyclical. This has been a particularly severe cycle with 
regard to the effect on the financial industry and their 
customers. And so, I think that explains some of the severity 
of the cycle.
    There were nearly 5,000 new charters for the industry 
during the period of our study, and we anticipate that 
chartering activity will pick up with the economy and with the 
recovery of the industry.
    Mr. Duffy. So do you think it is more the cycle in a crisis 
as opposed to the new rules and regulations that have come from 
Dodd-Frank and others?
    Mr. Brown. Our experience through history is that it has 
been highly cyclical. So, we would anticipate a rebound.
    Mr. Duffy. But is it this cyclical in the sense that when 
we are 4 years, 3 years from the crisis we have not started to 
recover and come up, we are actually still going down?
    Mr. Brown. As was indicated, the performance of the 
industry tends to lag the recovery of the economy. The recovery 
of the economy itself has been somewhat muted, again, going to 
the severity of the financial crisis.
    Mr. Duffy. Okay. And I wanted to give a few minutes or a 
minute-and-a-half back to the gentleman from Georgia. So I 
would yield my time to him.
    Mr. Westmoreland. Thank you for yielding. Let me say that I 
think Basel III would be the last nail in the coffin for a lot 
of our community banks. So I hope you will take that into 
consideration.
    Mr. Evans, in your report you noticed what I have been 
saying for a while, that some of the acquiring banks had driven 
down the real estate values by selling at depressed prices. Do 
you see that the FDIC can handle what I am anticipating is a 
second wave of this, when these loss share agreements expire? 
If they are not extended for some point in time, there is going 
to be another selloff, which will depress the markets even 
more, which would cause even more community banks to fail.
    Mr. Evans. Thank you. We did hear from one bank who 
expressed those issues. We also, I should point out, heard from 
other acquiring banks who said the loss share agreements gave 
them time to work out loans. And so, I think the verdict is 
still out; more work needs to be done to try to figure this 
out. Certainly given what we have heard, it is something that 
you might want to consider looking into in greater depth.
    Mr. Westmoreland. I yield back.
    Chairwoman Capito. Thank you.
    I would like to welcome to the subcommittee a new member, 
and recognize him for questioning, Mr. Heck from Washington.
    Mr. Heck. Thank you, Madam Chairwoman, very much.
    I believe this question is most appropriately directed at 
Mr. Edwards. Sir, could you, as succinctly and clearly as 
possible describe for us, help us better understand the 
division in decision-making responsibility and authority when 
it comes to the acquisition of a failing bank, between 
headquarters and regional offices?
    As you might imagine, that question stems from 
circumstances in the congressional district I have the honor to 
represent, where the decision-making process kind of went on 
and on. And losses mounted. And when finally it came down and 
it was never clear where the decisions were being made, the 
evidently self-qualified local investors took a walk on the 70 
stipulated new conditions. So, help us describe that division 
if you would please, sir.
    Mr. Edwards. Sure. And I will ask Doreen to pipe in as 
well. So, when somebody is trying to be qualified to bid on a 
failing bank, they have to go through the Division of Risk 
Management Supervision and get approved to bid. I will let 
Doreen describe how that works.
    But essentially, they have to be in good financial shape 
and they have to be deemed to be qualified to take that failing 
bank over and be successful. Otherwise, we wouldn't want that 
transaction to go forward.
    Doreen, do you want to add to that?
    Mr. Heck. And that is done at headquarters?
    Ms. Eberley. No. The process is handled in the region. 
Essentially for an institution to be on the bid list for a 
failing bank transaction, we have to be able to know ahead of 
time that we can resolve the statutory factors that would be 
required to be considered for a merger transaction--
    Mr. Heck. So the regional offices are the ones who make the 
decisions, not here?
    Ms. Eberley. The regional--
    Mr. Heck. Is that correct?
    Ms. Eberley. Right. The regional office--
    Mr. Heck. Including the formulation of new conditions or 
conditions, is that made at the general office?
    Ms. Eberley. Yes. For an institution to become listed on 
the bid list and be able to participate in a failing bank 
transaction, that happens at the region. So, other transactions 
occur as well on an open bank basis. And those considerations 
may involve the Washington office on a parallel basis in 
considering things like change of control of an institution 
that is open and troubled before failure.
    Mr. Heck. So there is a division of responsibility?
    Ms. Eberley. For certain transactions, yes. That is an open 
bank transaction for a recapitalization of an institution 
through a change of control.
    Mr. Heck. And then that decision is made here?
    Ms. Eberley. It is not made here. There is discussion back 
and forth. There is consultation.
    Mr. Heck. Between corporate headquarters, as it were, and 
the regional bank?
    Ms. Eberley. Yes.
    Mr. Heck. I see. I don't know to whom I should ask this 
question, but I am trying to put myself in the shoes of a 
community banker who is running a pretty well-run shop and is 
looking at admittedly the fairly low cost of money right now 
that he or she has to pay to depositors, and looking forward at 
the prospect, which seems to me to be inevitable that interest 
rates will rise again.
    And I am wondering if you agree that, in and of itself, was 
an inherent impediment to aggressive loaning for what would 
otherwise be qualified borrowers insofar as the amount of money 
you lock in long-term and low-cost returns, confronts a 
changing interest rate environment you may be stuck. And I 
guess as a part of that question it makes me wonder when you 
evaluate bank portfolios, what is your forecast, what is your 
outlook for the interest rate environment?
    Mr. Brown, I thought I should ask that question of you, 
upon reconsideration. Thank you.
    Mr. Brown. First of all, our historical experience has been 
that lending tends to expand somewhat during periods of rising 
interest rates. That is the part of the economic cycle when the 
economy is expanding and the monetary authority feels it is 
okay to raise interest rates from the recession lows.
    Mr. Heck. Excuse me, sir. Do you not agree, then, that it 
would be an impediment to more lending? We had a lot of 
discussion here about not being able to get as many dollars out 
there circulating as possible. But if you are confronting 
increasing interest rates, how much today do you want to put on 
your books that is low return?
    Mr. Brown. Historically, lending has increased more in 
periods of rising interest rates. Periods of very low interest 
rates have been associated with less vibrant economies, slow 
growth like we have seen recently. And a lot of the bankers we 
have talked to in the roundtables and other venues have cited a 
lack of loan demand in the current environment, that 
entrepreneurs are not eager to expand their operations.
    Chairwoman Capito. The gentleman's time has expired.
    Mr. Heck. Thank you.
    Chairwoman Capito. Thank you.
    And I would like to welcome a new member to our committee, 
and a new Member to Congress, Mr. Pittenger from North 
Carolina. Welcome.
    Mr. Pittenger. Thank you, Madam Chairwoman. Thank you for 
calling this important hearing. And I thank the witnesses for 
being here with us today and responding to our questions.
    I would like to follow up on Mr. Duffy's questioning and 
also Mr. Westmoreland and others. I served on a community bank 
board for about 14 years, from the early 1990s until the mid-
2000s. It was an exciting time. It was a great time for 
investors to invest in community banks. It was a great time of 
growth. And our community banks played a significant role in 
our region.
    I live in the Charlotte, North Carolina, area. And our bank 
grew. We ended up selling to a regional bank. We had our 
typical requirements, CRA and loan loss reserve issues that we 
were accountable to. We had the audits that came in. We got a 
clean bill of health most all the time. It was a good 
environment. It was very positive, and frankly, it was a great 
learning curve for me.
    But today, of course, the environment has changed, and the 
impediments are out there in a greater way. I met with seven of 
our community bank presidents a couple of weeks ago, and they 
expressed to me just more of an oppressive atmosphere, totally 
different than what I had the privilege of being involved in 
during those 14 years. And clearly, Basel III was a major 
concern, just the high regulatory effect and the cost of 
compliance, the attention that is given to it.
    The concerns are getting capital. And the difficulty there 
where some banks were forced to look for private equity. And as 
such, the only exit for private equity is to sell a bank and 
consolidate more, which is worse for the market, and worse for 
competition.
    So, all this leads us to believe that the need for relief 
today, to create that same environment that we had back during 
those positive years and to recognize that perhaps what we are 
doing today through the regulations is creating more difficulty 
and impediments than protection. And maybe the pendulum just 
swung way too far and maybe if we can come back.
    I speak on their behalf, and frankly, on the behalf of 
communities all over the country that there would be very 
serious consideration to giving relief to these community 
banks, which in our region I--we probably had six community 
banks that grew and now they are all have consolidated or sold 
out. It is pretty sad. But I believe we can see this again if 
we have some thoughtful, prudent reevaluation of the 
requirements they are having to live under today.
    If you would like to comment, I would be glad to hear from 
you.
    Mr. Brown. I think the topics that you raised obviously are 
of concern. They have been raised as concerns to us in our 
interactions with the bankers.
    I would point out that in terms of the evolution of the 
industry, the industry's financial condition and performance is 
improving, and that includes small institutions. And the return 
on assets has increased for each of the last 3 years, and the 
return on equity.
    Non-current loans have gone down. This repairing of the 
balance sheet and the earnings capacity of small banks has 
proceeded slower than the economic recovery, perhaps also 
slower than the larger banks in terms of their recovery. But it 
is taking place. And I think that you also mentioned access to 
capital.
    We found that just under half of all of the additions to 
capital during our study period relate to retained earnings. 
And of course, that requires a healthy level of earnings to 
gain that capital. So, the restoration of that earning capacity 
is very important for access to capital for the industry. That 
is what our study--
    Mr. Pittenger. Sir, I would just say to you that I think it 
is a compelling statement that there are no new charters. So it 
is a much different climate today. And that is reflected in the 
absence of those who want to get back and engaged in this 
business as they were before.
    I yield back my time. Thank you.
    Chairwoman Capito. The gentleman yields back.
    Mr. Posey for 5 minutes.
    Mr. Posey. Thank you, Madam Chairwoman.
    Mr. Rymer, on Page 59 of your report you note that the 
historical cost was proving to be poor measurement approach in 
inflationary markets. Is it fair to say that the impaired 
accounting and fair value accounting is a poor measurement in 
bubble markets? As briefly as possible, please.
    Mr. Rymer. Yes, sir. In terms of fair value accounting 
related to bank portfolios, we didn't find that fair value 
accounting was--
    Mr. Posey. Can you just answer my question? You agree with 
me or you don't agree with me?
    Mr. Rymer. Sorry. If you could repeat it, sir; I have a 
little bit of a hearing problem.
    Mr. Posey. Is it fair to say that the impairment accounting 
and fair value accounting is a poor measurement in bubble 
markets?
    Mr. Rymer. Public markets?
    Mr. Posey. In bubble, B-U-B-B-L-E markets.
    Mr. Rymer. I don't think you can apply fair value 
accounting to bank lending. It doesn't fly.
    Mr. Posey. Very good. Thank you.
    A question for each of you, just a yes or no if you would, 
do you think it is possible through overregulation to bankrupt 
or make insolvent lending institutions? Let's start with Mr. 
Brown.
    Mr. Brown. That has not been the experience of the study.
    Mr. Posey. Is that a ``yes?''
    Mr. Brown. I think that would be a ``no.''
    Mr. Posey. A ``no.'' So it is impossible to overregulate a 
business out of business. Okay. Thank you.
    Yes, ma'am? Please speak up. I can't hear you up here.
    Ms. Eberley. The question was, is it possible to 
overregulate a business out of business?
    Mr. Posey. Yes.
    Ms. Eberley. I--
    Mr. Posey. It is a tough question. I understand that. 
Especially for people who work for the government. No insult 
intended. So, you don't know whether it is possible to 
overregulate anybody out of business or not. Okay.
    Mr. Edwards, how about you?
    Mr. Edwards. Is it theoretically possible? I would concede 
it is theoretically possible. In my experience, have I seen 
that? No, I have not.
    Mr. Posey. Okay.
    Mr. Rymer?
    Mr. Rymer. I would agree with Mr. Edwards. I think 
theoretically, it is certainly possible.
    Mr. Posey. Okay.
    Mr. Evans. I agree as well. Theoretically, it is possible. 
It is possible to overregulate a business.
    Mr. Posey. Do you think it would be possible if regulators 
put 55 percent of a bank's loans on nonaccrual? Let's start 
with you, Mr. Brown.
    Mr. Brown. If they put 55 percent of loans on nonaccrual--
    Mr. Posey. Wrongfully.
    Mr. Brown. Wrongfully?
    Mr. Posey. Yes.
    Mr. Brown. Then what is the question? I'm sorry.
    Mr. Posey. Do you think they could put a bank out of 
business like that?
    Mr. Brown. It is possible a bank could go out of business 
if it had 55 percent of loans on nonaccrual.
    Mr. Posey. Okay. But the last time you said it wasn't 
possible to overregulate them out of business. But you think if 
they did that, it would be possible.
    Mr. Brown. If they had 55 percent of loans on nonaccrual, 
it is possible they could be.
    Mr. Posey. Okay.
    Ms. Eberley. I don't think regulators could inappropriately 
put loans on nonaccrual.
    Mr. Posey. I can't--you are going to have to speak into the 
microphone, please.
    Ms. Eberley. I don't think that a regulator could 
inappropriately place a loan on nonaccrual. So I don't believe 
that would cause an institution to inappropriately go out of 
business. I think that if loans need to be on nonaccrual, they 
should be on nonaccrual, and the accounting guidance is fairly 
clear. It is clear that institutions--
    Mr. Posey. Okay--
    Ms. Eberley. --nonperforming loans.
    Mr. Posey. You said, ``no.'' That is good.
    Mr. Edwards?
    Mr. Edwards. Yes. I have to agree with Ms. Eberley that it 
is hard for me to understand a circumstance where the 
regulators would--
    Mr. Posey. Okay. That is good.
    Mr. Rymer?
    Mr. Rymer. First of all, it is the bank's responsibility 
initially to make the nonaccrual judgments. It is not the 
regulator's responsibility.
    Mr. Posey. All right. So is that a yes or a no?
    Mr. Rymer. If--
    Mr. Posey. Just yes or no, just really simple.
    Mr. Rymer. I would say from the work that we did, I did not 
see such a circumstance.
    Mr. Posey. Never mind. Thank you.
    Yes, sir, at the end?
    Mr. Evans. Nonperforming loans would be a significant 
driver of bank failures. And that is what we found in our 
report. But the classification issue, I will pass on that.
    Mr. Posey. For Ms. Eberley's benefit, I know of an instance 
where regulators took a first mortgage with--on a hotel 
actually, about a 30 percent loan-to-value ratio, about 7 years 
mature, never been a day late. And the regulator said, we don't 
think in this market they should be able to make their payment. 
They have never been 1 second late in the history of the loan, 
a well-secured loan.
    Some people think it might be entirely appropriate to put 
that on nonaccrual. And some people trying to use a little bit 
of commonsense think it would be highly inappropriate.
    Mr. Rymer, let's see, Mr. Evans, from your research do you 
believe impairment accounting as applied in the examination 
process fuels the various spiral of negative balance sheet 
pressures, leading to more failures and write downs?
    Mr. Rymer. Our study did cite some issues.
    Mr. Posey. Okay. That was a ``no.'' That is good enough 
because I have a lot of ground I would like to cover, and I am 
running out of time.
    Mr. Rymer. --regulatory issues.
    Mr. Posey. I am out of time.
    Chairwoman Capito. You are out of time, sorry.
    Mr. Posey. Thank you, Madam Chairwoman. I would sure love a 
lightning round if we had 2 minutes left.
    Chairwoman Capito. Thank you.
    Mr. Barr, I would like to welcome you to the committee, and 
I recognize you for 5 minutes for questioning.
    Mr. Barr. Thank you, Madam Chairwoman.
    Ladies and gentlemen, a president of a small community bank 
in Central and Eastern Kentucky told me that it used to be that 
his bank made a business decision about whether to make a loan 
to a borrower and what the terms of that loan would be. Today, 
that same banker tells me that the government makes that 
decision for them. With that troubling anecdote in mind, I want 
to focus my questions on the costs imposed by regulations and 
the costs imposed by increasingly aggressive enforcement by 
supervisory agencies like the FDIC.
    First of all, just a quick yes or no answer from Mr. Brown, 
Ms. Eberley, and Mr. Edwards. Do you think it is important to 
perform cost-benefit analysis as a predicate to promulgating 
rules and regulations?
    Mr. Brown. Yes, and that is our practice.
    Ms. Eberley. I agree.
    Mr. Edwards. Yes, I concur with that. Yes.
    Mr. Barr. Okay. And Mr. Brown, you testified earlier that 
you solicit input from industry regarding regulatory costs 
through informal practices and also in the notice of comment 
process. Ms. Eberley, you noted that your agency was engaged in 
technical assistance, Web seminars, training sessions for bank 
directors, workshops. And I applaud the agency for taking those 
actions.
    But the FDIC study that you all refer to in your testimony, 
Mr. Brown specifically, you indicated that most interview 
participants stated that no single regulation or practice had a 
significant impact on the institution, but that the cumulative 
effects of all regulatory requirements have built up over time.
    Several other members on this panel have mentioned that 
earlier today, that increased staff is something that you are 
observing compliance staff in these community banks. But that 
it is so time- consuming, so costly, and so interwoven into the 
operations that it would be too difficult to break out these 
specific costs. With that testimony in mind, how can the 
analysis be done, the cost-benefit analysis be done properly if 
you acknowledge that the true costs associated with regulatory 
compliance cannot be captured?
    Mr. Brown. I think the difficulties in making a precise 
quantification of the costs and the benefits of specific 
regulations is something that has been noted by the GAO and 
other sources. We are very mindful of the balance between 
wanting to get information on the costs, regulatory cost, but 
also imposing the burden of additional regulatory reporting on 
the industry, which in itself can be a burden.
    So we maintain that balance. That is why we rely on input 
from the industry, especially during the rulemaking process, to 
try to get better information. We think that industry is in the 
best position to understand their cost structure.
    Mr. Barr. Given that compliance costs are increasing, and 
the study corroborates that and you acknowledge that increasing 
compliance staff is something that is happening in the 
industry, that the fastest growing area of banks is not in loan 
officers or in lending, but in compliance staff. How is the 
FDIC tracking, if at all, the increased compliance costs, 
increased costs of employing compliance officers as part of, as 
you acknowledge, your important cost-benefit analysis?
    Mr. Brown. I don't believe the responses indicated that 
compliance costs were the fastest growing cost element of those 
institutions. They had indicated that it had increased over a 
long period of time in response to a large number of regulatory 
changes over time. But there was no indication that it was the 
fastest growing area.
    Mr. Barr. Okay. On top of compliance costs, I also want to 
just briefly explore the issue of regulatory clarity. And the 
example that I will cite to you is a compliance officer in a 
very reputable and growing community bank in Central Kentucky 
who tells me that her most pressing concern is the mixed 
signals that she receives from regulators.
    Specifically, on the one hand, they are told that they need 
to be prudent and responsible with their loans in order to 
ensure safety and soundness. That comes from you all typically. 
Yet on the other hand, the Community Reinvestment Act wants 
banks to reach out to riskier, low-income borrowers who don't 
meet creditworthy borrowing criteria.
    So the question is, is the FDIC sensitive to this concern? 
And what is the FDIC doing to address the contradictory 
mandates imposed on community banks from safety and soundness 
examinations on the one hand and CRA audits on the other?
    Ms. Eberley. The consumer protection examinations are not 
under my purview, but I do know that we don't believe that the 
Community Reinvestment Act requires institutions or directs 
institutions to make loans that are not creditworthy. So I 
would disagree with the stipulation that there is--
    Mr. Barr. What would you say to that particular compliance 
officer who doesn't understand the government's direction to 
the bank?
    Ms. Eberley. We need to have a discussion with the banker. 
And they need to seek clarity, and I would encourage them to 
seek clarity from their supervisor, from their field 
supervisor, from their regional office. Both the consumer 
protection function and the safety and soundness function 
report up to one regional director in the field. For Kentucky, 
that is Anthony Lowe out of our Chicago office.
    Mr. Barr. I would just--my time is up. But I would just 
like to encourage the FDIC to take that concern very seriously, 
that there is a serious lack of clarity on the part of well-
meaning, well-intentioned compliance officers in these 
community banks. And your sensitivity to that would be 
appreciated.
    Chairwoman Capito. Thank you.
    Mr. Pearce for 5 minutes.
    Mr. Pearce. Thank you, Madam Chairwoman.
    Just following up on Mr. Posey's statements, and then the 
discussion of whether it was theoretically possible for the 
government to regulate out of business. Now I am taking a 
broader view than just the banking industry. But I would direct 
you to my State, where we used to have 123 timber mills. And 
because of one regulation, all but one are shut down today, and 
23,000 farmers in the San Joaquin Valley all gone because of 
one regulation.
    The banks in the area, by the way, became unstable. 
Suicides rose to an all-time high for any place in the country 
because of one regulation. So, when you are unable to find in 
your own experience, come on to New Mexico. Come out to the 
West and we will show you a lot of areas that have been 
regulated out of existence.
    Following up on what Mr. McHenry was talking about, I 
suspect that he may have been listening in on the meetings with 
our bankers. I hear the same complaints there, that in the 
past, regulators came in and they were interested in safety and 
soundness. And today, they come in and they are 90 percent 
compliance.
    And so, Mr. Brown, you had said earlier in your testimony 
that safety and soundness, that was your charter. Do you have 
any idea on the budget for safety and soundness versus the 
budget for compliance, and the number of hours spent yearly in 
compliance versus safety and soundness? Does anyone on the 
panel have that?
    Mr. Brown. Congressman, I don't believe we have those 
numbers--
    Mr. Pearce. I would like to get them.
    Mr. Brown. We can certainly get back to you on that.
    Mr. Pearce. Now, keep in mind that every time I ask 
questions like this, we have a lower rate of getting back to me 
than the U.S. Postal Service. So I would really appreciate if 
you would follow up on that.
    Now, Ms. Eberley, you were talking about how you have deep 
interest in making sure that there is not any hostile 
environment. Do you have a--last weekend, I was going to check 
into the Hampton for coming up, and I was able to go online and 
I was able to get five stars or three stars. This hotel, this 
one at this place rated three stars, four stars, five stars. 
And then, I could get comments from people who had stayed 
there.
    Do you have anything like that for your process for your 
examiners so that bankers anonymously--because you heard the 
hostility, no they are not going to come to you. They are 
scared out of their minds. They are afraid that you are going 
to take them over and that you are going to do something. And I 
think that they have a valid reason, looking at the 123 mills 
that used to be in New Mexico and they are gone.
    So, do you have a process for feedback where you can rate--
or where your people get rated five stars, four stars or three 
stars? Do you have anything like that?
    Ms. Eberley. We do have an examination survey process. So 
at the end of every examination when we mail out the report of 
examination, we mail a survey to the institution and ask them 
to complete it. I think the scale is 1 to 10--
    Mr. Pearce. And it talks about the individual regulators 
themselves?
    Ms. Eberley. Yes--
    Mr. Pearce. The individual regulators.
    Ms. Eberley. The--
    Mr. Pearce. And what percent of those do you get back?
    Ms. Eberley. Pardon me?
    Mr. Pearce. What percent of those do you get back?
    Ms. Eberley. I don't know the exact percentage, but we get 
a fairly good number, and--
    Mr. Pearce. Pretty good number?
    Ms. Eberley. Yes. And they go to our Division of Insurance 
and Receivership, so they don't--I am sorry, Insurance and 
Research. They don't come to my division. So that division 
compiles the information for me and gives it to me on an 
aggregate basis with trends by region so that I can see what 
the results are.
    Mr. Pearce. Do you make that information available to the 
banks so that they know when someone is coming in what sort of 
examination that the last people received?
    Ms. Eberley. No, it is not made available today.
    Mr. Pearce. I keep in mind that I can get that, paid $2.99 
online for some program last night and I am able to get that 
information for $2.99. Yet you all control the banking industry 
of the world and they are sitting out there alarmed at what you 
are doing.
    In New Mexico, we don't get many floods. We get 9 inches of 
rain a year. And yet, the flood insurance is a piece that is 
hammered down in New Mexico and people--the bankers express 
alarm about that.
    Now, in a recent compliance review, one of the banks got a 
$15,000 fine because the names did not match exactly the IRS 
names. Can't you--again, on that $2.99 program I filled out 
last night, if I didn't fill it out correctly, it just wouldn't 
accept it. Can't you give a bank something where if they don't 
fill it out correctly--why did you stick somebody $15,000 for 
not--there were less than 100 of those names.
    Ms. Eberley. So was this on their HMDA?
    Mr. Pearce. It is on the loans and--
    Ms. Eberley. Yes. So probably the--
    Mr. Pearce. And it didn't match the IRS?
    Ms. Eberley. Right.
    Mr. Pearce. Those used to be letters. And you sent them a 
letter of concern. And now, you are sticking people with fines 
that are very tough for small institutions, trailer houses. You 
are making it tough to lend money on trailer houses and on--I 
will be finished in just a second, Madam Chairwoman, you are 
very patient.
    New Mexico is 47 per capita income. If you can't lend for 
trailer houses and if you can't lend for consumer stuff, what 
purpose is there in New Mexico? That is us. We are at the 
bottom of the heap. You guys are making it very tough for New 
Mexico to get access to loans.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. The gentleman yields back.
    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 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    The hearing is adjourned.
    [Whereupon, at 12:11 p.m., the hearing was adjourned.]



                            A P P E N D I X



                             March 20, 2013

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