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67–940 PDF 2011

LEGISLATIVE PROPOSALS REGARDING 

BANK EXAMINATION PRACTICES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS 

AND CONSUMER CREDIT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

JULY 8, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–45 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SHELLEY MOORE CAPITO, West Virginia, Chairman 

JAMES B. RENACCI, Ohio, Vice Chairman 

EDWARD R. ROYCE, California 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JEB HENSARLING, Texas 

PATRICK T. MCHENRY, North Carolina 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

MICHAEL G. GRIMM, New York 

STEPHEN LEE FINCHER, Tennessee 

CAROLYN B. MALONEY, New York, 

Ranking Member 

LUIS V. GUTIERREZ, Illinois 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

GREGORY W. MEEKS, New York 

STEPHEN F. LYNCH, Massachusetts 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 8, 2011 ....................................................................................................... 1 

Appendix: 

July 8, 2011 ....................................................................................................... 53 

WITNESSES 

FRIDAY, JULY 8, 2011 

French, George, Deputy Director, Policy, Division of Risk Management Supervision, Federal Deposit Insurance Corporation ................................................. 32 

Johnson, Simon, Ronald Kurtz Professor of Entrepreneurship at the Massachusetts Institute of Technology’s Sloan School of Management ..................... 9 

Kelly, Jennifer, Senior Deputy Comptroller, Midsize and Community Bank 

Supervision, Office of the Comptroller of the Currency .................................... 34 

McKillop, James H. III, President and CEO, Independent Banker’s Bank 

of Florida, on Behalf of the Independent Community Bankers of America 

(ICBA) ................................................................................................................... 6 

Whalen, Michael, President and CEO, Heart of America Restaurants and 

Inns ....................................................................................................................... 7 

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 54 

French, George .................................................................................................. 55 

Johnson, Simon ................................................................................................. 64 

Kelly, Jennifer .................................................................................................. 68 

McKillop, James H. III ..................................................................................... 87 

Whalen, Michael ............................................................................................... 93 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Capito, Hon. Shelley Moore: 

Written statement of the American Bankers Association ............................. 96 

Posey, Hon. Bill: 

Letter of support for H.R. 1723 from the Florida Bankers Association ....... 102 

Letter of support for H.R. 1723 from the Independent Community Bankers of America ............................................................................................... 104 

Letter of support for H.R. 1723 from the National Bankers Association .... 106 

Letter of support for H.R. 1723 from the National Association of REALTORS® ........................................................................................................... 108 

Written responses to questions submitted to George French of the FDIC .. 109 

Written responses to questions submitted to Jennifer Kelly of the OCC .... 120 

Perlmutter, Hon. Ed: 

Written responses to questions submitted to George French of the FDIC .. 128 

Westmoreland, Hon. Lynn: 

Chart listing the 10 States that have had more than 10 bank failures 

since 2008 ...................................................................................................... 129 

(1) 

LEGISLATIVE PROPOSALS REGARDING 

BANK EXAMINATION PRACTICES 

Friday, July 8, 2011 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:32 a.m., in room 

2128, Rayburn House Office Building, Hon. Shelley Moore Capito 

[chairwoman of the subcommittee] presiding. 

Members present: Representatives Capito, Renacci, Royce, Manzullo, McHenry, Pearce, Westmoreland, Luetkemeyer, Canseco, 

Grimm, Fincher; Maloney, Watt, Miller of North Carolina, Scott, 

and Carney. 

Also present: Representative Posey. 

Chairwoman CAPITO. This hearing will come to order. 

The purpose of today’s hearing is to better understand the challenges the community banks are facing during bank examinations. 

I am going to waive my opening statement because we have the 

sponsors here of two of the pieces of legislation that we are considering. So I am going to give them my time. 

And with that, I am going to go ahead and recognize the ranking 

member, Mrs. Maloney, for an opening statement. 

Mrs. MALONEY. I want to thank you. And I will put my opening 

statement in the record, but I just want to welcome the panelists 

today and thank you for having this hearing, and express my 

strong support for community banks and for small banks. 

I do have serious questions about the bill that would treat nonaccrual loans as if they were accrual loans, if they meet four criteria. I feel that a better way would be to give banks more time 

to work it out. 

I think it is important that we stay on the same GAAP accounting procedures that are in place. And banks should work with their 

clients to restructure the loans or put them in a way that will 

make them healthy in the future. 

We have to remember that in the past 4 years, we had one of 

the worst economic downturns in the history of our country. We 

lost well over $13 trillion in household wealth, unemployment shot 

up, and jobs became scarce. And we had to take measures, such as 

the TARP program and others to really help our financial institutions to recapitalize and become stable. 

Many of these causes, according to some economists, were due to 

a lack of capital standards, a lack of any limits on leverage. 

2 

During these years leading up to the crisis, under Fed Chairman 

Greenspan, everyone supported—most of the regulators supported 

deregulating, lowering standards. Now, the opposite is in place. 

Most regulators are supporting strong standards for capital and for 

leverage limits and for building a stronger financial base. 

I believe a better way to help our community banks would be to 

give them more time to work out the challenges they have in this 

stressful economic time. 

I yield back. 

Chairwoman CAPITO. Thank you. 

I just would ask the members—I am going to try to be stringent 

on the time allotments for several reasons, because that is a fair 

way to do it, but also because we are going to have a vote that is 

coming up around 10:45, that is going to be lengthy. So, we want 

to move this hearing as quickly as we can so we can get to the witnesses. 

We are going to do opening statements by seniority. 

So, Mr. Royce is recognized for 1 minute. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

There was a recent article in the American Banker entitled, 

‘‘Community Bankers Face a Choice: Sell Out, Fold or Change.’’ 

And that article noted that the number of banks in 2020 may be 

half of the current number because of the various factors working 

against small banks. 

Now, you would expect a certain amount of consolidation in a 

downturn, but many of the problems faced by community banks 

were inspired by Washington. And I will just go through a few of 

them. 

It was Washington that gave them hundreds of new regulations 

in Dodd-Frank. It was Washington that decided to enact price controls on interchange fees and limit a critical revenue source for 

these smaller firms. 

It was Washington that propped up their too-big-to-fail competitors, thus expanding the competitive advantage these firms hold in 

the market, thus advantaging the cost of capital for larger investment banks versus the smaller community banks. 

Certainly, many will add overzealous bank examiners to this list. 

Being from California, I have heard from those community bankers 

who feel hamstrung by their regulators. 

I yield back, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. McHenry, for 1 minute? 

Mr. MCHENRY. In the interest of time, I will yield my time back 

to the Chair. 

Chairwoman CAPITO. Thank you. 

Mr. Westmoreland, for 2 minutes. 

Mr. WESTMORELAND. Thank you, Madam Chairwoman. I appreciate you calling this hearing and giving me the opportunity to 

make an opening statement. And I also appreciate your willingness 

to include my bill, H.R. 2056, in this hearing. 

In my opinion, there is no greater threat to our communities 

than bank failures, especially in my State of Georgia. 

Since Chairman Bair last testified before this subcommittee, two 

more banks have failed in Georgia. Georgia’s grand total is now 65 

3 

failed banks. To date, 15 banks have failed in Georgia just this 

year. 

I am here today to once again express the profound frustration 

people in my district have with the FDIC. Banks in Georgia, both 

strong and weak, big and small, are trying to survive in a market 

where government is picking winners and losers every day. 

The banks that are failing now are from paper losses, and by this 

I mean that banks are forced to write down assets because of 

mark-to-market and other regulations which immediately cause a 

capital call from the regulator. 

Often, this occurs on loans that are actually performing. But 

Georgia is by no means alone with the threat of bank failures. Ten 

States have had more than 10 failures since 2008. They are Arizona, California, Florida, Georgia, Illinois, Michigan, Minnesota, 

Missouri, Nevada, and Washington. 

Sadly, these States also have some of the highest unemployment 

and foreclosure rates in the country. The bill I introduced, H.R. 

2056, directs the FDIC Inspector General to study FDIC’s loss 

share agreements, banks failing because of paper losses, hardship 

of being able to modify loans, and the application of the FDIC policies by examiners in the field. 

For these 10 States, failure on the part of management to ensure 

information of policies by examiners on the ground have resulted 

in continued stagnation in the real estate industry, higher than average unemployment, and the steady pace of bank failures. 

This is why my bill, H.R. 2056, and my colleague Mr. Posey’s bill, 

H.R. 1723, are so vitally important. Three years after the events 

of 2008, 2 years after the recession was said to be over, the regulators testifying today are no closer to find a solution to the bank 

crisis, even though you say you have all the tools. 

I urge the committee to continue to examine this crisis in our 

communities. 

And with that, Madam Chairwoman, I yield back. 

Chairwoman CAPITO. Thank you. 

Mr. Luetkemeyer, for 1 minute. 

Mr. LUETKEMEYER. Thank you, Madam Chairwoman. 

I may be one of the few Members of Congress here who has been 

employed as a bank examiner during my career. And I appreciate 

the conversation we are having today. 

I also want to thank my colleagues from Georgia and Florida for 

the work on the bills we are about to hear about today. My home 

State of Missouri is one of the hardest hit for bank closures, and 

this is an issue that must be addressed. 

We also need to recognize that institutions should not be penalized for making good loans to borrowers who have never missed a 

payment. Our examination environment is an issue I have been 

concerned about for many years. I continue to hear from my Missouri bankers that the relationship between financial institutions 

and the regulators seems to have turned into a game of ‘‘gotcha.’’ 

This is an issue I have raised many times with the various regulatory officials, but it still seems to persist. If we do not begin to 

consider proposals that will give these institutions targeted relief, 

then we will continue to see reduced lending and a growing numVerDate Nov 24 2008 18:10 Dec 02, 2011 Jkt 067940 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\67940.TXT TERRIE
4 

ber of unnecessary institutional failures, which will delay any hope 

of economic recovery. 

I look forward to an important discussion today, and I yield back, 

Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. Canseco, for 30 seconds. 

Mr. CANSECO. Thank you, Madam Chairwoman. 

Today, we have heard more sobering news about our troubled 

economy. A mere 18,000 jobs were created in June, and the unemployment rate is now at an unacceptable 9.2 percent. 

We were told recovery summer was supposed to be last year, but 

because of the ongoing regulatory burden on businesses caused by 

some of the confusing and conflicting regulations we are going to 

talk about today, it does not appear we are going to have a recovery this summer either or any summer until the regulatory burden 

is lifted off of small business and community banks in my district, 

too. 

Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Fincher, for 30 seconds. 

Mr. FINCHER. Thank you, Madam Chairwoman. 

Community and small-town banks are major stakeholders in our 

rural economy. Farmers, small businesses, and manufacturers depend on loans from community banks to make payroll, hire employees, and invest in the equipment. 

As a co-sponsor of H.R. 1723, I look forward to hearing from our 

witnesses today about how this bill will help community banks better provide loans to job creators in our districts who are needing 

access to capital. 

As Mr. Canseco said, 18,000 jobs created, unemployment 9.2 percent. We are heading down the wrong path. So thank you guys for 

coming today. 

Chairwoman CAPITO. Thank you. 

Mr. Posey, for 2 minutes. 

Mr. POSEY. House Resolution 1723 is the jobs bill that will help 

our economy recover. It helps our local banks do what they were 

created to do: make loans to small businesses and homeowners. 

I was first exposed to the plight of community bankers when 

Representative Ron Klein, a former member of our committee, invited me to attend a bankers summit he held in Orlando. 

It was there for the first time I learned regulators were placing 

loans on a nonaccrual basis for such reasons as parents or others 

having made payments on loans while the borrowers were in between jobs, even though not a single payment was late or missed. 

Because performing, high-interest loans were modified to a more 

current rate even though a payment was never late and never 

missed, and because regulators felt in their opinion that borrowers 

should not have been able to make the loan payments that they 

made because the economy was late—again, even though not a single, solitary payment had been late or missed. 

Such subjective overregulation makes banks less inclined to loan 

money to job creation, and results in more foreclosures, more layoffs, and longer unemployment lines. The traditional definition of 

a performing loan is exactly that: a loan which a borrower is curVerDate Nov 24 2008 18:10 Dec 02, 2011 Jkt 067940 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\67940.TXT TERRIE
5 

rently repaying on the agreed terms, period. This legislation simply 

codifies that definition. 

The Common Sense Economic Recovery Act has a 2-year sunset 

provision. So unless it is extended, it is over in 2 years. But it 

would stop regulatory abuse, create jobs, and help get our economy 

back on track. 

I want to thank you, Chairwoman Capito, for calling this hearing 

and also thank the great staffs on both sides of the aisle for facilitating it. 

I would like to ask unanimous consent for four letters of endorsement to be entered into the record. I have letters of support for 

H.R. 1723 from the Independent Community Bankers of America, 

the National Bankers Association, the National Association of REALTORS®, and the Florida Bankers Association. 

I thank you, Madam Chairwoman. 

Chairwoman CAPITO. Without objection, it is so ordered. 

I would also like to enter into the record a statement from the 

American Bankers Association, along with your request. 

Thank you. 

And Mr. Grimm, for 1 minute. 

Mr. GRIMM. Thank you, Madam Chairwoman. Thank you for 

holding this hearing. 

Thank you for the witnesses for being here today. 

The system of credit is a big part of the life blood of our economy. 

It allows capital to officially flow from those who save to those looking to invest and those looking to expand their businesses, which 

ultimately creates jobs—we all recognize that during the previous 

boom, mistakes were made. Lending standards became far too loose 

and large losses followed. 

However, I now fear that the pendulum has swung too far in the 

other direction. I am deeply concerned that overzealous bank regulators are too quick to force banks to take write-downs against 

loans that are currently performing. These write-downs lower the 

amount of credit that these banks can extend into our economy. 

I am particularly concerned about the application of mark-tomarket accounting rules and how they are being applied to loans 

that are currently performing. 

The lack of credit being created by regulatory policy is stifling 

our economy’s ability to create jobs, as evidenced by the dismal job 

losses that we have seen. With that, I yield back. 

Chairwoman CAPITO. Thank you, Mr. Grimm. 

And that concludes our opening statements. 

I would like to, first of all, thank the panel for coming today. And 

I would like to introduce our first panel for the purpose of giving 

a 5-minute opening statement. 

First, we have Mr. James H. McKillop—did I say that right? 

Thank you—the president and CEO, Independent Banker’s Bank of 

Florida, on behalf of the Independent Community Bankers of 

America. 

Welcome, Mr. McKillop. 

6 

STATEMENT OF JAMES H. McKILLOP III, PRESIDENT AND CEO, 

INDEPENDENT BANKER’S BANK OF FLORIDA, ON BEHALF OF 

THE INDEPENDENT COMMUNITY BANKERS OF AMERICA 

(ICBA) 

Mr. MCKILLOP. Chairwoman Capito, Ranking Member Maloney, 

and members of the subcommittee, good morning. 

I am James McKillop, president and CEO of the Independent 

Banker’s Bank of Florida. I am pleased to represent community 

bankers and ICBA’s nearly 5,000 members at this important hearing. 

As a banker’s bank, I provide lending, investment, and payment 

services to over 300 community banks in the Southeast. 

I have a broad perspective on the challenges faced by community 

banks, which I am pleased to share with you today. ICBA believes 

that the two bills to be discussed today, H.R. 1723 and H.R. 2056, 

will go a long way toward improving the current oppressive examination environment, a top concern of community banks. 

The exam environment is discouraging lending at the very time 

that bank credit is needed to sustain economic recovery. Specific 

concerns include write-downs of performing loans based on collateral value, despite the cash flow of the borrower, second-guessing 

of appraisals, and moving the capital goal post beyond what is required by regulation. 

While all banks accept the need for balanced regulatory oversight, the pendulum has swung too far in the direction of overregulation. 

What is particularly frustrating to us is that field examination 

practices are often not consistent with the directives from Washington, such as the November 2008 interagency policy statement on 

meeting the needs of creditworthy borrowers. 

That directive cautions against excessive tightening of credit and 

encourages banks to practice economically viable and appropriate 

lending. Unfortunately, this policy is often overlooked. Good loan 

opportunities are passed over for fear of examiner write-down and 

the resulting loss of income or capital. 

ICBA supports H.R. 1723, introduced by Representative Posey, 

because it will reaffirm existing agency guidance on loan clarifications and bring more consistency to the examination process. 

The bill provides that a loan must be put on accrual status if it 

has been paid on a current basis for the past 6 months, among 

other conditions. 

Establishing conservative, bright line criteria will allow lenders 

to modify loans as appropriate without fear of being penalized. 

When loans become troubled in a tough economic environment, 

often the best course of action for the borrower, the lender and the 

community is a modification that will keep the loan out of foreclosure. 

But many examiners are penalizing modifications by aggressively 

and arbitrarily placing loans on nonaccrual status following a 

modification, even though the borrower has demonstrated a pattern 

of making contractual principal and interest payments under the 

loan’s modified terms. 

7 

I want to emphasize that H.R. 1723 is not an effort to rewrite 

accounting rules. Rather, it is an effort to bring examiners back 

into line with accounting rules. 

Specifically, agency guidance on troubled debt restructuring provides that a modified loan should be placed on accrual status when 

there is a sustained period of payment performance, generally recognized as 6 months, and collection under the revised terms is 

probable. 

ICBA also supports H.R. 2056, introduced by Representative 

Westmoreland, which would require the Inspector General of the 

FDIC to study examination resolution policies that may contribute 

to the current difficult environment for banks. 

The study would focus on many of the concerns that we have 

identified in the current examiner environment, such as paper 

losses and the cause of the institutions to raise more capital, commercial real estate loan workouts. 

The study would be very useful in raising awareness of these 

concerns, hopefully changing examination practices and giving momentum to the legislation that would directly fix examination problems, such as H.R. 1723. 

ICBA fully supports H.R. 2056 and believes that it might also be 

appropriate for the GAO to work closely with the FDIC Inspector 

General because the topics to be studied are common to all Federal 

banking agencies and affect all banks. 

Finally, I would like to advocate for an additional piece of legislation, the Communities First Act, which would improve the regulatory environment and community bank viability. 

Communities First would raise the threshold of SEC registration 

to 2,000 from 5,000 owners. Another provision would extend the 5- 

year operating loss carry back to free up community bank capital 

at this very point in time. 

We are pleased that the SBA has bipartisan co-sponsorship and 

look forward to its advancement in the House. 

ICBA appreciates the opportunity to testify. We encourage you to 

schedule H.R. 1723 and H.R. 2056 for consideration as soon as 

practical. 

Thank you. 

[The prepared statement of Mr. McKillop can be found on page 

87 of the appendix.] 

Chairwoman CAPITO. Thank you. 

Our second witness is Mr. Michael Whalen, president and CEO, 

Heart of America Group. 

Welcome, Mr. Whalen. 

STATEMENT OF MICHAEL WHALEN, PRESIDENT AND CEO, 

HEART OF AMERICA RESTAURANTS AND INNS 

Mr. WHALEN. Chairwoman Capito, Ranking Member Maloney, 

and members of the subcommittee, thank you for having me here. 

I represent no other institution than, I think, the people on Main 

Street. Back in 1978, right after I got out of law school, my law 

school buddies thought I was crazy when I started a little, 100-seat 

restaurant called the Iowa Machine Shed, in rural Davenport. 

8 

It was with sweat equity. And it was small-town bankers who 

had a belief in my, maybe not in my balance sheet, but in my work 

ethic and our vision and what we intended to do. 

And over the course of 33 years, we have done the American 

dream. My company today has a nine-figure net worth. I am not 

here to tell you I am bragging about that, but to really kind of lay 

the groundwork for what is happening on Main Street. 

In a stabilized environment, our debt-to-value ratio is in the 30 

percent. We are not leveraged. We are a great, great company to 

lend money to. 

And we decided, as things started to come out of the gloom and 

doom, that we are really marching to a hell with a heavenly cause, 

and start to build some new projects, including a six-story Hilton 

Garden Inn with one of our giant Italian Bakehouses in suburban 

Kansas City, in Olathe, Kansas, a brilliant growth area and a great 

site, that I already owned free and clear. 

It was really as close to a no-brainer loan as I have ever had in 

33 years. I thought, ‘‘This is going to be easy.’’ 

And they gave us—the community gave us $12.5 million in Economic Recovery Zone Bonds in order to even help facilitate the financing. So, off we went, and met with banker after banker, and 

laid it out what our company was, laid out the pro forma on this 

thing. Seriously, this was as good as a deal as I have ever presented to a bank in 33 years. 

And almost—I am going to give—I have counted about 24 banks. 

It continued to have the same dynamic. Enthusiastic reception. 

Wonderful when they looked at our financials. They would get in 

there, and the word came back, time after time, ‘‘Look, Mike, we 

are just really scared that if we make this loan, we are going to 

get second-guessed.’’ 

Now, that is the reality on Main Street. 

Another project that we are doing right now, a $20 million hotel 

in East Peoria, Illinois, I am working with a banker. And, basically, 

they are saying the same things over and over again, ‘‘We are fearful that if we make this loan, even though it is a good, solid loan, 

that we are going to get second-guessed,’’ because they do not like 

the category. 

Now, eventually, in both those situations, I found financing, because our company is really strong. 

But I will tell you that if this environment had prevailed back 

in the 1970s and 1980s when I was trying to get off the ground, 

we would have been dead in the water. 

And that is why I am here. I am not here for my company. I am 

not here for community banks, but I love them, okay. God bless 

them. They have stuck with me sometimes when they should not 

have. I am here for the guy trying to do what I did 33 years ago, 

which was to get started. 

Now, the other thing that I would like to say is this: I deal with 

a lot of solid banks. And I think that some of the trouble that occurred, particularly on the Wall Street banks and some of the 

major national banks is, let us say there are two kids in the backseat. One is acting up, one is raising Cain, and the other one is 

quiet. 

9 

And I get the feeling that we are doing the situation where we 

are walking around and smacking the quiet kid and saying to the 

one that raised Cain, ‘‘You know, you are going to get that if you 

do not settle down.’’ 

I think we have had really good, well-managed banks that have 

given to fear and that—Pepperdine University, I just happened to 

come across a study that indicated that they talked to a lot of 

bankers, through their representative sample study, found 75 percent of the bankers said that they are concerned, they are worried 

about being second-guessed by regulators. 

Sixty-one percent of those bankers said that they did not do a 

loan they thought they should do, underwriting standards indicated that they should do, but they are scared about getting second-guessed. 

And I would like to submit to you that the other 39 percent 

maybe were not as honest with the response as they should have 

been. 

So what we do have is a crisis on Main Street. And we have to 

get that straightened out. It is not because of a loan excess. 

I just found out—and this is kind of a piece de resistance, because I was calling some of my bankers, that a loan that I had on 

some undeveloped property. It is fully developed, but it is not, right 

now, developing any income stream, even though we have been 

more than capable of carrying the debt service because of the excess cash flow from our other operations, was treated as a nonperforming loan a year ago. 

I did not even know it. It was absolutely ridiculous, because we 

had more than the carrying capability. It was only for that reason 

that it did not come to a catastrophe. 

And that is the kind of thing that is killing job creation in this 

country. 

[The prepared statement of Mr. Whalen can be found on page 93 

of the appendix.] 

Chairwoman CAPITO. Thank you, Mr. Whalen. 

Our final witness on this panel is Professor Simon Johnson, the 

Ronald A. Kurtz Professor of Entrepreneurship at the Massachusetts Institute of Technology’s Sloan School of Management. 

Welcome. 

STATEMENT OF SIMON JOHNSON, RONALD KURTZ PROFESSOR OF ENTREPRENEURSHIP AT THE MASSACHUSETTS 

INSTITUTE OF TECHNOLOGY’S SLOAN SCHOOL OF MANAGEMENT 

Mr. JOHNSON. Thank you very much. 

I would like to make three points, if I may. 

The first is to reiterate and reinforce a point made by Mrs. Maloney at the beginning, which is, we should not lose sight of the context here. We are in the aftermath of the most serious financial crisis since World War II, which involved $13 trillion of lost household 

wealth, as well as a 6 percent, 7 percent drop in employment, from 

which we are struggling to recover. 

I, in that context, would emphasize what I think Mr. Royce said 

at the beginning, that the major responsibility here lies with the 

Wall Street banks, the so-called too-big-to-fail banks, that got masVerDate Nov 24 2008 18:10 Dec 02, 2011 Jkt 067940 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\67940.TXT TERRIE
10 

sively out of control and did enormous damage to the rest of the 

economy, including to small businesses and to community banks. 

So I think it is very important to get that clear. And I hope that 

we can agree on this issue. 

The second point is that a core part of this banking crisis was 

due to the lack of capital and excessive leverage on the part of the 

very big banks, but, unfortunately, it has to be said, also on the 

part of some of the mid-sized and smaller banks that need capital 

as a buffer against losses. 

Personally, I would be attracted to a system in which there were 

no capital requirements, and banks could choose their own capital 

levels, because everything we know about unregulated systems of 

that kind is that banks have much more capital. They fund themselves with much more equity relative to debt in those unregulated 

systems than they do in our system. 

However, I do not think we can go to such an unregulated system, because the experience in the Great Depression with regard 

to depositor runs was so horrific that I would be surprised if anybody, including from my side of the table or from community banking or from small business would like to go back there. 

So, we have a regulated system. We have federally-insured deposits. The FDIC has a responsibility to ensure there is an acceptable level of capital in these banks. And if the banks do not have 

enough capital, if they run out of equity, if the losses swamp the 

equity, the bank becomes insolvent and there is a charge to the deposit insurance fund, which, as you know, is funded in the first instance by the banks themselves, but also draws on the credit of the 

United States Treasury. 

Now, I, for one, do not want us to go anywhere near another situation of bailouts or a TARP, Troubled Assets Relief Program, situation, where we are providing capital to private banks in an effort 

to prevent systemic catastrophe. 

It is therefore prudent on the part of the FDIC, the OCC and 

other bank regulators to ensure the banks have sufficient capital 

at all times, including in difficult times such as these. 

I have reviewed the latest situation, including the testimony submitted by the FDIC and by the OCC today. And it is my assessment as somebody who works on these issues, who has worked on 

crises around the world—I am the former chief economist of the 

International Monetary Fund, among other things, and I have 

worked on crises for more than 20 years. 

I think the rules that we have right now in the United States, 

as explained by the FDIC and the OCC, make sense. They are appropriate. 

I understand completely the desire to try and stimulate further 

jobs in this way. Of course, I would also like more jobs to come 

back and unemployment to come down. 

But I would caution you very strongly against this kind of regulatory forbearance. This leads to trouble. This leads to more losses. 

This led to much of the losses we also lost in the 1980s that we 

had from the—ultimately from the S&L crisis. 

I agree with Mr. McKillop and with Mr. Whalen that the pendulum in such a situation can swing too far the other way. I do not 

11 

think that has happened in this case. I do not think that is what 

is coming out of these rules, as explained by the FDIC. 

There is plenty of credit available in this country. There are also 

banks that are borderline insolvent. I support H.R. 2056, in part 

because I think the rules have not been fairly applied across community banks and big banks. 

And I think the OCC should be pressed very hard on this. I think 

they have given too much forbearance to the big banks. 

I also think, by the way, the FDIC has closed not too many 

banks, but too few. I think when you are pressed for the GAO to 

be involved, which I think Mr. McKillop suggested, and I would 

support, you will find things that perhaps you did not want to find. 

So be very careful with this. 

But I think we should have transparency, as much transparency 

as possible. 

And in closing, I am afraid that I do not support H.R. 1723. I 

think it will lead to more trouble down the road. 

Thank you very much. 

[The prepared statement of Professor Johnson can be found on 

page 64 of the appendix.] 

Chairwoman CAPITO. Thank you all. 

We will now begin the questioning portion, and I will begin with 

a question. 

Mr. Whalen, you are an entrepreneur. You have obviously created over 30 years a lot of jobs in your time and continue to do 

this. 

In the context of what we are talking about today, because I 

think that is the bottom line of what we are talking about, when 

you talked about your frustration of your last project on the commercial real estate deal, do you see this as an inhibitor to job creation for you and those like you that are well-capitalized, that have 

a long history of job creation and have been able to look at a lot 

of different financing arenas to move your companies forward? 

Mr. WHALEN. Absolutely. We are kind of the canary in the coal 

mine, because we are well-capitalized, a strong company that has 

never had a real failure in 33 years. Our track record is outstanding. 

And if we are facing this much difficulty, this much fear from 

these bankers, then I cannot imagine somebody who is still struggling, but still strong to try to build a company. 

And we can sit here and we can pay hosannas to the small and 

medium-sized business people. All of us sit around in the hinterland and watch this from the Beltway, but then you sit there and 

say, ‘‘Wait a minute. Where are the policies that facilitate all the 

medium-sized persons to try to get off the ground?’’ 

And, Professor, with all due deference, maybe we could have a 

debate on the macroeconomic situation and the Wall Street situation and the excesses of it, but I think what we are here talking 

about today is Main Street, usually smaller and regional banks, 

and the fact that, really, the medicine that should be applied perhaps on Wall Street is being applied in a double dose on Main 

Street. 

And so I am here to probably say what it is like walking on Main 

Street and not on Wall Street. 

12 

Chairwoman CAPITO. How many people would you say you have 

employed right now, indirectly or directly, mostly, yes? 

Mr. WHALEN. Somewhere between 2,500 and 3,000. These 

projects have put together hundreds of construction jobs. 

Chairwoman CAPITO. Is that down from a figure from maybe 5 

or 6 years ago? 

Mr. WHALEN. No, we did not lay anybody off. 

Chairwoman CAPITO. Consistent. 

Mr. WHALEN. We did not have to. We hung in there. We did 

what everybody did; we hunkered down. But as soon as we saw it 

come back, or start to come back, we went back. 

I have what I refer to as a sickness called being an entrepreneur, 

and I am going to continue to do it. 

But when I start to talk to my friends in business and I talk to 

my bankers—and, of course, none of my bankers wanted me to 

mention their name, okay? 

[laughter] 

Chairwoman CAPITO. For obvious reasons. 

Mr. WHALEN. —a story—‘‘Mike, I will tell you this story and that 

story, but do not mention my name.’’ There is a genuine fear, as 

I said, of being second-guessed on loans. 

Here is a good example. If we start a new hotel, it is usually a 

2- to 21⁄2-year period while it stabilizes up and achieves the 

EBITDA level that you would normally have to have to service the 

debt on a pro forma. There is going to be a period, and a shortterm period, where my other operations are going to subsidize that. 

If you came in 6 months at the end of the operation of that loan, 

and said is that on a standalone basis fully capable of amortizing 

that loan, does it meet things like debt service coverage ratios of 

1.2 or 1.3, the answer is, of course not. It has never worked that 

way. 

And if they start to apply these draconian rules, you shut down 

small and medium-sized businesses. 

Chairwoman CAPITO. Thank you. 

Now, Professor Johnson, I know that there is a—we all want to 

get to the same place, I think we acknowledged that, which is full 

employment, availability of credit. 

But we do hear, repeatedly, that while we are hearing the President has a plan for small-business lending through the SBA, is 

that really occurring on Main Street? I think that is a question we 

need to ask. 

Or are the differences in the applications of capital requirements, 

etc., inhibiting that program from moving forward? A lot of banks 

are not even getting involved in that, because they do not want to 

touch it for reasons that the rules may change or that they are 

going to be more heavily scrutinized and not be able to meet up to 

the standards. 

So I will give you a chance to respond. 

Mr. JOHNSON. Thank you. These are all very good and appropriate questions. 

I think we have to ask, why are the banks scared? What are they 

afraid of? 

13 

And the answer is, it must be, that they have relatively little 

capital, either because they were thinly capitalized to start with or 

they suffered losses along the way. 

I work with a lot of entrepreneurs also, as does Mr. Whalen. I 

do not think that H.R. 1723 says institutions could disregard currently available borrower financial information. That is very 

strange in an unregulated, private-sector context. You want to look 

at the borrower. 

Anybody to whom you have lent money, you would like to be able 

to evaluate that credit on a holistic basis. Disregarding whether or 

not they can repay you is very strange, and not a good business 

practice, and not something we should be encouraging. 

So I agree with your skepticism on whether the Small Business 

Administration-type loans can make a difference. I suspect they 

cannot. 

But I do not think we should be encouraging banks to adopt such 

a break with standard accounting practices actually. That is the 

FDIC and the OCC interpretation. 

I think the rules that we have right now are what we should be 

applying. 

Chairwoman CAPITO. All right. Thank you. 

Mrs. Maloney? 

Mrs. MALONEY. I want to thank you for having this hearing, and 

to thank all of our panelists today. 

I am concerned about safety and soundness, given what we have 

just gone through and certainly the financial stability and the effects that it might have on classifying what otherwise would be a 

nonaccrual loan as an accrual loan under the terms of this bill. 

And I am concerned if this would perpetuate the practice of holding inadequate capital relative to risk that participated in and 

caused the financial crisis. 

So I would like to ask Mr. McKillop and go down the line. I am 

very sympathetic to the challenges that community banks, or some 

community banks, are facing. And some of them are seeking forbearance, a regulatory forbearance during this financial climate, 

and I am certainly supportive of it. 

I would like to know—and Mr. Westmoreland, I would like to be 

associated with your comments earlier and be a cosponsor of your 

bill. I agree that community banks are an important part of every 

community and played a critical role in our recovery. 

Are there other alternatives that could achieve the goal with 

fewer potential negative implications on safety and soundness and 

financial stability than would reducing capital requirements? 

Could giving more time—are there other ways that we could approach it that would help community banks? 

Mr. MCKILLOP. Ranking Member Maloney, there might be. I 

have been in banking for almost 35 years, and I have been dealing 

with banks in Florida and Georgia and Alabama for all my life. 

And what I have seen through the 1980s period into the 1990s 

and now here, 2011, is that there is an occurrence following a catastrophe that, by necessity, rallies all the troops. 

We have done a very good job in trying to focus in on DoddFrank and deal with the major mountaintop issues. But community 

14 

banks are not the Wall Street banks and the unregulated institutions that caused the Dodd-Frank bill to have to come into play. 

We do not believe, ICBA does not believe, and I personally do not 

believe that Representative Posey’s bill changes accounting standards at all. What we are saying in the bill is, ‘‘pay attention to 

those standards, and do not go beyond them in a regulatory environment at the bank level.’’ 

I will give you a ‘‘for instance’’: When we have to restructure a 

loan for a borrower, we must put it on nonaccrual for 6 months. 

Must. No ifs, ands or buts. That will take place even if the loan 

continues today, from day one, and continues all the way through 

that 6-month period. 

Now, we hit the 7th month and we start to move into a gray 

zone. And if documentation in my files does not say that I see how 

the borrower can continue to make payments, the regulators have 

been inclined to say, ‘‘That loan must stay on nonaccrual,’’ even 

though the loan is current. 

To the degree that I can take it off of nonaccrual, I can put it— 

Mrs. MALONEY. Let me ask, so it has to stay on the nonaccrual, 

even though they are current, and they are asking you to pledge 

that they are going to pay in the future, but you cannot really 

pledge, because you do not know everything that is going to happen. Is that basically it? 

Mr. MCKILLOP. The documentation that I might have is a year 

old, from old tax returns. I am still dealing with 2009 tax returns. 

The law does not require businesses to file until October for 2010. 

So, the documentation that the regulators look at says this thing 

does not support the facts of the loan. And what this bill creates 

is the payment, the evidence of payment is a greater fact than any 

documentation deficiency. 

Mrs. MALONEY. Thank you very much. My time has expired, but 

I would like to hear more concrete examples of how this works. 

Thank you. 

Chairwoman CAPITO. Thank you. 

Mr. Renacci, for 5 minutes. 

Mr. RENACCI. Thank you, Madam Chairwoman. 

Thank you to all the witnesses for being here. 

I am concerned about safety and soundness also, but I am also 

concerned about jobs. And, Mr. Whalen, I appreciate you being 

here because almost 28 years ago, I started my own business and 

I created over 1,500 jobs, employed over 3,000 people. And if some 

of the standards were placed on my business over 28 years that are 

being placed on businesses today, my business would not be here 

any longer. And that is a shame. 

Now, today my business has been sold and it is still employing 

over 3,000 people and it is still a success story, and 67 percent of 

employment is with small businesses like yours. So I thank you for 

what you do. 

In the testimony I heard today, it is interesting—Mr. McKillop, 

I would agree with you, you have said specifically about what some 

of the examiners are doing, requiring write-downs or reclassification of performing loans, placing loans on nonaccrual, even though 

the borrower is current on payments. And I can go on and on. 

15 

But, those are issues—I can take you back to my district in Ohio, 

and I can take you to some small businesses that have lost the 

ability to refinance their debt because of these same things, even 

though they have continued to make payments, even though their 

value, their asset value is greater than their loan. These are things 

that the examiners are continuing to do. So I appreciate your testimony. 

And I will go over to Professor Johnson. You testified on a couple 

of things that do concern me. And it is interesting, because I do believe we need—you said we need significant capital. I am a firm believer that we need appropriate capital levels. 

The question is, and the problem I have, is that the appropriate 

levels of capital are being determined by regulators who are making decisions in many cases that are dropping the capital levels 

down in these banks because they are calling loans substandard. 

So, I would question when you say ‘‘significant,’’ do you really believe that if a loan is being paid, if it is—if the value is in excess 

of the debt, if the loan is being paid. But I am going to give you 

an example. If the loan is up for renewal and cannot be paid off, 

is that a loan that should be substandard and should be classified 

as reclassified on a bank’s balance sheet so that it will reduce the 

capital? 

Mr. JOHNSON. Thank you, Congressman. 

I think the rules are very clear. And I also laid out for you in 

the FDIC testimony to come shortly, and I will quote from that: ‘‘If 

the borrower is expected to repay the loan in full according to its 

terms, there is no required write-down or place in nonaccrual status, regardless of any deterioration in collateral, for example, the 

point they are addressing here.’’ 

And on the points made by Mr. McKillop, I could link the two, 

the rules are that after a period of 6 months of demonstration for 

a modified loan that you—that the borrower can perform, the loan 

can be removed from nonaccrual status. 

I think these are very sensible rules. Even the OCC—which I 

have to tell you does not have a good reputation with regard to 

avoiding regulatory capture—says in its testimony that these 

rules—and I agree with this—would ‘‘create regulatory accounting 

standards that are less stringent than GAAP for regulatory capital 

services.’’ 

I really do not think you want to go there, from a free market, 

pro-business perspective, this is not a good place to go. 

Mr. RENACCI. The problem is, though, when they believe that the 

loan cannot be paid. And if you ever want to travel back to Ohio, 

I will take you to many small businesses who have been making 

payments for 10 years, 20 years, and just because they are only to 

pay their interest today, the loans are being classified, and that is 

a problem. 

So that is where I am saying there is overreaching, and some of 

these regulators are coming down on businesses that are creating 

jobs. 

Look, we have a problem today. You heard it this morning with 

the unemployment rate. It is small business owners like Mr. 

Whalen’s business and many others that are going to be able to 

produce jobs, and I am extremely concerned that we are taking regVerDate Nov 24 2008 18:10 Dec 02, 2011 Jkt 067940 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\67940.TXT TERRIE
16 

ulations—and, again, I would say appropriate capital, not significant capital. You used the word ‘‘significant’’ a few times. 

The question of whether it is appropriate, significant or enough 

capital gets to be determined by a regulator who can take a loan 

and place it as a classified loan and reduce the capital in a bank. 

And, again, I can probably name you—I am a CPA also—I can take 

you to 10 of my clients in the past who have had loans that have 

been classified and they have not been able to borrow because of 

this situation. 

So let us be careful when we talk about significant, appropriate, 

and then how we determine what loans are classified or not. 

So, again, this testimony is near and dear to my heart because 

it is about jobs. I am concerned that we are taking the small business owners and the opportunities for them to create jobs away by 

reducing their ability to borrow. 

Thank you. 

Chairwoman CAPITO. Mr. Watt, for 5 minutes. 

Mr. WATT. Thank you, Madam Chairwoman. 

First of all, I want to thank the Chair for convening this hearing, 

because it is really among the most important, I think, and constructive hearing. 

I think all of us as Members have heard the complaints about 

policies being set at the Washington level not playing themselves 

out in the field at the examination level. And this is a serious concern. 

As a general proposition, I am very sensitive to the problem and 

somewhat favorably inclined to H.R. 1723, Mr. Posey’s bill, but I 

think perhaps the bill may be overreacting too much in the opposite direction. I would say, as a general proposition, I am very favorably disposed to H.R. 2056, because I think a study of this issue 

would be very helpful and constructive in getting us to the result 

that we are trying to get to. 

My concern with H.R. 1723—and this is what I want to focus on 

in my questioning—is the part that basically forbids banking regulators from imposing additional capital requirements on loans that 

would be treated as accrual loans by operation of the bill. I think 

that is a step too far, because I think the four conditions that are 

outlined in the bill that create a so-called accrual loan are too proscriptive. 

And so, McKillop, I wanted to ask you about that in particular. 

An accrual loan under this bill would be a loan that is current, no 

payments were delinquent more than 30 days during the last 6 

months, the loans are amortizing, and payments are not being 

made through an interest reserve account. 

Those are the four criteria that would qualify. And if you met 

those four criteria, as I understand this bill, banking regulators 

would be forbidden from imposing additional capital requirements. 

So, the question I want to focus on is, should not there be some 

kind of additional out for extenuating circumstances that goes beyond those four criteria? I guess that is my concern. I could conceive of a situation where the loan is current, no payments were 

delinquent for more than 30 days, the loans are amortizing, payments are not being made through an interest reserve account, but 

17 

the borrower has robbed Peter to pay Paul, meeting all of those criteria, and the rest of the business is falling apart. 

How do we protect ourselves if we pass this legislation against 

that kind of eventuality, Mr. McKillop? 

Mr. MCKILLOP. That is a great question, Congressman, and I am 

not sure that I can give you a full answer. 

Mr. WATT. You recognize it as a problem— 

Mr. MCKILLOP. I recognize it as a possible problem. Yes, sir, I 

do. 

The banking regulators and the regulations that we must comply 

with prescribe standards of capitalization that we must live with. 

And as we drift to lower and lower levels of capital standard, the 

degree of our flexibility as management inside the bank is constrained. And at some point in time the regulators, just through 

the capital standard, can impose increased regulation to cease, to 

cause there to be a cessation— 

Mr. WATT. I do not mean to cut you off. I would love to engage 

in a long conversation about this, but my 5 minutes is going to run 

out. 

You have acknowledged that it is a potential problem and it is 

one that we may need to address. 

Mr. Johnson—Professor Johnson, do you acknowledge that this 

could be a potential problem also, and how might we address it? 

If you can address that quickly? 

Chairwoman CAPITO. You would make a quick answer there— 

please. 

Sorry. 

Mr. WATT. I am sorry. 

Mr. JOHNSON. Of course, there is a potential problem here. I do 

not think the bill addresses it. 

I would ask, if the banks have great opportunities, such as lending to Mr. Whalen, why do not they raise equity? There is plenty 

of capital out there that wants to lend— 

Mr. WATT. You are answering a different question now. I am trying to focus on the specifics of the bill. 

Chairwoman CAPITO. The gentleman’s time has expired. 

Mr. WATT. I have run out of time. I am sorry, Madam Chairwoman. 

Chairwoman CAPITO. Thank you. 

Mr. McHenry, for 5 minutes. 

Mr. MCHENRY. Thank you, Chairwoman Capito. 

Mr. McKillop, the research shows that loan balances in 10 out 

of the last 11 quarters have been lower. I hear from my small businesses who say that their bankers will not lend to them. I hear 

from bankers who say, ‘‘I cannot lend to them because of the regulators.’’ I hear from the regulators who say they are not qualified 

borrowers. 

So there is a circle here. Give me your take on it. And do not 

give me the standard answer—give me something new, give me 

something interesting that I have not heard before. 

Mr. MCKILLOP. You are not going to be caught on my watch. I 

believe that there is pressure and uncertainty in the bank boardroom where the examination process, probably for good reasons, 

has put the bank into a constrained management position. 

18 

Loans have gone bad. In Florida and Georgia, we are dealing 

with unemployment and underemployment exceeding 15 percent. 

Loans will go bad in that environment. When a loan goes bad, the 

management mark under an examination goes down. All other 

gradings go down and many banks go under a regulatory order. 

So under a regulatory order, the board of directors is very reticent to move forward. They look around in their community and 

there is a community where 15 percent is either unemployed or underemployed. That means 20 percent or 35 percent of the businesses are also affected very negatively by the business that those 

people would be doing. The whole community is in a recessionary 

environment. 

Does that new loan that comes through the books satisfy the regulator? Maybe, maybe not. But if not, when it hits the books of the 

bank, then it is another loan that is classified. As classified loan 

volumes grow, more pressure comes on the banker. 

So the banker, who is trying to make that community work, is 

between a rock and a hard place. Okay? The business person is between a rock and a hard place. They need credit. They need the 

access to credit. In reasonable periods, the banker makes the decision and says, ‘‘I will take a chance on you.’’ In today’s environment, the regulatory pressure, at least in Florida and Georgia, is 

such where the bank boardrooms cannot take that chance. 

Mr. MCHENRY. Okay. But to Mr. Whalen’s point, which is—Mr. 

Whalen, I am familiar with your original restaurant. I have been 

there—fantastic food, great service. Thank you. 

But it sounds like Mr. Whalen is sure money. Explain to me his 

situation and your view. If you have a company that is well capitalized with the ability to pay— 

Mr. MCKILLOP. Absolutely. 

Mr. MCHENRY. But a project, as these things are, takes some 

time to be profitable. So give me your take on it, then Mr. Whalen, 

I will give you an opportunity. 

Mr. MCKILLOP. I believe that the major criteria in Mr. Whalen’s 

case is a guidance issue by the regulators relating to commercial 

real estate exposure, CRE. Okay? Florida bankers and Georgia 

bankers and Alabama are very familiar with this. CRE exposure 

was guidance as it came out several years ago, many years ago 

now. I believe it was 2005, but I am not positive. 

It is now a very bright line. If a banker exceeds exposure to certain CRE, commercial real estate loans as a function of capital, a 

percentage of capital, and if they exceed that bright line, which has 

become a regulatory very hard line, even though it still says ‘‘guidance’’ in all the regulations, then the banker comes under increased 

scrutiny. 

Mr. MCHENRY. My time is short here. 

Mr. Whalen, I will give you an opportunity to finish up. I have 

20 seconds. 

Mr. WHALEN. Simply put, we are not necessarily just talking 

about current loans, but the chilling effect that it is having right 

now on new job creation. I think that is the concern. For example, 

if it takes a year for a new hotel to ramp up, and after the first 

year it falls short of its debt service by a quarter-million dollars, 

19 

even though I might have $5 million of cash-flow on the other side, 

the regulators could come in and say, ‘‘That loan is nonperforming.’’ 

And that basically ignores the way that businesses grow. Things 

do not start from day one necessarily being self-amortizing. And 

that is what we are talking about. We are talking about the 

chilling effect, the fear factor of stopping good solid loans. 

Chairwoman CAPITO. Thank you. 

The gentleman’s time has expired. 

Mr. Miller from North Carolina, for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Madam Chairwoman. 

I think we all recognize the importance of community banks and 

community bank lending to small business. I enthusiastically supported the small business lending fund. I offered an amendment in 

this committee to strengthen that legislation. I am disappointed 

that program is not really up and running yet and housing starts 

are one-third of natural demand—natural demand from new household formation and replacement of dilapidated stock, housing stock. 

And there are a few markets in the country, although we have 

an overhang of probably 11 million in the inventory, shadow inventory. But in those housing markets where there is really a demand 

for new lending for new housing, to loosen up a little bit on community banks so they can lend for acquisition development and construction. 

So I understand the importance of small business lending by 

community banks. I am on it. 

But all of you acknowledge that the real crisis 3 years ago was 

not community banks and there was an enormously concentrated 

banking industry; 80 percent of banking—of lending capacity at 

banks was with the 19 banks that got the stress test. And it appears that there is even more concentration now than there was 

then. 

It also appears that regulators have a pretty good idea of what 

is going on at the community banks. You are just not that complex. 

That is actually a compliment. But they have hardly a clue still, 

and they certainly did not know then—they did not know 3 years 

ago. 

The OCC did not know. The Fed did not know. The boards of directors did not know. The CEOs did not really know what all was 

going on at their banks because they were so enormous and so complex. They were in so many lines of business that created a very 

questionable alignment of interests, by my lights, often an outright 

conflict of interests, and that has not really improved. 

Dr. Johnson, I know that you have criticized the overall size of 

banks. Do you think we have a better sense—and generally, I have 

supported the idea of higher capital for requirements particularly 

for the biggest banks. But one criticism I have heard is that higher 

capital does not help you if you do not really know what their assets and liabilities are. And we still kind of do not, or at least some 

suggest we do not. 

Professor Johnson, do we have a handle yet on what is going on 

with those biggest banks? And do you think—what advantages or 

disadvantage do you see to the size and complexity of those banks? 

Mr. JOHNSON. Thank you, Congressman. 

20 

I think that is the elephant in the room, if you like. And I fear 

that the problems of the big banks are not now behind us. If you 

look at the situation in Europe, for example, as it is currently developing, there are very big exposures that we have through Wall 

Street, the banks and actually the money market mutual funds, to 

some of the serious problems in Europe, and we do not have 

enough capital in that part of the financial system. 

Now, I take your point that we also may not know what are the 

true assets and liabilities in those banks. And I think we are talking today about various dimensions of collateral damage caused by 

the failure of those massive banks. 

And I think the process of that collateral damage will further the 

concentration of the system, because the more small community 

banks go out of business, really go out of business. They really 

made loans that have gone bad. There is no—ultimately no way 

you can avoid that, the more concentrated the system is going to 

be at the end and the worst—the stronger the power of the big 19, 

or I would say the big six bank holding companies are the ones 

that worry me the most; and the more danger we are exposing ourselves and our system to down the road. 

Mr. MILLER OF NORTH CAROLINA. One criticism of the too-big-tofail banks is they still have, despite everything we have done, there 

still is an assumption they would not really be allowed to fail, and 

they get credit on better terms because their creditors assume that 

they are going to get paid regardless of what happens to those 

banks. 

Mr. McKillop, what is the competitive effect of that? We may 

deny it, but the market still thinks it is there—the implicit guarantee that those banks will not be allowed to fail. Does that put 

you at a competitive disadvantage to those biggest banks? 

Mr. MCKILLOP. Congressman, it definitely does. There have been 

numerous studies over the years on the effects of massive aggregation and huge economies of scale and whether or not that puts a 

large bank at an advantage to a small bank. A lot of those issues 

are very difficult to unwind, but if you look at the deposit rates 

that are paid by the large institutions and compare that against 

the rates that are necessary to be paid by the small institutions, 

we have found times where that difference widens dramatically. 

I am going from memory. This is not necessarily accurate. But 

the last study that I remember exceeded a 50 basis point advantage, a half-point advantage in terms of the cost of money. So the 

inference is that was an extra layer of insurance or too-big-to-fail. 

You could not fail, so they did not have to pay as much to get the 

deposit through the door. 

Chairwoman CAPITO. Thank you, Mr. McKillop. 

Mr. Westmoreland? 

Mr. WESTMORELAND. Thank you, Madam Chairwoman. 

Professor Johnson, have you had the opportunity to start any 

businesses up like Mr. Whalen has from scratch? 

Mr. JOHNSON. I have certainly not entered the hotel business. I 

have worked closely with business people in various capacities. 

Mr. WESTMORELAND. But not for yourself. 

Mr. JOHNSON. I have not—in my own business— 

Mr. WESTMORELAND. So you have not employed anybody? 

21 

Mr. JOHNSON. I have employed people, but not in the kind of 

business that we are talking about. 

Mr. WESTMORELAND. Right. Have you ever made a loan in a 

bank? 

Mr. JOHNSON. No, I have not made a loan from a bank, although 

I have worked with bankers closely on exactly those kinds of situations, particularly after crises. 

Mr. WESTMORELAND. Thank you. 

Let me tell you a little bit about what is going on in my district 

and with the community banks. We have had banks that have 

failed that people who have gotten TARP money have come in and 

taken the banks over. We have also had acquiring banks from Arkansas and other places come in that have a loss-share agreement 

with the FDIC. 

When these banks come in, they will go in and do a fire sale and 

it lowers all the values in the community. We had one bank that 

got TARP money, almost $1 billion, came in, had a fire sale, really 

put it up, did not do foreclosures, put it up at public auction and 

got about 30 cents, 35 cents on the dollar. 

Our community banks had some construction loans in these 

same neighborhoods. Now, all of a sudden, their values were written down. The builders who were trying to employ people, make a 

living, were basically put out of business because this bank that got 

TARP money came in and drove all the values down. 

The same thing has happened with banks that come in with a 

loss-share agreement. The quicker they can flush those loans, the 

more reimbursement they get. And if they modify the loan, then 

that loan comes out from under the loss-share agreement, and that 

bank takes it over. So, there is no incentive to work these out. 

And so these community banks, through no fault of their own, to 

have performing loans, to have good loans and employing people, 

when the government has either made a deal with an acquiring 

bank to reimburse them for their losses or gotten the TARP money, 

they are the ones that have driven the market down and the community banks are suffering. 

So we have banks that have been too-big-to-fail, but we have 

other banks that have been too-small-to-save. 

And these community banks—and Professor Johnson—these 

community banks that you are probably aware of, the most prominent people in the community, even people at ours, have bought 

stock in there. 

Once these community banks are taken over, that wealth—$15, 

$20, or $30 million—is flushed out of that community, gone forever. 

And somebody else is getting those funds, that money, and taking advantage of what these communities have built up. 

I have sat down with community bankers and said, give me some 

specifics. 

And, Mr. Whalen, one of the examples you have given about the 

six-story building—and I have been to Davenport, too, and so I 

want to compliment you on your food—but had an expansion of a 

business in my district. 

That was a—it had increased its employment 25 percent. It was 

a $7 million expansion. He was going to buy a million dollars worth 

of equipment. 

22 

And his banker, whom he had been banking with for 30 years, 

said, ‘‘We cannot do it because our commercial real estate portfolio 

is at a percentage where we cannot make you the loan.’’ 

Now, there is something wrong with that. Government is getting 

in the way of this recovery and we wonder why we are not creating 

jobs. 

Mr. McKillop, these community bankers I am talking to—and 

every time I talk to the FDIC, they say, give me specifics. 

My community bankers do not want to give me—because they 

are afraid of retaliation. Can you just say something about that? 

And is this an experience of all your community bankers? 

Mr. MCKILLOP. Congressman, yes, it is. When an examination 

takes place, one of the issues that Congress should understand is 

that the information in that exam is confidential. 

It is—we are not supposed to talk about it, period. And there are 

legal sanctions that can be taken. 

My charter is a little different. I can step out on some issues and 

talk more clearly. But I cannot say specifically about another bank. 

I have seen and heard from my customers—some of my customers are in your district—the same thing, sir, okay? It is a difficult issue, and it is difficult not to generalize. So let us be careful 

about that. 

But the regulatory pressure— 

Chairwoman CAPITO. Let me just inform the witnesses and everybody in the room, the vote has been called. It is going to be a 

very lengthy series of votes. 

I would ask the first panel, when I suspend the hearing, to come 

back. I would really appreciate it, because we have a lot of other 

questioners, if that is all right. 

And I will go to Mr. Scott, and hopefully we can get one more 

person in before we suspend. 

Mr. SCOTT. Thank you, Madam Chairwoman. 

Let me just say briefly what is going on in my State of Georgia, 

which is ground zero for bank failures. We lead the Nation in bank 

failures. 

Just 2 weeks ago, regulators shut down the Mountain Ridge 

bank in the town of Clayton in Georgia, bringing the number of 

U.S. bank failures this year to 48. But the startling figure is that 

in Georgia alone, during this period of 48 banks closing all across 

the country, 15 of those bank failures this year have been in Georgia. And we are only halfway through this year. It is only July. 

As a matter of fact, The Atlanta Journal-Constitution said that 

the Mountain Ridge Heritage Bank was the 65th bank in our State 

to fail in the last 21⁄2 years. So it is devastating there. 

And that is one of the reasons why I am proud to cosponsor with 

my good friend, Congressman Westmoreland, House Resolution 

2056, which really will get the FDIC Inspector General to take a 

look at some of the issues that have caused these bank failures, especially the application and effect on consent orders and cease-anddesist orders, and particularly orders that have been enforced uniform—whether or not these orders have been enforced uniformly 

across the spectrum. 

23 

But to zero in on our smaller community banks, one of the real 

issues—and I would like to, first of all, I think, address this to each 

of you. 

But, Mr. McKillop, since you are here and representing the small 

bankers, I want to ask you about the repeal of regulation Q. 

There is a considerable concern within the smaller community 

banks in my district and throughout Georgia, probably throughout 

the Nation, that the new-found ability to pay interest on checking 

accounts placed them at a competitive disadvantage versus the 

larger banks. 

There is also a concern that this repeal could negatively affect 

the safety and soundness of community banks. Do you think that 

the effect of the repeal on community banks was adequately studied before regulation Q was inserted into the Dodd-Frank bill, and 

would you not feel and agree that a delay of the repeal would be 

a good idea in order to have time to fully study its impact? 

Mr. MCKILLOP. Congressman, you bring up a very good question. 

I am not sure that I have the resources to be able to answer you 

appropriately. My bank deals with lots of small banks throughout 

the Southeast. 

And I believe that the change in Reg Q will change the cost of 

interest rates. I also remember that it was fairly well advertised 

in advance that a possible change could occur. 

So as for the timing and the degree of analysis, sir, I am not 

qualified, really, to answer. 

Mr. SCOTT. Does anyone else have a thought on that at all? Do 

you feel that the smaller banks, community banks, are at a disadvantage with the larger banks at all? 

Would anyone like to express concern about that? 

Let me ask you about 2056, then, Mr. Westmoreland’s and my 

bill, and others who have cosponsored it, would you—do you believe 

that the bill would be an effective way of having the information 

necessary to eventually prevent bank failures? 

If not, in your opinion, what needs to be added to the topics that 

should be studied by the FDIC to prevent future bank failures? 

Does anyone have a comment on that? 

Mr. MCKILLOP. Yes, sir. The degree of the study is probably the 

most important, sir. I am a little skeptical. I have seen Congress 

bring forward proposals to study things and ultimately the study 

is either so late or so tardy or so thin— 

Mr. SCOTT. Let me ask, as my time is short and I know others 

want to ask questions. I do not want this opportunity to pass without you giving us, as a representative of the smaller community 

bank, what do you think we can do to stop these bank failures? 

It is a drain in Georgia and across this Nation. What do you 

think we could do if 2056 is not the answer? 

Mr. MCKILLOP. The ultimate fundamental is capitalization, sir. 

And if we can create an environment that says these banks will be 

stabilized into the future, they will become viable into the future, 

they will not be closed immediately, then we could see community 

banks begin to raise capital. 

Today’s environment is exceptionally onerous for community 

banks that have a lot of regulatorily defined impaired or substandard loans. 

24 

Mr. ROYCE. [presiding]. Thank you. Without objection, we have 

a statement from Chairman Spencer Bachus that we will enter into 

the record, and we will go to Mr. Luetkemeyer for his questions. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Whalen, I want to congratulate you. You may be the best 

witness I have ever seen in all of the few years I have been here 

in Congress. 

You bring an expertise from what you do. You are pertinent to 

the issue and your frankness is very refreshing. Thank you very 

much for being here today. 

Mr. McKillop, thank you for the kudos on the Communities First 

Act. It is a bill that I am handling, and will hopefully have up after 

the August recess here. And along that line—and you made several 

comments that are pertinent to today’s discussion with regard to 

the legislative proposal regarding banks’ examination practices as 

the headline for our committee hearing today. 

And you have nailed it when you said that the regulatory environment is making it very difficult to do business. Mr. Whalen is 

an example of that. 

What do you see as a—this bill that we are looking at today is 

one—and the two bills, I guess, are a couple of solutions that we 

have come up with. 

Do you have some other ideas, besides Communities First and 

some other things that we can do? 

Because I think what we have done here with these two bills 

today, we have some great ideas, I think, for ways that will give 

some forbearance to some of the activities that are going on. 

Mr. MCKILLOP. Congressman, I look at Dodd-Frank, and I say 

that was a bill that had to come by, had to occur to deal with the 

too-big-to-fail issue and the problems on regulated institutions. 

But at the same time, I look at what is happening now and the 

trickle-down effect that will be occurring into the future, and I go 

back to prior conversations with Directors in the FDIC, and I believe that establishing a separate way of examining community 

banks, a separate examination standard, might be the only thing 

that we can really implement with some peace. 

Mr. LUETKEMEYER. One of the things that I hear regularly from 

my bankers back home is that there is a huge disconnect between 

what the folks in Washington are telling us is supposed to be the 

way that banks are examined and what is really going on out in 

the field. 

I assume that your testimony lends itself to that direction. You 

agree with that statement? 

Mr. MCKILLOP. I agree totally with it, sir. 

Mr. LUETKEMEYER. Do we need to say it louder? We have some 

regulators here in the audience. Do I need to stand on the table 

today and you want to shout in your microphone to let them know 

that there is a huge disconnect between what is going on here in 

Washington and what is really going on out in the field? 

Mr. MCKILLOP. Let my yes be yes. 

Mr. LUETKEMEYER. Because I have met multiple times with regulators and it does not seem to register. 

25 

So thank you for being here today. And, again, if we need to, we 

will sing this praise from the highest heaven here that this is what 

is going on and we need it to stop. 

But one quick question for the professor. You made the comment 

awhile ago, sir, that you said that—I would like for you to elaborate on it—that we really need to have no capital, would be a way 

to go. And then you turned around and said that we need to have 

no forbearance. 

Can you justify those two statements? Can you tell me how they 

are juxtaposed against each other and make sense? 

Mr. JOHNSON. Yes, Congressman. 

I did not say no capital, I said no capital requirements. But that 

does not make sense in a system with deposit insurance. 

In pure free market systems, before, for example, in the United 

States before there was deposit insurance and before the creation 

of the Federal Reserve, banks routinely had 30, 40, 50 percent equity capital as a share of their assets. So they had a lot more capital. 

And one consequence that we should all recognize and—we actually can all agree on is because we now have deposit insurance, 

banks are able to have less capital, they are protected— 

Mr. LUETKEMEYER. So what you are saying is we had—if we had 

no insurance we would have more capital—or should have more 

capital— 

Mr. JOHNSON. If you look at private banks, the non-insured 

banks, financial institutions that take the same kinds of risks as 

banks, small, medium or large, they routinely have 30 percent capital. So that is 30 percent equity funding as a share of the total 

funding; 30 percent equity, 70 percent debt. 

That is not risk-weighted capital. There is no risk adjustment— 

pure, plain, straight numbers. 

And so, we run our financial system with very little capital relative to what you get when you do not have the sort of regulatoryrelated deposit insurance. 

Mr. LUETKEMEYER. Fine. I do not disagree with that. I think that 

you are probably right. 

With regards to no forbearance, that is exactly what we are talking about here today, though, with regards to Mr. Posey’s bill—forbearance here, to put in law that is really supposed to be in practice, as was said awhile ago. 

Do you disagree with this bill, then? I think you made that statement awhile ago. 

Mr. JOHNSON. Yes, I do disagree with the bill, Congressman. 

In Texas, in the early 1980s, there was a serious problem with 

commercial real estate. One response was regulatory forbearing, including through legislation passed by Congress. 

Now, the problem was not just in Texas. The problem was not 

just in the bank that originally had the problem. But by the end 

of the 1980s, we had what is now known as the S&L crisis that 

was large and cost the taxpayers hundreds of billions of dollars in 

order to sort out. 

That was a direct result—costs escalated because of the regulatory forbearing. 

Chairwoman CAPITO. Thank you. 

26 

I thank you for your patience. 

We are on a vote. We have about a minute-and-a-half left for the 

vote, so I think we are going to suspend the hearing. We will stand 

in recess until after the last vote. We should be back here between 

12:15 and 12:45. Some of the staff can give you a more accurate 

time. 

You can go to the glorious Rayburn cafeteria and enjoy a great 

a lunch. 

Thank you. 

[recess] 

Mr. RENACCI. [presiding]. We are going to call the hearing back 

to order. 

Mr. Pearce, you have 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Before we were so rudely interrupted, I was going to ask—when 

I am looking at Mr. Whalen’s testimony, I see on page one, he says 

that the decision to make a loan will be second-guessed by regulators. And then he goes on to make the point that regulators are 

responsible for the failure to—for the loans to take place. 

Then Professor Johnson on page two, number eight, says to 

blame bank examiners for the lack of lending in a post-crisis economy makes no sense. And so, I would kind of like to drill down just 

a little bit deeper in that. 

Professor Johnson, do you have empirical evidence? I guess if I 

were going to look to try to figure out the difference, I would look 

at safety and soundness reviews and compliance reviews. That 

would be two vastly different approaches. One would be concentrating on the capital and whether the financing by debt or whatever. The other one might be a regulatory approach. 

So in your empirical evidence, have you studied the amount of 

reviews now that are compliance versus those that are concentrating simply on safety and soundness? Which one is dominating 

in the reviews right now? 

Mr. JOHNSON. Congressman, that is a very good and a very fair 

question. I do not think anybody knows that level of detail on the 

systematic data. 

We do know from the Federal Reserve’s senior loan officer’s opinion survey, and from the National Federation of Independent Businesses survey of small business economic trends, the predominant 

fact there is that demand for loans remains sluggish because of the 

damage to the balance sheet. So I do not— 

Mr. PEARCE. I am hearing a completely different thing, sir, in 

New Mexico small banks. And I am hearing that there is evidence 

that—I get banks together on phone calls frequently, and they tell 

me that compliance reviews have replaced safety and soundness, 

the tediousness of it. And, in fact, those soundness reviews are killing the market exactly the way that Mr. Whalen describes. 

They, in fact, tell me that when they used to get a simple markup, say, a notation, a write-up for something. Now, they face 

$50,000 fines. And they tell me, ‘‘Why would I loan money on a 

New Mexico house that I am never going to make $50,000 on that 

particular loan? Why would I risk making the loan in order to get 

possibly a write-up, because we left a comma out or because we did 

not completely fill out the flood insurance?’’ 

27 

Flood insurance in eastern New Mexico is not a high priority 

item. We have not had rain since last August, and the State is 

burning up, as you can see on TV. And so, this would lead us to 

believe a little bit more that the process of reviews is in fact killing 

the market exactly like Mr. Whalen said. 

Now, in your verbal comments, you asked the rhetorical question, why are banks scared. And then you said that they have too 

little capital. 

I, in fact, am hearing from banks every day that they have plenty of capital, and they have loan demand, but they also tell me that 

if they make one bad loan, that their bank is going to be taken 

away from them. They point to examples in New Mexico where 

that has happened. 

So, why would a banker risk making a loan that somebody is 

going to come in and review at some later time that could cause 

them to lose their entire bank? 

I would have you look at Charter Bank and the Bank of the Rio 

Grande, both of which were operating fairly well until they began 

to come in and say, ‘‘Well, we are going to downgrade this or that,’’ 

very few non-operating loans. 

I think the next point that I would really like to ask about is the 

procyclical and countercyclical regulatory measures. 

Right now, I think that the regulators, and I think you could 

make a very strong point, that they are pro-cyclical. When things 

are good, they simply open the door and let them get better instead 

of trying to check the process and trying to—instead of saying, 

‘‘Well, let us all slow down just a bit.’’ 

And when they start going bad, then they make things go worse 

by their foreclosures, by their insistence that they close down loans 

that are still performing. Then, appraisal values go down, and so 

builders cannot get loans, because the appraisal values have been 

abnormally pushed lower by the actions of regulators that are calling into question loans that are performing every day. 

We recently had a group of—this was about a year ago, as a matter of fact, even before the election—Indian American hotel owners. 

All came in from a three-State region. Every single one of them 

had demand requirements that you had to provide $750,000 in capital to loans that had performed flawlessly, never missed a payment. 

Those feel like regulatory excesses that are simply doing what 

Mr. Whalen contends. And your contention, on the other hand, is 

that it is ludicrous to make that assertion. Would you—I tend to 

side with Mr. Whalen, and the evidence that I hear every day sides 

with him. Would you like to comment on that? 

Mr. JOHNSON. May I? Again, these are legitimate concerns. Certainly, regulators can become procyclical, as you say, exaggerate 

the boom and also exaggerate the bust. And certainly, there are 

convincing anecdotes and instances, examples, but systematically is 

this what is happening? Have examination standards become tighter? 

Mr. PEARCE. When every banker in the State says yes, because 

I have these conference calls. Do you have any empirical evidence 

that says it is not happening, that it is only anecdotal? I find that 

pretty offensive, when you do not come in here with empirical eviVerDate Nov 24 2008 18:10 Dec 02, 2011 Jkt 067940 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\67940.TXT TERRIE
28 

dence, and you are declaring what I come with, with bankers saying often. I consider that to be offensive that you are saying it is 

anecdotal. 

If you come here as a professor, you bring the empirical evidence 

for the claims you are going to make, sir. 

Thank you. I yield back. 

Mr. RENACCI. Mr. Posey? 

Mr. POSEY. Thank you very much, Mr. Chairman. 

Mr. Pearce, I think, if you look at the written statement, Mr. 

Johnson looks at the situation in reverse. He seems to view it that 

the regulators are the good guys and presumes that banks are bad 

guys, who just want to somehow game the system. 

The statement was absolutely silent and failed to address in any 

way whatsoever regulation, which is the point of this bill and the 

point of this hearing that we are having here. 

Mr. McKillop and Mr. Whalen, I wonder if you could each share 

with me how important you think cash flows are versus collateral 

value? Are the regulators focusing too much on collateral value and 

not enough on cash flows? 

Mr. WHALEN. Yes, if we had a situation where the FASB Board 

did suggest that we would, in effect, go on mark-to-market rules 

through appraisals, if would have been the end of small and medium-sized businesses. It would have been absolute chaos. How 

often do you go in to get an appraisal every week, every month, 

every 6 months? 

The irony of it is, is that you can—ups and downs in appraisals, 

but cash flow is still the mother’s milk of repaying a loan. And that 

is one thing that has occurred here, which is, I think, excessive use 

of appraisals. You did have excessive appraisals there for a while. 

We have swung to the other side. 

I had a situation where we put in $13.5 million of hard infrastructure into a development. Basically, the appraisal came back 

unchanged from the year before. I said, ‘‘Wait a minute. I just 

spent $13.5 million. Here is the bill.’’ ‘‘Well, you know, it is a tough 

market.’’ 

The point being is I do think that this is exactly that—way too 

much emphasis on what is the appraisal of the day, the appraisal 

du jour, and not enough on looking at historical and cash flow 

trends. 

Mr. POSEY. Thank you very much. 

Mr. MCKILLOP. At best, the collateral value is generally a secondary source of repayment. The primary source is cash flow. As 

bankers, we always look for that first. 

Mr. POSEY. And is there in banking any better measure of an account, in your opinion, than the simple matter that the payments 

were made on a timely basis? 

Mr. WHALEN. That was the old idea—borrow the money and pay 

it back. 

Mr. POSEY. I get a feeling that there are two kinds of people in 

this room. There are people who see the problem of arbitrary overregulation, and those that do not. It is just really simple. 

And if you do not see the problem, then you will find all kinds 

of objections to this legislation, because it changes a regulatory enVerDate Nov 24 2008 18:10 Dec 02, 2011 Jkt 067940 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\67940.TXT TERRIE
29 

vironment that some people seem to think is okay and needs to be 

preserved for whatever reason. 

But I just do not see how letting a current debt be left on an accrual basis perpetually, as long as payments are made, can harm 

anybody. I think that is common-sense legislation and basically 

what it is going to take to recover. 

This is no cost at—unlike some of the big banks that got bailouts, the community banks got bailed on. And most of the community bankers that I am aware of, a majority of the interest in the 

banks are held by the officers, the directors of the bank, and people 

in the local community. 

There is not a big spread of stockholders across this Nation and 

around the world whose money they are gambling with. They are 

gambling with their own money, if they are gambling. They are 

loaning their own money, more than they are other people’s money. 

And they are accountable for it. 

And given the opportunity to work with the homeowner or a 

small-business man who may be in tough times, they can bring it 

to a positive conclusion, whereas a heavy-handed, monolithic bureaucrat can come in there and just stomp them out of business. 

In my State, unfortunately, there is probably not very much real 

estate that is worth today what it was 5 years ago. And so if your 

loan is over 5 years old, and some bureaucratic regulator just decides they need to have a current appraisal, there is a good chance 

your property is not going to appraise for what it did 5 years ago. 

You could essentially take every loan on real estate in our State, 

probably, and put it on a nonaccrual basis for that reason. 

That is bad for Florida, that is bad for the United States of 

America, and that is bad for the taxpayers. 

Thank you. 

I yield back. 

Mr. RENACCI. Thank you, Mr. Posey. 

Mr. Royce, for 5 minutes? 

Mr. ROYCE. Thank you, Mr. Chairman. 

I would like to ask Professor Johnson a question. And it has to 

do with a concern that you raised about the ability of the resolution 

authority that was passed last year to resolve a global financial institution that is in trouble. 

Can you briefly explain your concerns regarding this authority as 

it pertains to these massive financial institutions? 

Mr. JOHNSON. Yes, Congressman. I am of the view that were one 

of the largest banks in the country—Citigroup, for example, or 

JPMorgan Chase—to get into trouble, this would be very hard to 

deal with under the resolution authority that the FDIC now has, 

working with the Federal Reserve, the Treasury and the Financial 

Stability Oversight Council. 

Because there is no cross-border resolution agreement; there is 

nothing between the United States and the United Kingdom, nothing between the United States and other countries. So there is no 

way to agree on who has what kind of priority in the event of a 

failure. 

And that would be a source of confusion, very much like what we 

saw in the days after the failure of Lehman Brothers. 

30 

Now, the FDIC has issued a paper of specifics on how they would 

have handled Lehman differently, and they make some good points 

in that paper. So my concerns are not so much about the specifics 

of a Lehman, but it is much more about the global mega banks 

that, unfortunately, I believe could not be handled through effective 

resolution at this time. 

Mr. ROYCE. One of the challenges we have is that with the toobig-to-fail presumption and with the legislation that we have 

passed in Dodd-Frank, the implied subsidy or benefit in the market, the lower cost of capital, keeps compounding. 

It used to be that the studies showed it was about a 100 basis 

point advantage for large banks over smaller banks. Now, we have 

the Kansas City Fed president saying maybe, by today’s standards, 

it has 360 basis points more. 

And if you look at the consequences of that, we have a situation 

now where 2 percent of the industry controls 78 percent of the assets. Before we went into this conundrum, we had 33 percent of the 

assets concentrated in the big investment banks in the 1990s. 

So it seems as though one of the disadvantages for community 

banks is this lower cost of capital that exists because of the implied 

government backstop and because of the various actions we took. 

And now, with Dodd-Frank, because it is apparently believed out 

there in the market, and if the Kansas City Fed’s right, it has compounded the problem, all of this leading to the question that if this 

plays out over time, then, as I said in my opening statement, we 

are going to just continue. 

And with it, would not there come an overleveraging, logically, 

of the largest financial institutions unless something is done along 

the way in terms of regulation which tried to capture that implied 

advantage, government backstop advantage. 

And if we assume that the reason we are in this is because of 

that—let me let you—I am going to run out the clock here. Go 

ahead. 

Mr. JOHNSON. I agree with everything you have said. I think that 

is a completely accurate and sobering assessment. 

There are various tools available under Dodd-Frank, including 

the so-called living will provision. So the FDIC does, in principle, 

have the power to force big banks to become smaller. 

But we have seen no indication that they have done that, and I 

would be skeptical that there will be political support for them taking those actions. 

And, as you say, if we could find a way to remove the funding 

advantage—I do not think it is quite as big as Tom Hoenig is saying, but it is big, and as Mr. McKillop said it is at least 50 basis 

points. That is probably closer to 75. That is a big deal in this market. 

If you can find a way to tax that or remove that funding advantage, that would be good. But it is very hard to do. And the result 

almost certainly will be an overleveraging of the too-big-to-fail 

banks, because of the government backstop, and further financial 

crisis that will damage, massively, both community banks and 

small business. 

I think nothing could be more important than dealing with the 

risks to the system posed by today’s mega banks. 

31 

Mr. ROYCE. Thank you. 

Thank you, Mr. Johnson. 

Mr. RENACCI. Thank you, Mr. Royce. 

Mr. Manzullo, for 5 minutes? 

Mr. MANZULLO. Thank you for coming to this hearing. It is unfortunate that we could not have one panel where the regulators sit 

with the regulated, to have more interaction than is going on. 

I am very disturbed over what the regulators are doing. The area 

I represent in northern Illinois is heavily involved in manufacturing. And I have had manufacturers come to me with an order 

in their hands from a major, major contractor—an order in hand, 

wanting work to be done locally. 

With the manufacturer going to the bank and asking just for 

enough money to buy the raw materials, it is called ‘‘factoring.’’ 

And with factoring, the banks have absolute control, because they 

would write the check to the vendors to the small manufacturer 

and actually receive the check coming back from the large manufacturer that ordered parts from the intermediary. 

And every time this happens, I sit there and I ask myself, why 

do we work so hard to return manufacturing to America, when the 

Federal regulators hate manufacturers? 

I am going to say that again. The Federal regulators hate manufacturing. They do not trust it. They think that is going to—things 

are going to fold up, and they actually do not believe that manufacturing is that important. 

This is reflected in some of the idiotic statements made by the 

examiners who, when two of my constituents were turned down on 

a loan, said to the bank, ‘‘You cannot continue the line of credit because those two brothers do not have any reserves left in their subS corporation.’’ 

That is how stupid the examiners were. You do not have reserves 

in a sub-S corporation. You distribute the money in a pass-through, 

the same as an LLC. 

And the bank said, ‘‘Our hands are tied.’’ I am talking about a 

30-year long commitment. 

And, Mr. Johnson, when you say in your statement that you cannot blame the examiners—‘‘to blame bank examiners for the lack 

of lending in a post-crisis economic—economy makes no sense’’— 

you are wrong. The reason that you are wrong is the fact that most 

of my work is done in manufacturing, probably 70 to 80 percent of 

time as a Member of Congress. 

I talk with these guys every single day. And I also talk to the 

banks, and I have also talked to the regulators. 

And then one day, I talked to the heads of the Fed, the FDIC 

and the OCC. And here is what they said: ‘‘We have not changed 

policy,’’ which is true. And each one invited me—said if you have 

a particular loan that you think should have been given, I will look 

at it personally. 

They were not stroking me. The problem is the bank. Every time, 

the bank refuses to take them up on it because they are fearful of 

retaliation coming from the examiners. 

Now, this stuff has to stop. And it has to come from the top. And 

I just want to throw that out to you and see if anybody there 

thinks I am nuts or if you want to agree with me or, Professor 

32 

Johnson, the—I think you probably agree with my answer, because 

the pressure is coming from the top and not just the examiners 

themselves. Would that be correct? 

Do not take all my time. We have two other guys I want to hear 

from. 

Mr. JOHNSON. I think you are raising very serious questions that 

deserve careful examination, to be sure. I have not seen evidence 

of this intimidation by regulators to which you— 

Mr. MANZULLO. I have. It exists. You cannot deny that it exists. 

The banks are being hammered by it. 

Mr. JOHNSON. I have not seen that evidence myself— 

Mr. MANZULLO. Anybody else? Mr. McKillop? Anybody? 

Mr. MCKILLOP. Your premise, I think, is right on target. I am obviously not aware of the banks in northern Illinois, but I see similar sorts of things occurring in other aspects of regulatory pressure 

on community banks quite often. 

Mr. MANZULLO. Mr. Whalen? 

Mr. WHALEN. You hit it right on the head. I have businesses in 

your district, by the way. 

Mr. MANZULLO. Yes, the machine shop. Good chicken. 

Mr. WHALEN. Thunder Bay. 

But, I had a banker and he has been in the business for multiple 

decades. He said, ‘‘Mike, I am going to lend this money to your 

business, but I know next year they are coming in and they are 

going to put this—have some kind of a watch list, but I do not 

care.’’ But he is one of the few who was not intimidated. 

Mr. MANZULLO. The—I am over? 

I yield back. Thank you. 

Mr. RENACCI. Thank you, Mr. Manzullo. 

Again, I want to thank the first panel for your testimony, and 

at this time, you are dismissed. 

I would also like to call up our second panel of witnesses. 

Good afternoon. At this time, I want to introduce individually for 

the purpose of giving 5-minute opening statements our second 

panel. Our first panelist is Mr. George French, Deputy Director, Division of Risk Management Supervision, Federal Deposit Insurance 

Corporation. 

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

Mr. FRENCH. Good afternoon, Chairman Renacci, and members of 

the subcommittee. I appreciate the opportunity to testify on behalf 

of the FDIC on the condition of the banking industry, our approach 

to supervision, and some concerns we have regarding H.R. 1723. 

The banking industry today continues to face challenging conditions. Loan demand is weak and for some banks problem assets are 

at high levels. Nevertheless, a number of indicators show signs of 

a turnaround and the FDIC is cautiously optimistic regarding the 

outlook for bank performance. 

The 4,400 community banks that we supervise continue to play 

a vital role in credit creation across the country, and especially for 

small businesses. 

33 

Now, before addressing H.R. 1723, I would like to make a few observations about our supervisory process. The FDIC attaches great 

importance to taking a balanced and fact-based approach to supervising banks in this challenging environment. In reviewing banks’ 

loan portfolios, we rely significantly on validating banks’ own credit 

risk management processes, and most often examiners agree with 

a bank’s assessment of loan quality. 

We do not micromanage banks in how they deal with individual 

customer relationships or how they manage their loan portfolios. 

The FDIC does not require banks to write-down loans based solely 

on a decline in collateral values. And in fact, as long as the borrower is expected to be able to repay the loan, no loss on the loan 

should be recognized. 

Another misconception is that once a loan is placed in nonaccrual 

status, it is stuck there until the next examination regardless of 

any work-out arrangements. In fact, when a borrower has demonstrated the ability to pay for 6 months, the loan can be returned 

to accrual status. 

We have joined several interagency efforts to clarify these points 

and to encourage banks to originate and restructure loans to creditworthy borrowers. We have heard from bankers that these statements have helped clear up misconceptions and helped them to become more comfortable extending and restructuring soundly underwritten loans. 

I also want to emphasize that to carry out our statutory responsibilities for supervision, we need accurate information about problem assets. We expect the financial statements prepared by banks 

to adhere to the standards prescribed by the accounting profession 

for problem loan accounting and loss recognition. 

And this is the source of our concern about H.R. 1723. Under 

that proposed legislation, as long as an amortizing loan is current 

and has performed as agreed in the recent past, institutions could 

disregard currently available borrower information indicating that 

it is improbable that the loan would be repaid in full. This would 

enable institutions to include accrued but uncollected interest income in regulatory capital when collection in full is not expected. 

Information about the borrower’s ability to repay the loan would 

be disregarded for purposes of placing loans in nonaccrual status 

and measuring capital, including for purposes of prompt corrective 

action determinations. 

This would result in an understatement of problem loans on 

banks’ balance sheets and an overstatement of regulatory capital. 

Compromising the quality of information about nonaccrual or troubled loans or preventing supervisors from acting on such information would detract from supervisors’ and investors’ ability to properly evaluate the safety and soundness of banks or require corrective action as needed. 

Such regulatory capital forbearance would detract from investors’ 

confidence in the reliability of all banks’ financial statements. 

Moreover, experience has been that policies that delay the recognition of bank losses can ultimately increase losses to the FDIC deposit insurance fund and the costs that healthy banks pay for their 

deposit insurance premiums. 

34 

In closing, I would like to reemphasize that the FDIC recognizes 

the challenges facing banks and their borrowers in this difficult environment and encourages banks to prudently originate new credits 

and work with distressed borrowers. At the same time, we believe 

that accurate financial reporting is critical to maintaining a safe 

and sound banking industry. 

With respect to H.R. 2056 directing the FDIC I.G. to study the 

issues relating to bank failures, I would just like to say that we are 

always glad to work with our I.G. We value their input. They are 

an independent organization and I believe they may be in contact 

with some of your offices regarding their views and specifics on 

that view. 

I would be glad to answer any questions from the committee. 

[The prepared statement of Mr. French can be found on page 55 

of the appendix.] 

Mr. RENACCI. Thank you, Mr. French. 

The next witness that I would like to introduce for a 5-minute 

opening statement is Ms. Jennifer Kelly, Senior Deputy Comptroller for Midsize and Community Bank Supervision, Office of the 

Comptroller of the Currency. 

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

OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Ms. KELLY. Chairman Renacci, and members of the subcommittee, I appreciate this opportunity to explain the OCC’s approach in assessing the condition of banks’ loan portfolios, including determining whether individual loans should be classified or 

placed on nonaccrual, and to offer the OCC’s views on H.R. 1723 

and H.R. 2056. 

Access to credit plays a vital role in restoring economic growth 

and supporting jobs in our communities and we share the subcommittee’s view that banks should not be unduly constrained from 

meeting the needs of creditworthy borrowers. 

We are committed to balanced and fair supervision of the financial institutions we regulate and I believe our examiners are striking that balance. OCC examiners assess the quality of a bank’s 

loan portfolio during each examination cycle. The goal of our reviews is to confirm the accuracy of bank management’s own assessment of credit quality, not to second-guess or supplant their judgments with ours. 

When a borrower’s ability to repay a loan becomes impaired, we 

expect the bank to classify the loan to recognize the increased risk. 

Examiners confirm management’s assessment through transaction 

testing of specific loans or loan portfolios. Where weaknesses are 

found, examiners direct bank management to take corrective action. 

To provide consistency in the examination process, the OCC and 

other banking agencies use a uniform risk rating scale to identify 

problem credit. This regulatory classification system consists of 

four levels of designation that identify different degrees of credit 

weaknesses. 

We have a variety of mechanisms in place to help ensure that 

OCC examiners apply our policies in a consistent and balanced 

35 

manner across institutions. And we spend considerable time and 

resources providing training and guidance to our examiners on 

evaluating credit risk. 

Loan analysis and accounting principles are focal points of every 

new examiner’s classroom and on-the-job training. One of our primary regulatory objectives is to ensure that the call report a bank 

is required to publish each quarter accurately reflects the condition 

of the institution at that point in time. 

Accurate and transparent financial statements are essential to 

allow investors, creditors, and regulators to evaluate a bank’s financial condition. Congress recognized the importance of this when 

it passed FDICIA in 1991. Section 121 of FDICIA requires that the 

accounting principles used for regulatory reporting should be no 

less stringent than GAAP in order to facilitate prompt resolution 

of troubled institutions. 

When a borrower shows signs of trouble, banks and examiners 

must consider whether the loan warrants criticism or classification, 

then whether the loan should continue to accrue interest. And finally, if the loan is subsequently modified, does it need to be reported as a troubled debt restructuring. 

The banking agencies’ policies for these and other loan accounting issues are detailed in the instructions that banks follow when 

preparing their quarterly call reports. 

Consistent with GAAP, the call report instructions that a loan be 

put on nonaccrual status when payment in full of principal or interest is not expected, or when principal or interest has been in default for a period of 90 days or more, unless the asset is both well 

secured and in the process of collection. 

As a general rule, a nonaccrual loan may be restored to accrual 

status when none of its principal and interest is due and unpaid, 

and the bank can reasonably expect repayment of the remaining 

contractual principal and interest, or when it otherwise becomes 

well secured and in the process of collection. 

With this background, let me briefly offer the OCC’s perspectives 

on H.R. 1723 and H.R. 2056. 

H.R. 1723 would permit certain loans that would otherwise be 

treated as nonaccrual loans to be treated as accrual loans for the 

purposes of calculating regulatory capital. 

We are concerned that legislation proscribing specific regulatory 

accounting that is less stringent than GAAPs could mask troubled 

assets and overstate a bank’s capital ratios. 

This type of forbearance could diminish investor confidence in 

banks and undermine a primary objective of the prompt corrective 

action regime. 

H.R. 1723 also requires the Financial Stability Oversight Council 

to study how to prevent contradictory regulatory guidance on loan 

classifications and capital requirements. 

The OCC shares Congress’ interest in assuring that assessments 

are fair, balanced, and consistent over time and across institutions. 

For this reason, we generally coordinate with our regulatory 

counterparts on the issuance of regulations and supervisory guidance on matters such as capital and capital requirements and loan 

classifications. 

36 

As previously noted, the criteria for loan classifications and loan 

accruals are set forth in the interagency guidance and the call report instructions. 

H.R. 2056 would require the FDIC’s Inspector General to study 

the effects of certain policies that may also pertain to institutions 

directly supervised by the OCC. 

As such, we believe it would be appropriate for the OCC to be 

given an opportunity to provide comments before the study is finalized. Thank you. 

[The prepared statement of Ms. Kelly can be found on page 68 

of the appendix.] 

Mr. RENACCI. All right. At this time, we are going to recognize 

members, and I will yield 5 minutes to myself at this point. 

I know that both of the organizations do not get up every morning and try and figure out ways to slow down banking and slow 

down jobs. But that is actually what is happening in the real world 

out there. 

We heard testimony from the bankers earlier. We heard testimony from an independent owner of a business. 

And I think I told you my personal experience as a CPA and also 

a business owner, that the regulators out there are overreaching. 

They are doing everything that I know you have said in your conclusion that they are not trying to do and that you do not want to 

do. But, there is overreach. 

And if you came back to my district in Ohio, I could take you to 

six, seven, eight different businesses that would tell you that I 

have paid my loans on time. The value of the property is there. 

And as a CPA, I have had the opportunity to see those things. 

So, it is not like they are just telling me that. I have actually had 

the opportunity to see it, and understand it. 

So tell me, from both your perspectives, how do you make sure 

that this is not happening? You could say here today that your 

goals are for it to not happen. 

But if I was able to take you out into my district to five or six 

businesses and show you that it is happening, tell me what you do, 

from each organization, to try and make sure that this is not happening? Because it is. So I would like to hear what your thoughts 

are on that. 

Mr. French first. 

Mr. FRENCH. I would like to start by saying that I think, overall, 

most community banks today— 

Mr. POSEY. Can you pull the microphone closer? 

Mr. FRENCH. Most community banks today do have a lot of capital, I would say. The typical community bank has more than twice 

as much capital as it needs to be well capitalized, 21⁄2 times its 

minimum. 

So I think, in many cases, the banks are waiting for a return to 

robust loan demand. That is what we are hearing from the bankers 

who come in to meet with us regularly— 

Mr. RENACCI. I hate to interrupt you, but I have had 11 bankers 

in my office who all told me they have the dollars and the demand, 

but the regulators have—they are concerned about overreaching 

because of what the regulators are saying. 

37 

Mr. FRENCH. We would certainly be concerned as well. We want 

our banks to lend. We want them to make good loans. 

We are not out there looking to close banks. So, what we do is 

we have our examiners—they have comprehensive training programs. 

We go out, on a quarterly basis, to our regional offices and to 

Washington executives, talk to them about professionalism in dealing with banks. 

Mr. RENACCI. Again, but is anybody going out to Main Street, 

America, and seeing what the actual regulators are doing to some 

of these small businesses? Because so far, I have not heard that. 

Mr. FRENCH. We take great interest in this. We have a small 

business lending hotline at the FDIC. 

We have received about 500 or 600 calls where we investigate, 

find out what is going on behind those. 

We have it processed in our exams, where every risk management exam, we have a structured dialogue with the bankers about 

obstacles that they are seeing to credit creation. 

And we keep track of the answers. And we hope, hopefully, over 

time, this will help us to get a better sense of where some of the 

concerns might be— 

Mr. RENACCI. But it does sound like you are not testing or sampling. You are waiting for people to come and call the hotline. The 

problem is most of these individuals are concerned. 

Most of these banks are concerned about calling the hotline, because then they are going to be—they know they are, in many 

ways, they feel they are going to be punished. 

Mr. FRENCH. Yes— 

Mr. RENACCI. I am—I know we are running out of time. 

Ms. Kelly? 

Ms. KELLY. I would say that we do a tremendous amount of outreach to bankers in terms of getting out there, talking to them, 

hearing some of the comments that you are relating to us here as 

well. 

And they do share specifics with us, and we talk through it. We 

also have an ombudsman, an independent ombudsman at the OCC. 

Banks can file a formal appeal, if they really disagree with us. 

But more often than that, the ombudsman has many conversations with bankers to help better understand what the issues are 

and get their side of the story and try and resolve things on the 

supervisory side. 

So it is encouraging that dialogue. I hear all the comments you 

are relaying to me about retaliation. But I can tell you there is an 

extensive dialogue. 

The other thing we have done is quite a few Members of Congress have asked us to participate in different local forums with 

small businesses and bankers. We always are willing to do that. 

We have found those sessions to be very helpful as well in terms 

of keeping us informed of what the issues are, what the concerns, 

and trying to be responsive to that. 

Mr. RENACCI. But, again, it does not sound like either organization is actually sampling or testing or going out in the field. 

38 

Ms. KELLY. I am sorry, I did not speak to that directly. Yes, we 

do. I have designated credit experts, who are spread across the 

country. They do quality assurance reviews on a sampling basis. 

And when we have a problem bank, a bank that has particular 

credit problems, we will send those experts in to take a closer look 

at the work that the examiners are doing. 

So that gives us a good sense of how well the examiners understand the policies, and are they applying them consistently. 

Mr. RENACCI. Thank you. And just in closing, I can tell you that 

it sounds like you are trying, but it is not working. 

And we really do need—there are business loans out there that 

are—and businesses who are not able to employ people because 

their credit has been shrunk, even though they have made payments, their assets are there. 

So I hope we can do a little better job in the future, because this 

is all about jobs and making sure that these businesses have that 

opportunity. 

All right. I am going to recognize Mr. Westmoreland for 5 minutes. 

Mr. WESTMORELAND. Thank you, Mr. Chairman, and I have a 

chart I am going to ask to be put up on the board there. 

Mr. French, have you ever worked in a bank? 

Mr. FRENCH. No, sir. 

Mr. WESTMORELAND. Have you ever been in business for yourself? 

Mr. FRENCH. No, I have not. 

Mr. WESTMORELAND. Ms. Kelly, have you ever worked in a bank? 

Ms. KELLY. No. 

Mr. WESTMORELAND. Okay. Have you ever been in business for 

yourself? 

Ms. KELLY. No. 

Mr. WESTMORELAND. Mr. French, in kind of relationship to what 

the chairman was asking, does the FDIC do any postmortem after 

these closings to review what may have caused the closing? 

Mr. FRENCH. Yes. There are a number of things that we do. But 

we certainly have the Inspector General material loss reviews after 

closings that, where the loss exceeds a certain threshold. 

We also have, for any bank that is in a problem status or about 

to be put into a problem status, the level of internal review required for that to happen escalates to the regional director level. 

And— 

Mr. WESTMORELAND. I am talking about banks that have closed. 

Mr. FRENCH. Yes. 

Mr. WESTMORELAND. Do you go in and do a— 

Mr. FRENCH. We— 

Mr. WESTMORELAND. —postmortem review of what caused it? 

Mr. FRENCH. We do both formal and informal lessons learned. 

Mr. WESTMORELAND. Okay. 

Mr. WESTMORELAND. And how about the OCC? 

Ms. KELLY. Yes. The Treasury Inspector General does their own 

review, and we do an internal review as well. We look at not only 

what caused the failure, but more importantly, our supervision and 

do a lessons learned from that, based on the history and the benefit 

of hindsight, and what we could have done differently. 

39 

Mr. WESTMORELAND. So I would not have any problem getting 

copies of the postmortem reviews of the 65 banks that are closed 

in Georgia? 

Ms. KELLY. The I.G. reports? 

Mr. WESTMORELAND. Your report. Does the OCC not do a report, 

the I.G. does the report? 

Ms. KELLY. The I.G. does the report that is a public report, yes. 

Mr. WESTMORELAND. So you do not actually go in and look at 

them yourself? Or you just read the report? 

Ms. KELLY. We do. But those are internal documents. 

Mr. WESTMORELAND. Okay. But do you go in yourself and actually do an interview with the bankers or try to find out what happened? 

Ms. KELLY. We are working with the bankers all the time up to 

the closing. So we are having constant communication with the 

bankers up until then. 

Do you mean going back and talking to them afterwards? 

Mr. WESTMORELAND. Yes. 

Ms. KELLY. I would agree with what— 

Mr. WESTMORELAND. After it is closed, you might get a different 

opinion than when they are in fear of being closed. 

Ms. KELLY. Okay. But I would agree with what Mr. French said 

about the levels of review and as the problems progress— 

Mr. WESTMORELAND. Trust me. It is a different environment 

after the banks close than it is when they are trying to fight for 

their life. The attitude is probably a little bit different. 

The information you get will probably be a little bit different. 

And, Ms. Kelly, let me say that the most complaints that I have 

gotten have been about the OCC regulators, very arrogant, almost 

threatening, almost calling people crooks. 

The fact that somebody would get A’s on their report cards and 

talk about how well the bank was managed and then at the next 

review get F’s and talk about how crooked all the directors were, 

and here again, from both of your standpoints, we have trouble getting a lot of these people to come forward because they are afraid 

of retaliation. 

To me, that is not good. But let me draw your eyes to the chart 

up here. These are the top 10. And we have been told many times 

that the reason that we have had so many bank closings is because 

we have too many banks. And Professor Johnson kind of alluded 

to that, that there are possibly too many banks. 

If you look at the number of banks that we have in Georgia, 261, 

we have had 65 bank closings. And if you look at our population 

and the number of banks that we have and compare it to some of 

the other States, I do not know that we have too many banks. 

We have 159 counties in Georgia. And you would assume that at 

least every county may have at least their own community bank, 

although I have four counties in my district right now that do not 

have a community bank because they have been closed. They do 

not have one. 

They have banks from Arkansas and other parts of the country 

that have come in and assumed these banks that know nothing 

about the community, and were really sent there to flush some of 

these loans down. 

40 

But I would just like—if you look at Nevada, 45 percent of their 

banks have been closed. And look at the unemployment rate, look 

at the serious delinquencies, and their does not seem to be a pattern. 

It seems like there would be some type of pattern as to why 

these banks were being closed. And I do not understand in particular the—why as a result of the banks that have gotten TARP 

or the loss share agreements going in and destroying the markets 

in these communities and then the banks that have been there providing for the communities suffer because of the things that those 

other banks did. They are having to write these loans down. 

I will give you another example of government intervention, and 

let me just close with this. The community—not the community redevelopment, but the stabilization program. I had a call today from 

a builder. A county had gotten money for the stabilization program 

to stabilize the neighborhoods. He is building in the subdivision. 

There are also homes that is already been purchased in this subdivision. 

The county came in and bought lots from a bank with this revi- talization money, and they are selling the houses for $20,000 less 

than what they sold for. And the bank has called him and told him 

that he is going to have to put up more collateral because the values of the homes are less. 

Does that make good sense to you? Really, how would the OCC 

and the FDIC look at that when they go into that bank and the 

guy cannot put up more collateral, he has paid his interest, he has 

the same things he has been doing when government intervention 

has caused that loan to call for more collateral. That is inexcusable. 

Mr. RENACCI. Thank you, Mr. Westmoreland. And I yield 5 minutes to Mr. Luetkemeyer. 

Mr. LUETKEMEYER. Do you two understand the reason for Mr. 

Posey and Mr. Westmoreland’s bill here today—bills, from the 

standpoint that they are both the results of the frustration with examiners and the fact that things are not changing? You understand 

that? You understand why those bills are out there, why we are 

here today? 

Ms. KELLY. Yes. 

Mr. LUETKEMEYER. I made the comment in the previous hearing, 

I can bring Bill Gates here, I can bring in 100 business people just 

like Mr. Whalen, I can bring in 100 bankers just like Mr. McKillop 

and they can testify to the same thing. 

And I have, over the past 21⁄2 years I have been in Congress, met 

with the FDIC, the OCC, and the Fed on an annual basis till this 

year because—nobody will listen anymore and presented the same 

problem, that there is a huge disconnect between what you think 

is going on in the field and what is really going on in the field. 

I will give you an example. I have a banker—he is not in my district, but he is in my area—who was put on the problem list. His 

bank was on the problem list. It had never been on a problem list 

in the history of this bank—never had problems with earnings, 

never had problems with capital, never had problems with past 

due. Yet, he happened to be the next bank that was examined after 

an examiner got ripped for not catching some stuff in the previous 

exam. 

41 

The next day, his was the next bank, and he was put on the 

problem list. And ever since he has been on the problem list he has 

never still had a problem with his capital, past due, earnings, 

whatever. 

That is what is going on. And you guys are blind to this. I hope 

that you understand how significant this problem is, because it is 

affecting the people who—Mr. French, you made the statement 

awhile ago that you do not micromanage banks. But do you really 

understand the effect that you have with the interpretation of the 

laws, the recommendations that you make and the exam that you 

have on communities? 

Do you understand that? 

Mr. FRENCH. We do understand, sir. That is part of why we really want to emphasize to our examiners the importance of taking a 

balanced and reasoned approach and— 

Mr. LUETKEMEYER. How are we going to solve this problem? 

Mr. Posey and Mr. Westmoreland are trying to find a way to 

solve the problem here today. You guys do not agree with this approach, obviously. 

What is your solution for how we can find a way to allow the 

banking community, especially community bankers, because they 

are the ones that really help our small business and local communities fund the businesses that make this country work. 

How do you—what is your solution if you do not like these two 

bills today? 

Mr. FRENCH. Like I said, I think we have a very sluggish, still, 

a very sluggish economy. And we had a lot of banks with a lot of 

capital, very liquid balance sheets now after going through this crisis for 3 years, 4 years. 

So we do have to keep reinforcing the message that we want 

banks to make prudent loans. And we do not want—we want to 

keep pressing the point with our examiners, as we have been 

doing, that you do not write down a loan based solely on the collateral if the borrower’s making his payments. And I think we just 

need to keep that up. 

Mr. LUETKEMEYER. Ms. Kelly what do you think? 

Ms. KELLY. Yes, my response would be that a key to economic 

recovery is making sure that we have a strong banking system. 

And our responsibility as regulators is to ensure that banks maintain their safety and soundness. 

And so it is important when banks are experiencing trouble that 

they identify those issues and they deal with them early on when 

there is still flexibility, they still have to work with borrowers who 

are experiencing some problems, possibly restructure the loan— 

whatever is the right thing to do. 

I would go back to the comment that Ranking Member Maloney 

made earlier about whether there is a way we can just give people 

more time. So the earlier that there is a recognition of a potential 

problem, and the borrower and the banker come together and talk 

about how there could be a problem with repayment and how can 

we work through it, the better. 

Mr. LUETKEMEYER. I understand that. I have been on your side 

of the table too. 

Ms. KELLY. Yes 

42 

Mr. LUETKEMEYER. I have been on both sides of the table. I am 

kind of unique around here. 

But by the same token, you have to understand from your side 

of the table what the people on the other side of the table are going 

through and understand that their long-time working relationship 

with those customers, they know those people. You do not. And yet, 

you are telling them how to micromanage—whether you like it or 

not, you are telling them how to micromanage their business. And 

I think that is unfortunate. 

One more question I want to ask you. 

Professor Johnson made a comment that the FDIC is closing— 

is not closing—you are not closing too many banks. You need to 

close more, closing too few. 

What do you think about that comment? 

Mr. FRENCH. I do not think we are anxious to close more. I think 

we are taking them as they come, one bank at a time. And we really—we try to avoid a failure whenever we can. We try to work with 

the bankers to help them to—in their efforts to reach out, get investors, deal with the issues that they have. But the failure is the 

last resort, and it is not a good thing. 

Mr. LUETKEMEYER. I realize we are—you know—I am hammered 

on. You get a chance to hammer on him. But thank you very much. 

Thank you, Mr. Chairman. 

Mr. RENACCI. Thank you, Mr. Luetkemeyer. 

I now recognize Mr. Pearce for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Ms. Kelly, you have said that bankers have the right to file an 

appeal whenever there is some write-down, is that correct? 

Ms. KELLY. If they choose to do that— 

Mr. PEARCE. If they choose to do that. 

Does the borrower have that same right? 

I find that the banks are more than willing to comply because 

They are pretty much afraid of the regulators. So they comply. But 

does the borrower have the right to make an appeal when you do 

that? 

Ms. KELLY. To the OCC? 

Mr. PEARCE. To anybody. Can they appeal to God, even? Do you 

you have a process for them to appeal? Because I think that is 

where the pressure comes in the situation. I assume that is a ‘‘no?’’ 

Ms. KELLY. We have a consumer complaint department that they 

could go— 

Mr. PEARCE. How strong is it? Can the consumer complaint department overturn the regulator? 

Ms. KELLY. The bank makes the decision about whether or not 

to make the loan— 

Mr. PEARCE. No, the regulator makes the decision and the bank 

says, ‘‘Yes, we are afraid of you and we are going to do what you 

said.’’ 

So is anybody—does the borrower have the right to appeal your 

decision to you? 

I guess that is a ‘‘no.’’ 

Ms. KELLY. But it is not my decision. 

Mr. PEARCE. The—I would follow up with Mr. Westmoreland’s 

questions. Can I get a copy of the postmortem on Charter Bank in 

43 

Albuquerque? I would like to see that. Is that information available 

to me—your process, your demand? 

Ms. KELLY. I would have to check with our attorneys— 

Mr. PEARCE. That is a formal request. I would like for you to 

check with your attorneys. 

Ms. KELLY. Absolutely. 

Mr. PEARCE. Is that process transparent? That process of closing 

banks, is it transparent? 

Ms. KELLY. What about the process? 

Mr. PEARCE. Is it transparent? Do you have it available to people? Is it something that you are proud of? Is it something that you 

would share readily? 

Ms. KELLY. I do not understand what you mean by process. If 

you could clarify for that. 

Mr. PEARCE. The process of closing a bank. 

Ms. KELLY. The decision to close— 

Mr. PEARCE. The decision and the process. 

Ms. KELLY. Our enforcement actions are public. 

Mr. PEARCE. Is that transparent? 

Ms. KELLY. They are public. 

Mr. PEARCE. Then why do you have a gag order on Mr. 

Werthheim and all the Charter board members? Why did you come 

in and threaten him that if he did not sign a gag order that you 

were going to prosecute him? Why do you have a gag order on a 

simple closing of a bank? 

Ms. KELLY. I— 

Mr. PEARCE. I would like an answer to that also. 

Ms. KELLY. I will have to follow up later— 

Mr. PEARCE. I would like an answer to that in writing. 

Ms. KELLY. —have to follow up with you on that. 

Mr. PEARCE. Mr. French, you declare on page 4 that there are 

common misconceptions. One is that the regulators require the 

write downs of loans to creditworthy buyers. 

If I provide you one, two, three—if I provide you three people 

who say that their creditworthy loan was written down because of 

a regulator, will you retract your statement publicly that it is a 

misconception? 

Mr. FRENCH. I guess we would have to see what— 

Mr. PEARCE. No, I am asking if I bring them to you and I provide 

them to you to talk to you, will you recant this testimony? Because 

I do not think it is a misconception. I believe that they are a write 

down. I do not think those groups of three States of Indian hotel 

owners came and asked me to meet with them in El Paso, Texas, 

a year ago to complain that they had never missed a payment, and 

yet you—somebody had caused their loans to be written down. I do 

not think they were misleading me, not every single one of them. 

Mr. FRENCH. My understanding, sir, is that there could be situations, for example, where there is the projects, lending project. 

Maybe the borrower, his tenants are behind on their rent— 

Mr. PEARCE. Every single one of them has— 

Mr. FRENCH. —the borrower may come to the bank and say, ‘‘I 

am not going to be able—’’ 

Mr. PEARCE. Yes, I find your comments to be quite hedging, 

much more hedging than your testimony here. 

44 

I go on and read here, ‘‘The agencies look to the ability of the 

borrower to repay.’’ What criteria do you use to determine if a loan 

is going to be repaid? 

Mr. FRENCH. That is a fact-specific and individual— 

Mr. PEARCE. Do you actually use that the payments are received 

on time and never missed? Is that one of the criteria fact-specific? 

Mr. FRENCH. Of course. That is one of the major— 

Mr. PEARCE. And each one of these hotel owners had never 

missed a payment, and they were being asked to come up with 

$750,000 more capital for a $3 million hotel, and you are telling me 

that it is not good enough that they have never missed a payment, 

that there is something else. 

And I will tell you that something else had to be the mark-tomarket, it had to be the fact that they were being downgraded, exactly what you tell me is not occurring that you describe as a misconception in your report. And I would like to bring enough pressure on you to where you actually acknowledge that there are questions on the other side because your report simply declares it a 

misconception, you dismiss it. 

Mr. FRENCH. I certainly want to acknowledge the serious— 

Mr. PEARCE. You mean, you have never heard one person tell you 

publicly or privately, personally, that their loan was written down? 

You have never heard that? Never? You have never? Never? You 

say it is a misconception. 

Mr. FRENCH. I have certainly heard of loans being written down. 

Mr. PEARCE. But you do not believe them, it is a misconception, 

you declare it is a misconception. 

I would like to continue the discussion in my office some day if 

you get the chance. 

Thank you. I yield back, Mr. Chairman. 

Mr. GRIMM. [presiding]. The gentleman’s time has expired. 

Mr. Manzullo, you are recognized for 5 minutes for questions. 

Mr. MANZULLO. Thank you. I would yield to you, Mr. Chairman, 

for 30 seconds. 

Oh, I am sorry, Mr. Renacci is not there, right? I do not know 

what happened to him. 

Mr. GRIMM. I appreciate it anyway— 

Mr. MANZULLO. Thank you. 

Ms. Kelly, I discussed with Mr. Renacci, would you be willing 

personally to meet with the applicants for loans who were turned 

down? Would you be willing to go out there and personally meet 

with these people face to face? 

Ms. KELLY. Sure. Yes, I would be happy to. 

Mr. MANZULLO. Good. I knew you would say that, because the 

disconnect is so extreme here. If we could find people acting in bad 

faith, then you can point the finger. 

The regulators acted in good faith. The examiners are acting in 

good faith. The bankers are acting in good faith. And the consumers are acting in good faith. So this is not a matter of good 

versus evil. It is not ‘‘Spy vs. Spy’’ out of MAD Magazine. It is a 

matter of the system is not working. 

Let me give an example, Ms. Kelly. On page 11 of your testimony 

you state, way at the bottom, ‘‘Examiners are criticizing or borrowers simply’’—‘‘Examiners are criticizing loans or borrowers simVerDate Nov 24 2008 18:10 Dec 02, 2011 Jkt 067940 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\67940.TXT TERRIE
45 

ply because the current market value of their collateral has declined are forcing bankers to write down loans to current distressed 

market values.’’ 

You were a bank examiner, I believe, for 27 years. 

Ms. KELLY. Yes. 

Mr. MANZULLO. When you—if you went into a bank yourself and 

looked at their portfolio, and let us say somebody has a million dollar loan on a business and the property value has fallen from a million dollars, say, to $700,000, but the person is otherwise current, 

what would you do in that case, as the bank examiner? 

Ms. KELLY. I would have to look at the specifics of the loan and 

the borrower’s financial information— 

Mr. MANZULLO. Let us just say that everything is fine, the loan 

is fine, the cash flow is fine. 

Ms. KELLY. Okay. There is clear information supporting the fact 

this borrower is going to be able to repay the principal in full. 

Mr. MANZULLO. That is correct. No default. 

Ms. KELLY. Then I would not write the loan down. 

Mr. MANZULLO. Then you need to talk to your examiners, because what they are doing is they go in, in a situation like this, 

and the examiners are forcing appraisal after appraisal after appraisal. These commercial appraisals are extraordinarily expensive. 

And the value of the property keeps on going down, but the borrower is in business, he is making it through, he is slugging it out, 

and then all of a sudden, he gets pressure from the bank. And the 

bank is saying, ‘‘Well, you have—we are going to call your loan, 

even though you are current,’’ and they blame it on the examiners. 

I was going to ask the question, do you understand the frustration going on here, but it is obvious that you do. 

Ms. KELLY. I do. I absolutely understand. Bankers are in very 

difficult times, borrowers are in very difficult times. And bankers 

have to manage their risk. 

And this is why someone made the comment about all the heads 

of the agencies have said, ‘‘If you want to bring us an individual 

loan, then we will look at it.’’ Because when you tell me this is a 

creditworthy borrower, I accept you at face value. But, I have not 

looked at the financial information to determine that, based on that 

person’s financial situation today, that their financial statements 

support their ability to repay the loan. 

Mr. MANZULLO. If I could follow up on Mr. Pearce’s question, if 

an examiner comes in, tells a bank that this loan is risky, and the 

bank ends up—and the examiners end up classifying the loan, now 

in that case, where the bank has acted in direct response to the 

statement of the examiner, does the consumer have recourse 

against the FDIC or the OCC to reverse that decision? 

Ms. KELLY. But the classification of a loan simply reflects the 

risk that is associated with that asset on the bank’s balanced 

sheets at that time. It does not preclude the banker from continuing to carry that loan, from continuing to work with the borrower. We encourage that. It is just a way for us to reflect the current condition. 

Mr. MANZULLO. But it causes the bank to have to put up more 

reserve capital. 

46 

Ms. KELLY. Yes, because it is reflecting the fact that there is 

greater risk associated with that— 

Mr. MANZULLO. And that makes the bank want to get out of that 

whole transaction altogether. 

Ms. KELLY. It may. But if they believe it is someone who has 

been a customer for a long time and they are going through tough 

times— 

Mr. MANZULLO. But the question was, if that was reversed and 

the bank does not have to put up more reserve capital, the bank 

can keep on going and making further loans. So there is no appeal 

system. 

Ms. KELLY. But if there was greater risk associated with that 

credit and the bank does not reserve for it properly, then it weakens the condition of the bank because if that person is not able to 

repay the loan the bank has less of a cushion to absorb that loss. 

Mr. MANZULLO. Okay. Thank you. 

Mr. GRIMM. The gentleman’s time has expired. 

The gentleman from Delaware, Mr. Carney, is recognized for 5 

minutes for questions. 

Mr. CARNEY. Thank you, Mr. Chairman. 

And first, let me apologize for missing the bulk of this hearing, 

so I am coming into this conversation at the very end. 

I have heard considerable frustration from Members about things 

that are happening with folks trying to get loans in their States 

and I have heard, not just today but other days, testimony from the 

gentleman from Georgia, Mr. Westmoreland, about some of the 

bank failures in his district. I have quite a bit of sympathy for that. 

And I want to congratulate him for bringing the resolution forward 

to look at that issue. 

But, I am kind of caught betwixt and between because we have 

testimony about a lot of banks failing, and obviously that is the 

case, and I hear the same thing from small-business owners in my 

State, which is my district, the whole State of Delaware, that they 

are not able to get loans for working capital, that they have performing loans that are being called, and a whole range of things 

similar to what you are been hearing from members on the other 

side. 

And we had the distinguished professor from MIT here this 

morning who talked about the need to be careful about what we 

would do here with H.R. 1723. 

So I think the challenge is really to strike some balance where 

banks are making prudent loans. Sheila Bair was here not long ago 

for incredible testimony where she said that they were encouraging 

banks to make good loans because that is the way banks make 

money. 

What is your perspective on what needs to be done at this point 

in time, whether the pendulum has swung back too far the other 

way, what you are seeing in the field. We are still, I suspect, seeing 

banks that are under stress. And is this second resolution, 1723, 

as Mr. Johnson said, going too far? How would you characterize 

that? 

Mr. FRENCH. Let me start. We are seeing some signs of improvement in banking performance, looking at it as a whole, in terms of 

the level of nonperforming loans, while still high, is starting to 

47 

come down, earnings starting to improve, provisions for loan losses 

starting to come down, percentage of profitable banks increasing. 

We are seeing some peaking of the problem bank list that we 

have, it is starting to plateau and perhaps looks like it is going to 

start inching downwards. 

We have about 12, 13 percent of the FDIC-supervised banks that 

are considered problem banks. 

Mr. CARNEY. Say that number again. 

Mr. FRENCH. About 12 or 13 percent. So 87 percent are not. 

So, I think there is a tendency for—when you get to a turning 

point in the economy it tends to come—you always think you are 

at the—things cannot get any worse, and that is when they start 

getting better. 

So— 

Mr. CARNEY. So as my time is running—sorry for cutting you off, 

but do you have a view of H.R. 1723? 

Mr. FRENCH. Sir, yes, I am sorry. We do not support that because 

we think it will require us to have regulatory capital that is less 

stringent than GAAP. And so we do not support that aspect of it. 

Mr. CARNEY. So that would be going too far the other way. 

Mr. FRENCH. That is our view. 

Mr. CARNEY. And it is just not good accounting from your perspective? 

Mr. FRENCH. That is correct. We think that it would basically require us to have—that banks have regulatory capital that was less 

stringent than what they are required to count as capital under 

GAAP. And we do not think that is a good— 

Mr. CARNEY. We heard earlier this morning from a very successful business person from Iowa, I believe, who talked about the difficulty he had and talked about his financials, his balance sheet, 

which sounded very strong to me. But he had been turned down 

by, I think he said 12 or 13 banks. 

Is there any way to—obviously, I do not know the details, but 

could you comment on a situation like that, obviously, anecdotal? 

I hear the same thing again from borrowers in my district. But, as 

somebody who represents these folks, it gets your attention. 

Mr. FRENCH. I would imagine it would. And that gets our attention, too, believe me. And we— 

Mr. CARNEY. Sheila Bair said, then let us know who they are. 

Yes, banks should be making those kinds of loans. 

Mr. FRENCH. We have the hotline that I mentioned for borrowers. Business borrowers can call and let us know what is happening out there, what their concerns are. And, hopefully, we will 

get a better understanding of what the issues are. It is just— 

Mr. CARNEY. Thank you. 

And I want to thank the Chair—I guess the acting Chair; the 

Chair is not here—for calling the hearing today. 

Mr. GRIMM. Thank you. 

And the Chair recognizes Mr. Posey for 5 minutes for questions. 

Mr. POSEY. Thank you, Mr. Chairman. 

The first thing I would like to do is set the record straight a little 

bit. This bill has been mischaracterized as changing accounting 

standards. And late last night, I received correspondence from the 

American Institute of CPAs, and I want to quote from this corVerDate Nov 24 2008 18:10 Dec 02, 2011 Jkt 067940 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 K:\DOCS\67940.TXT TERRIE
48 

respondence: ‘‘It does not legislate accounting standards. You are 

dealing with regulatory capital issues.’’ 

So, for everyone who has alleged that this changes accounting 

standards, it is just not true, if you have any respect for the CPAs. 

And I think they are the authorities on that issue far and away. 

Everything would be good, if out in our districts reality reassembled even remotely the picture that you have painted about regulation. Saying that this would preclude you from being able to examine or monitor loans, if you could not put them on nonaccrual basis, 

it is just not wrong and it is just not true. 

You could still monitor. You could still prosecute for fraud. You 

could prosecute for abuse. There is nothing that would stop you 

from doing that at all. 

And this is not forbearance, if we statutorily define performing 

loan as a historic performing loan. Too many people want to paint 

this as forbearance so they can tar and feather it in a public arena. 

And that is just underhanded and dishonest in my humble opinion. 

I agree with you that accurate reporting is critical. And that is 

accurate both ways. Again, I think it is atrocious that a regulator 

can say, ‘‘Well, we are going to put this on nonaccrual, because we 

do not think he should be able to make the payments in this economy.’’ 

Maybe they did not calculate it that the people are eating beans 

or rice or doing whatever it takes to make their payment. But I 

think that is pretty sad. 

You pretty much describe the current state of affairs of regulation being fair, balanced, and realistic. And I think it is just the 

opposite. You have painted a picture that regulators are all perfect, 

and everything is in perfect order. Nothing can be done to help create jobs and stop people from having their property foreclosed on. 

And I think I just have to disagree with you there. I wonder 

what testimony of the previous witnesses or the other members of 

this committee you particularly disagree with or think it is misleading or dishonest, because you speak to us like none of the 

things they have said is true. And I am inclined to believe it is just 

the opposite. 

We know about the hotlines. We know about the ombudsmen. If 

you have a problem with the regulator, call the ombudsman. But 

what happens when a bank calls an ombudsman? He tells the ombudsman how unfairly he is being treated. And the next call made 

is the ombudsman calling the regulator saying, ‘‘Guess what jerk 

idiot just called me today to complain about you?’’ 

There is retribution out there in our homeland. Trust me. Ask 

any banker. They will not want to come up here and get more retribution, but it is out there. They have all testified to that pretty 

much already. 

We all know what some of the most fearsome words are to Americans across this great country: ‘‘I am from the government. I am 

here to help you.’’ And some of the reasons people fear that have 

been expressed very clearly today here. 

It is disappointing to me that you fail to acknowledge even remotely that there is even the minutest problem anywhere and that 

there is any solution that is needed other than more regulation— 

regulate them more—and that there is an abundance of capital. 

49 

Why weren’t these loans being made that people talked about 

today, if there is an abundance of capital just looking for good 

loans? It is because they fear the overregulation. 

How do you close a bank that has significantly greater assets 

than it does liabilities? We are probably going to run out of time 

before you have time to answer that, and with the chairman’s permission, I would like to request that you respond to that in writing. 

Give me a couple of scenarios as to how you close banks with 

more assets than liabilities. And do not fail to mention how much 

of the assets have been put on a nonaccrual basis so that they 

could not use them to operate the banks. 

I want to know how many regulators you have. And I would like 

to know how many have ever been disciplined for abusing their 

regulatory authority, if any. What kind of grading do you do on the 

regulators to make sure that they are fair and balanced? 

I hope that you can work out some way to support this solution 

or another one internally if— 

We have run out of time. The bottom line is that if, in fact, you 

continue just to dispute the findings that have been clearly been 

put forth by our witnesses and members of this committee, it is 

just personally very disappointing. 

Thank you, Mr. Chairman. 

Mr. RENACCI. The gentleman’s time has expired. 

The Chair is going to make a recommendation, Mr. Posey, that 

you maybe put those questions, all of them, in writing, so that they 

can be responded to in writing, because you have gone pretty 

quickly, and we want to make sure all those questions are answered. So thank you very much. 

The Chair recognizes the gentlewoman from New York, Mrs. 

Maloney. 

Mrs. MALONEY. I thank the Chair for yielding and I apologize. 

It is a busy, busy day with the unemployment numbers coming out, 

the debt ceiling debates, and all kinds of policy decisions being 

made, which brings me to a question related, really, to the stagnant economy that we are having. 

There has been an austerity program, where there have been 

many cutbacks. The economy is not growing. We just created 

18,000 jobs, similar to last month. To what extent do you think the 

lack of the loans are people are not applying in this stagnant economy, number one? 

And number two, under the Basel program we are now calling 

upon Europe and other countries to have more stringent capital requirements. That is part of what Chairman Bernanke and our entire economic team is working for. To what extent would relaxing 

our risk weighting of nonaccrual loans, as this bill would permit, 

be inconsistent with and undercut those efforts that we have on 

our national level? 

Lastly, I am very sympathetic to the financial crisis that many 

of our community bankers are facing. Are there other ways that 

regulators could accommodate time for them to get their house in 

order or to re-capitalize without moving into close a bank, but 

working with them to become solvent, so they can become strong 

and serve the communities? 

50 

Thank you. And thank you for your service and for being here 

today. Thank you. 

Mr. FRENCH. Thank you, Congresswoman. 

We are—the FDIC is a strong supporter of the effort to basically 

increase the overall capital requirements of the banking industry, 

as you know. So we agree with the thrust of what is going on in 

the Basel process, and we think it is very important for the banking industry to have a solid base of capital that will enable it to 

be a source of credit to the economy through good times and bad 

times. 

So one of the issues with, as you allude, with 1723 is that it, for 

a certain class of loans, it says that certain losses that would otherwise be recognized for accounting purposes would not be recognized 

for capital regulation purposes. And that is inconsistent with the 

overall direction of where we would like to go in terms of capital. 

So in terms of what else we can do, giving banks more time, I 

think that is very appropriate. The prompt corrective action system 

really kicks in for a pretty small group of banks. As I said before, 

most of our banks are not in problem status. Most, when you look 

at their balance sheets and financial reports, purport very strong 

capital ratios. 

But when that is not the case, we have the prompt corrective action system, where we work with them, hopefully, as early as possible, to address capital— 

Mrs. MALONEY. But as I understand it, the prompt corrective action gives them 90 days to correct their situation. And given the 

fragile economy, that may not be enough time for a good community bank that really would need more time to recapitalize. 

So I am wondering, is there flexibility to extend that time, or is 

it a 90-day cutoff? 

Mr. FRENCH. There is flexibility. And I would also emphasize 

that it is a very small number of banks that ever gets to dealing 

with that 90-day issue. That is a really low level of 2 percent capital. But once we get that— 

Mrs. MALONEY. But when I talk to the gentleman who was 

speaking earlier from Georgia, he was talking very passionately 

about 65 banks that have been closed in his great State. And I 

would assume all 65 of them went through prompt corrective action, right? 

And I know that in my State, there have also been a number of 

community banks and large banks that have closed. So they all 

went through prompt corrective action. So it is not a small number, 

when you are representing a community that has one of those 

banks that is affected. And in some cases, it may be the only bank 

in the community, so it is really very, very important. 

How do you get an appeal from the 90-day to extend? Would you 

have to legislate that, or can you—is that a discretion of— 

Mr. FRENCH. It is built into the statute. And if we think that the 

bank has a prospect—if we think it is in the best interest of the 

insurance fund and that the bank is expected to be able to raise 

the capital, that would have to be something that we really—looks 

like it is going to succeed. 

If it is just a matter of, we are still looking around, and we have 

been doing that for years and it has been—at some point, you have 

51 

to make a judgment as to what has the most cost-effective approach. 

Mrs. MALONEY. Is it appealable, if a judgment is made to close 

a bank? Can a bank appeal to a higher person? 

Mr. FRENCH. Not being a lawyer, I would want to get back to you 

on that. 

Mr. RENACCI. The gentlewoman’s time has expired, but if Ms. 

Kelly would like to give a response? 

Ms. KELLY. I just wanted to add something—I would agree with 

everything that Mr. French said, but just to add the point that the 

90 days is really the very end of the process. If you look at some 

of the I.G. reviews that have been done at various closings, you will 

see that our regulatory interaction with a bank that is developing 

problems starts very early. 

And this goes back to the point I made earlier about the sooner 

that a bank recognizes its problems and starts working constructively on them, the more time and more flexibility they have to 

solve it. 

Mr. RENACCI. Thank you, Ms. Kelly. 

The gentlewoman’s time has expired. The Chair will yield 5 minutes to himself for questioning. 

First of all, thank you, Mr. French and Ms. Kelly. We do appreciate your time in coming to testify. It has been a robust discussion 

so far. 

There is one thing, though, I think we walk away. There cannot 

be any question or ambiguity in your minds at this point that there 

is certainly a disconnect somewhere. The passion in the Members 

is coming directly from the people they represent, our constituents, 

many of whom are the hard-working people who have created the 

jobs for decades. And we had a gentleman, I believe his name was 

Mr. Whalen, who was testifying earlier today, that over 33 years, 

he built a company, a solid, solid company. And one of his loans 

on a project that he was doing was written down, even though he 

made every payment and made every payment on time. 

Regardless of how bad the meltdown was, regardless of what we 

have been through, the pendulum has swung way too far. When 

that is happening for a successful entrepreneur like Mr. Whalen, 

and it is a story we are hearing consistently through every part of 

the country from New York to Iowa to Pennsylvania, Indiana, Florida, throughout the country, we cannot put our heads in the sand 

and ignore it. 

There is a disconnect. Every banker I have spoken to says they 

are afraid of their regulators. They are saying that loans they 

would normally—that do fit the guidelines, but they are just not 

willing to go for it. So when I hear things like, ‘‘there is capital out 

there,’’ they are absolutely right. They are just not lending it. 

We heard before bankers are in difficult times. Borrowers are in 

difficult times. That is accurate. That is true. But I submit to you 

that the regulators are making it worse, instead of better. And I, 

for one, completely agree that we need to have strong rules to prevent another financial breakdown or a meltdown or a crisis. But 

there is a tipping point and we have tipped. 

And I do not think that you can have so much consistency among 

the members of what they are hearing from their constituents 

52 

without recognizing we have a serious problem. And if it continues 

we are going to see what we have seen today: unemployment increase yet again. 

Something is not working. Something is broken. And it certainly 

is not the entrepreneurial spirit of the American workforce. It is 

not the relentless work ethic that built this country. It is the fact 

that we had some problems, and what the government does to address them is always over-address. We have seen this time and 

time again. 

But I think there is another problem that I have seen as someone who worked in the Federal system for 16 years. I have seen 

it myself. When there is a problem, those at the top do not want 

that problem to happen again no matter what because it is their 

watch. ‘‘Not on my watch is that going to happen.’’ 

So they do everything they can, and this in all sincerity, with all 

good intentions not to allow that to happen again. And they get so 

focused on making sure it does not happen again that those under 

them are told in no uncertain circumstances we better not have a 

pattern of defaults or problems or anything. So everyone goes into 

CYA mode and everyone clamps down. And what happens is you 

create an environment that no business can be done. 

And the reality is if no business is done, from a regulator’s point 

of view, you will not have any problems. It is very true. But that 

is not sustainable for our overall economy. It is not even close to 

sustainable. 

And what is happening now is the frustration level of those who 

have worked their tails off to build businesses and are passing 

those businesses on to their children, are seeing it dwindle away 

and circle the drain. And that is reflected every single day in all 

the economic forecasts and it is seen in the unemployment rate. 

If we do not alleviate and get out of our own way, and allow 

these entrepreneurs and innovators to access the capital they need, 

to grow their business, to expand their business, to start their new 

businesses, I submit to you that we can never recover from this recession. 

I would just ask in closing that as you leave here today, I think 

you have the most noble of intentions. I really do. But I think in 

the interests of ensuring that we never have another calamity, we 

have become so laser-focused on the problem that we have restricted business to a point that you are right, we will not have any 

more financial meltdowns, but we will not have any finances to 

worry about. 

So, I would please ask you to really reflect on that and work with 

your regulators that are out there making life very difficult for a 

prosperous economy to grow and to be robust in this country. 

And with that, I thank you for your time and your attention, and 

we will close up. 

The Chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

The hearing is adjourned. 

[Whereupon, at 12:14 p.m., the hearing was adjourned. 

(53) 

A P P E N D I X 

July 8, 2011 

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