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TOO BIG HAS FAILED: LEARNING FROM 

MIDWEST BANKS AND CREDIT UNIONS 

FIELD HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

AUGUST 23, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–151 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

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 

DENNIS MOORE, Kansas 

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 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

DENNIS MOORE, Kansas, Chairman 

STEPHEN F. LYNCH, Massachusetts 

RON KLEIN, Florida 

JACKIE SPEIER, California 

GWEN MOORE, Wisconsin 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

ALAN GRAYSON, Florida 

JUDY BIGGERT, Illinois 

PATRICK T. MCHENRY, North Carolina 

RON PAUL, Texas 

MICHELE BACHMANN, Minnesota 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

August 23, 2010 ................................................................................................ 1 

Appendix: 

August 23, 2010 ................................................................................................ 37 

WITNESSES 

MONDAY, AUGUST 23, 2010 

Beverlin, John D., Sr., President and Chief Executive Officer, Mainstreet 

Credit Union ......................................................................................................... 26 

Herndon, David L., President and Chief Executive Officer, First State Bank 

of Kansas City, Kansas ........................................................................................ 19 

Hoenig, Thomas M., President, Federal Reserve Bank of Kansas City .............. 6 

Kemper, Jonathan M., Chairman and Chief Executive Officer, Commerce 

Bank, Kansas City, and Vice Chairman, Commerce Bancshares, Inc. ............ 23 

Kemper, Mariner, Chairman and Chief Executive Officer, UMB Financial 

Corporation ........................................................................................................... 21 

Marsh, Marla S., President and Chief Executive Officer, Kansas Credit Union 

Association ............................................................................................................ 25 

Stones, Charles A., President, Kansas Bankers Association ............................... 17 

APPENDIX 

Prepared statements: 

Moore, Hon. Dennis .......................................................................................... 38 

Beverlin, John D., Sr. ....................................................................................... 40 

Herndon, David L. ............................................................................................ 45 

Hoenig, Thomas M. .......................................................................................... 52 

Kemper, Jonathan M. ...................................................................................... 60 

Kemper, Mariner .............................................................................................. 72 

Marsh, Marla S. ................................................................................................ 79 

Stones, Charles A. ............................................................................................ 84 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Moore, Hon. Dennis: 

Comments on the Dodd-Frank Wall Street Reform & Consumer Protection Act .......................................................................................................... 89 

Letter from the National Association of Federal Credit Unions (NAFCU) . 91 

(1) 

TOO BIG HAS FAILED: LEARNING FROM 

MIDWEST BANKS AND CREDIT UNIONS 

Monday, August 23, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:40 a.m., in the 

Capital Federal Conference Center, Regnier Center, Johnson County Community College, 12345 College Boulevard, Overland Park, 

Kansas, Hon. Dennis Moore [chairman of the subcommittee] presiding. 

Members present: Representatives Moore and Jenkins. 

Also present: Representative Cleaver. 

Chairman MOORE OF KANSAS. Good morning. This field hearing 

of the Subcommittee on Oversight and Investigations of the House 

Financial Services Committee will come to order. 

Our hearing today is entitled, ‘‘Too Big Has Failed: Learning 

from Midwest Banks and Credit Unions,’’ inspired from the April 

6, 2009, Time magazine cover story, ‘‘The End of Excess: Why this 

Crisis is Good for America.’’ This is the second in a series of hearings where we will look at the key issues that may not be receiving 

enough attention, so we can learn and work towards a stronger and 

more stable financial system. 

Before we begin with the formal proceedings, I want to take a 

moment of personal privilege to first thank Johnson County Community College President Terry Calaway and all of the staff and 

faculty here for hosting today’s field hearing. 

For those of you who do not know, before my constituents sent 

me to Congress, I was elected and proud to serve on the Board of 

Trustees for Johnson County Community College, and I am very 

glad we were able to have one of my last subcommittee hearings 

here at Johnson County Community College. 

I also want to thank the other members who have traveled and 

taken time out of their busy schedules to be with us today: Congressman Emanuel Cleaver from the 5th Congressional District of 

Missouri; and Congresswoman Lynn Jenkins from the 2nd District 

of Kansas. Thank you very much for being here. 

We will begin this hearing with the members’ opening statements, up to 10 minutes per side, and then we will hear testimony 

from our witnesses. For each witness panel, members will each 

have up to 5 minutes to question our witnesses. The Chair advises 

2 

our witnesses to please keep your opening statements to 5 minutes, 

to keep things moving, so we can get members’ questions in. 

Without objection, all members’ opening statements will be made 

a part of the record. I now recognize myself for 5 minutes for an 

opening statement. 

Our economy continues to slowly recover following the worst financial crisis and recession since the Great Depression in 1929. 

While there were a number of contributing factors that caused the 

financial crisis, one of the lessons we have learned is that ‘‘too-bigto-fail’’ financial firms can cause a lot of damage if not appropriately supervised. 

And who paid the price for these mistakes? Unfortunately, it was 

not those ‘‘too-big-to-fail’’ firms on Wall Street, but rather our constituents and businesses here in Kansas and across the country. 

American households lost about $14 trillion in net worth over the 

course of 2 years. Retirement accounts saw an over 20 percent decline in value, forcing many Americans to delay their retirement. 

Millions of Americans lost their homes through foreclosure. Bernie 

Madoff’s Ponzi scheme defrauded $65 billion from investors. 

And the government was forced to respond to prevent further 

damage. Congress approved, and even though it was deeply unpopular, I voted for the $700 billion TARP proposal. I did so not 

because I wanted to, but because it was the right thing to do, I believe, for our people and our country. In fact, while there continue 

to be misperceptions about it, economist Mark Zandi, an advisor to 

Republican Senator John McCain in the last presidential election, 

has recently done some analysis and found that without TARP, the 

Recovery Act, and other measures, we would have seen the unemployment number double with 8.5 million fewer jobs, and that is on 

top of the more than 8 million jobs we have already lost. 

But given the economic damage we did suffer, it is not surprising 

that many Americans have lost their faith in our financial system. 

As Mr. Hoenig has put it, ‘‘too big has failed’’ and we need our financial institutions, big and small, to get back to the fundamental 

business of banking and financial intermediation. And while not 

perfect, I believe that the types of smaller and medium-sized banks 

and credit unions we will hear from today and others here in the 

Midwest should be held up as an example of what the post-crisis 

financial system should look like. Financial firms should know who 

their customers are and perform proper due diligence before making a loan. 

To help restore Americans’ faith in our financial system, I 

worked as both a senior member of the House Financial Services 

Committee and as a House conferee to improve and perfect the financial regulatory reform measure. Part of this work included defending smaller banks, credit unions, and small businesses that did 

nothing to create the financial crisis. 

For example, I worked with my colleagues to provide a full 

grandfathering of existing trust-preferred securities for all banks 

with less than $15 billion. I pushed to fully preserve the thrift 

charter, making the case that while the ineffective Office of Thrift 

Supervision should be eliminated, the business model with which 

many Kansas thrifts acted responsibly should not be eliminated. 

And I offered the amendment to exempt all banks and credit 

3 

unions with fewer than $10 billion in assets from the new Consumer Financial Protection Bureau’s enforcement powers. Many 

forget, but a new consumer financial protection agency was not 

only called for by the Obama Administration, but by former Secretary Hank Paulson as well. 

The Dodd-Frank Act includes other new powers to regulate ‘‘toobig-to-fail’’ financial firms and provides regulators with a new liquidation tool that will ensure we end ‘‘too-big-to-fail’’ bailouts, and 

we shut down any financial firm—big and small—that fails. As the 

bill was being signed into law, the headlines from the Wall Street 

Journal were, ‘‘Big Win for Small Banks’’ and ‘‘Small Banks Avoid 

Overhaul’s Sting.’’ 

That said, I understand that with any new set of rules comes unfamiliarity. Something I hope to see as the new rules are implemented is not an endless stream of additional disclosure forms that 

are difficult for small firms to comply with and only serve to confuse consumers. We created the Consumer Bureau to streamline 

and simplify these financial forms and documents so that consumers know what they are signing up for, and as a result, will 

be much easier for small community banks and credit unions to 

comply with. 

It is time to move forward with a stronger financial system, and 

I look forward to hearing from today’s witnesses on what lessons 

we can and should learn from responsible banks and credit unions 

we are fortunate to have here in the Midwest. 

I now recognize for up to 10 minutes, my colleague, Representative Lynn Jenkins, a member of the House Financial Services Committee. 

Ms. JENKINS. Good morning, and thank you, Mr. Chairman, for 

holding today’s important hearing. And I would like to thank Federal Reserve Bank President Hoenig for being here with us this 

morning. We have an important topic to discuss. 

It is important to every American trying to obtain a home loan, 

small business loan, car loan and even those concerned with their 

own job stability. Individuals and businesses are asking about the 

health of their bank and their ability to obtain a loan from their 

bank when they need it. These questions are essential to every 

American household and business, and it is my hope that both 

President Hoenig and our panel of bankers and credit unions can 

share with us some strategies they have employed to ensure that 

they can continue to provide these important services to our communities. 

I am proud to be here today to highlight lending institutions in 

Kansas as industry leaders in making prudent financial products 

available to customers and maintaining the integrity of their institutions throughout that process. 

The financial crisis has dramatically impacted the lending industry as a whole and many of the banks represented here today have 

managed to provide an example to others of what sound judgment 

and policy looks like during times of irrational exuberance. However, many of our witnesses represent community banks and credit 

unions already feeling overly burdened by the government and regulators, and now are feeling the crunch more broadly with the passage of financial regulatory reform. Other witnesses represent reVerDate Nov 24 2008 11:18 Dec 06, 2010 Jkt 061855 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\61855.TXT TERRIE
4 

gional banks, which have performed admirably, but will now have 

to restructure their business model. 

I am eager to learn what lessons you all can share with us today 

that we can carry back to Washington, and what trends you see 

that have you concerned for your industry in the future. I am sure 

the banking community, and the credit unions have much to share 

with us today, and I am anxious to hear from both sides as to how 

this can be constructive for all of us. 

I want to again thank the chairman for putting this together, 

holding the hearing, and I look forward to hearing testimony from 

each of today’s witnesses. 

I yield back the balance of my time. 

Chairman MOORE OF KANSAS. Thank you, Representative Jenkins, for being with us today. 

I now recognize Representative Emanuel Cleaver for up to 5 minutes, another member of the House Financial Services Committee. 

Congressman Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. I appreciate you allowing me to participate in this field hearing. I am not on the Oversight and Investigations Subcommittee but the work that you have 

done already has paid off with the legislation we recently approved. 

It is an honor to participate with you at this very important hearing. You are right on point to look at the ‘‘too-big-to-fail’’ issues and 

their impact from the view of Midwest banks and credit unions, 

which have not seen the problems that some of their east, west, 

and north coast brethren have encountered. 

It is my pleasure to welcome the very distinguished witnesses for 

today’s hearing. From time to time, I consult with the financial 

services industry in my district, and they have always provided 

sound advice. It is also a great honor that they can come before us 

today and provide testimony. 

Mr. Chairman, earlier this spring, Committee Chairman Barney 

Frank joined you and me to honor UMB and Commerce Bank, who 

were named the second and third rated best banks in America in 

2009, by Forbes magazine. As I was putting together the background for the awards, I learned some important information about 

UMB and Commerce Bank that is relevant to today’s hearing. 

UMB’s shared corporate vision is to be recognized for their unparalleled customer experience. One of the corporation’s shared values is, ‘‘customers first, we do the unparalleled to create an environment that consistently exceeds the expectations of our customers.’’ UMB embodies strong community involvement in all the 

communities it serves. From financing for small businesses to providing working capital loans to companies that support job creation 

and retention to employee volunteerism and corporate donations, 

UMB stands tall with their communities. In fact, UMB recently received an outstanding rating from the Office of the Comptroller of 

the Currency in their most recent public evaluation of UMB’s community lending and participation. 

When the largest banks in America were trying to repay billions 

of dollars in TARP funds and to improve their balance sheets to 

deal with the impact of the severe economic problems the States 

were having, UMB was keeping to their business strategy—conservative, with slow, steady growth. And in September 2009, the 

5 

street.com article entitled ‘‘UMB’s Kemper Proves Boring is Better: 

Best in Class,’’ Mariner Kemper said, ‘‘The Street, the investor population believed that we could leverage our earning streams more 

if we had taken the same risks as the rest of the industry. I am 

thrilled to be able to stand up and say our strategies worked for 

us. We did not erase 20 years of earnings by taking three years of 

risk.’’ In a press release around the same time, Mr. Kemper said, 

‘‘This ranking also shows that the regional banking model works. 

UMB sticks to our time-tested prudent business practices such as 

making loans within our territory, building relationships with our 

customers, and understanding that strong underwriting practices 

produce quality results. Our standards have remained unchanged 

in all economic conditions. This principle, as well as a focus on a 

diverse income stream from fee-based businesses affords us steady 

growth.’’ 

Likewise, Commerce Bancshares, Inc.’s corporate mission is to 

‘‘raise the voice of the customer and in doing so create a differentiating experience which encourages our customers to develop a relationship with Commerce and then become long-tenured loyal customers. The company’s customer promise is ask, listen, solve. That 

means the company promises to ask the right questions, listen 

carefully to what our customer is telling us, then solve for the appropriate solution to meet our customers’ specific needs. Commerce 

Banks embody strong community involvement in all that it does in 

this community.’’ 

And then finally, Mr. Chairman, Commerce is committed to environmental sustainability to reduce their environmental footprint. 

They encourage recycling, try to consume less paper, encourage employee carpooling and public transportation, and monitor and manage energy usage. In 2008, Commerce opened Missouri’s first 

LEED-certified bank branch in O’Fallon, Missouri. 

Mr. Chairman, more than 100 banks have failed over the past 2 

years since our economy began its meltdown. They have taught us 

valuable lessons on how not to run a bank. And so today, UMB and 

Commerce Banks, as well as many other community banks, regional banks, and credit unions are juxtaposed to those ‘‘too-big-tofail’’ banks and teach us what banks should do, or how not to fail. 

Thank you, Mr. Chairman, I yield back the balance of my time. 

Chairman MOORE OF KANSAS. I thank my colleagues for their 

statements. 

I am very pleased to introduce our first witness, who was so respected the last time he testified before our subcommittee earlier 

this year that we had to invite him again. 

This morning, we will hear from Mr. Tom Hoenig, President and 

Chief Executive Officer of the Federal Reserve Bank of Kansas 

City. President Hoenig is currently the longest-serving Federal official and this year is a voting member of the Federal Open Market 

Committee. He has been a strong, independent Midwestern voice 

in the national debate on financial reform and economic recovery. 

In fact, our title from today’s hearing comes directly from a speech 

Mr. Hoenig made in Omaha in March 2009. And he has been one 

of the leading experts people turn to on ending ‘‘too-big-to-fail.’’ 

6 

I want to publicly thank Mr. Hoenig and his entire staff at the 

Kansas City Fed for being such a valuable resource to me and our 

office, as well as for your service to the Kansas City community. 

Without objection, Mr. Hoenig, your written statement will be 

made a part of the record, and you are recognized for 5 minutes 

to provide a summary of your written statement. 

STATEMENT OF THOMAS M. HOENIG, PRESIDENT, FEDERAL 

RESERVE BANK OF KANSAS CITY 

Mr. HOENIG. Chairman Moore, thank you very much, and Congresswoman Jenkins and Congressman Cleaver, thank you for this 

opportunity to testify before the subcommittee. I think it is a timely hearing about the future of community banks. 

Before I begin, I do want to note and share with you, Chairman 

Moore, that this wonderful campus and this wonderful school was 

also helped to be formed by an individual by the name of Will 

Billington, who was a mentor of mine from the Federal Reserve 

system, and he was one of the founding trustees, and so it is a 

great pleasure for me to join you here today. 

Chairman MOORE OF KANSAS. Thank you. 

Mr. HOENIG. Let me just say that over the past 20 years, as the 

banking industry has consolidated into fewer and larger banks, a 

perennial question has been, ‘‘Is the community bank model viable?’’ The short answer is ‘‘yes.’’ The longer answer is, ‘‘yes, if they 

are not put at a competitive disadvantage by policies which favor 

and subsidize the largest financial institutions in this country.’’ I 

have worked closely with community bankers my entire career, 

through good and bad economic times. I know the business model 

works, and therefore, they can survive and prosper. 

There are more than 6,700 banks in the country, and all but 83 

would be considered community banks based on a commonly used 

cutoff of $10 billion in assets. In the Tenth District, we have about 

1,100 banks, and all but 3 would be considered a community bank. 

A lower threshold of $250 million, which focuses on a far more homogeneous group, still includes about 4,600 banks or about twothirds of all banks. My submitted material and remarks now are 

directed towards this group of banks, this smaller group, which 

serve Main Street in communities across this country of ours. 

Community banks are essential to the prosperity of the local and 

regional economies across the country. The maps I provided show 

that community banks have the majority of offices and deposits in 

almost a third of the counties nationwide. However, their presence 

and market share are most substantial among Midwestern States, 

where their role is particularly crucial in rural areas and smaller 

cities. It is the economies in these States that would suffer most 

significantly without their presence. Why? 

Community banks have maintained a strong presence despite industry consolidation because their business model focuses on strong 

relationships with their customers and their local communities. 

Banks in our region, for example, serve all facets of their local 

economy, including consumers, small businesses, farmers, real estate developers, and energy producers. They know their customers 

and local markets, know that their success depends on the success 

of these local firms, and they recognize that they have to be more 

7 

than a gatherer of funds if they hope to prosper as a bank. These 

factors are a powerful incentive to target their underwriting to 

meet specific local credit needs. And it gives their customers an advantage of knowing who they will be working with in both good 

and difficult times. Larger banks are important to a firm as they 

grow and need more complicated financing, there is no question. 

But in this region, most businesses are relatively small and their 

needs can be met by the local bank. 

It is said that a community with a local bank can better control 

its destiny. Local deposits provide funds for local loans. Community 

banks are often locally owned and managed through several generations of family ownership. This vested interest in the success of 

their local communities is a powerful incentive to support local initiatives. It is the very ‘‘skin in the game’’ incentive that regulators 

are trying to introduce into the largest banks, that has been lost 

for some time. It is the small community’s version of ‘‘risking your 

own funds’’ that worked so well in the original investment banking 

model, and kept partners from making risky mistakes that would 

require personal bankruptcy back then, and government intervention more recently. 

There is no better test of the viability of the community bank 

business model than this financial crisis, this recession and abnormally slow recovery that we have experienced over the past 21⁄2

years. The community bank business model has held up well when 

compared to the megabank model that had to be propped up with 

taxpayer funding. Community bank earnings last year were lower 

than desired, but on a par with those of the larger banks. However, 

community banks generally had higher capital ratios that put them 

in a better position to weather future problems and support lending. 

This is an important point to note as the decline in overall bank 

lending, particularly to small businesses, is a major concern to all 

of us. Data show that community banks have done a better job 

serving their local loan needs over the past year. Community banks 

as a whole increased their total loans by about 2 percent as compared to a 6 percent decline for larger banks. In addition, community banks have had either stronger loan growth or smaller declines across major other loan categories. Business lending in particular stands out, with community bank loans dropping only 3 percent as compared a 21 percent decline for the larger banks. 

Of course, some community banks made poor lending and investment decisions during the housing and real estate boom of the mid2000’s. Unlike the largest banks, community banks that fail will be 

closed and sold. For community banks that survive, it will be a 

struggle to recover. Commercial real estate, particularly land development loans, will be a drag on earnings for some time yet. Nevertheless, for those that recover, a business model that continues to 

focus on customer relationships will be a source of strength for 

local economies. 

Thus, community banks will survive the crisis and recession and 

will continue to play their role as the economy recovers. The more 

lasting threat to their survival, however, concerns whether this 

model will continue to be placed at a competitive disadvantage to 

the largest banks. Because the market perceived the largest banks 

8 

as being ‘‘too-big-to-fail,’’ they had the advantage of running their 

business with a much greater level of leverage and a consistently 

lower cost of capital and debt. The advantage of their ‘‘too-big-tofail’’ status was highlighted during the crisis when the FDIC allowed unlimited insurance on non-interest-bearing checking accounts out of concern that businesses would move their deposits 

from the smaller to the largest banks. As outrageous as this may 

seem, in many cases it is easier for larger banks to expand through 

acquisition into small communities. This occurs because smaller 

banks tend to focus on their local markets and, therefore, face significant restrictions to in-market mergers. This policy ignores the 

fact that the largest 20 financial institutions in the United States 

now control just under 80 percent of the country’s total financial 

assets. In other words, the anti-competitive market analysis needs 

to be looked at, given the changing times. 

Going forward, the community bank model will face challenges. 

Factors such as higher regulatory compliance costs and changing 

technology will encourage community bank consolidation. And despite the provisions of the Dodd-Frank Act to end ‘‘too-big-to-fail,’’ 

community banks will continue to face higher costs of capital and 

deposits until investors are convinced that advantage has ended. 

The community banks have always faced these challenges, and survived and prospered despite them. If allowed to compete on a fair 

and level playing field, the community bank model is a winner and 

will continue to serve our communities well. 

Thank you. 

[The prepared statement of Mr. Hoenig can be found on page 52 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Hoenig. I now recognize myself for 5 minutes for questions. 

Mr. Hoenig, from your perspective, would you please describe the 

major differences and advantages that smaller to medium-sized financial institutions may have over the largest financial firms in 

the United States? And you have spoken to this in your opening 

statement, but if you have additional—for example, it seems like 

a smaller financial firm would be easier to manage while also increasing the likelihood that the firm really knows their customers. 

Is there something unique to the business model and practices utilized by Midwest banks and credit unions that Wall Street banks 

maybe could learn from? 

Mr. HOENIG. I think that the advantage of the regional and community bank is, in a sense, their size. They are of a size that can 

be managed. We know economies-of-scale advantage cuts off long 

before $50 billion, so that there is the ability to manage across 

functions within the bank. There is a greater opportunity, and I 

think you will hear about that more today, about the fact that you 

do build your customer relationships with a medium-sized business 

line, I think, more easily. And so those are extremely important in 

this country. 

I have been told time and time again about other models where 

you only have three or four banks across the country and that 

seems to work. And I say this country is the greatest country in 

part because it has had a greater availability of credit through 

community banking across the United States over the past 200 

9 

years. I think we should change that great model with great care 

as we look forward. So I have a lot of confidence in this model. 

Chairman MOORE OF KANSAS. Thank you, sir. 

Do you have any concerns that we may see greater consolidation 

in the banking and credit union sector in the next few years as 

more smaller institutions may fail? And what impact might that 

have on the stability of the financial system? For example, would 

fewer and larger banks and credit unions create additional systemic risks that might outweigh any benefits enjoyed from economies of scale? 

Mr. HOENIG. I think that, first of all, there are going to be more 

consolidations. I think the cost, the carry cost for a community 

bank is going to grow per dollar of assets and, therefore, you will 

want to get the size up in order to spread that cost over more assets. So I think that will be the trend. I do not think that necessarily means the end of community banking. It does mean you 

are going to have a smaller number of banks, but I think we will 

still have thousands of banks in this country for some time to 

come. 

As far as looking ahead, I think we have to be careful because 

the cost of capital is to the advantage of the largest institutions. 

And so, that will work away at the competitive position of the 

smaller banks over time and we need to be mindful of that. 

Chairman MOORE OF KANSAS. Thank you. 

You testified before the subcommittee in Washington on the topic 

of reversing our dependence on leverage and debt. To be clear, Midwest banks and credit unions never had the levels of leverage that 

firms like AIG and Lehman Brothers had; is that correct? And if 

so, why do you think that is and what can we learn from smaller 

financial firms that are not overleveraged? 

Mr. HOENIG. I think first of all, it is correct. The largest banks 

in this country, as I testified, increased their real leverage, what 

I call true equity capital, to assets from about 17 to 1 to over 30 

to 1 from the early 1990’s through to 2007 when the crisis began. 

Smaller community banks’ real leverage ratio did not rise significantly above their original 16 to 1. Part of that is that they were 

not thought of as being ‘‘too-big-to-fail.’’ They knew that they had 

to have the capital base and the market expected that of them. And 

therefore, they had an incentive to maintain their capital levels at 

higher amounts. I think that is important to remember going forward. That is why we spent important time on this issue of resolution in the Dodd-Frank bill to make sure that advantage was at 

least mitigated, if not eliminated. Only time will tell whether this 

‘‘too-big-to-fail’’ will go away and whether this will, through the 

market as much as regulatory, force them to reduce their leverage 

levels not only within this country but on a global basis. That is 

a huge issue coming up for the regulatory authorities, both in the 

United States and internationally and that is what should be the 

leverage restrictions on the largest banks. And that is not settled, 

at this point. 

Chairman MOORE OF KANSAS. Thank you, sir. 

I now recognize for up to 5 minutes Representative Jenkins for 

questions. 

Ms. JENKINS. Thank you, Mr. Chairman. 

10 

In your statement, you said that the community bank model is 

a viable one but only if they are not put at a competitive disadvantage by policies which would favor the larger institutions. 

Mr. HOENIG. Yes. 

Ms. JENKINS. So I am just curious if you think that the DoddFrank bill puts the community banks at a competitive disadvantage, and if so, how? 

Mr. HOENIG. The Dodd-Frank bill is designed to, as I said, mitigate that advantage by—it calls for a resolution of the largest 

banks should they fail, should they become insolvent or unable to 

meet their obligations. So it is designed to eliminate that advantage. But the only way we will know that is how the market reacts 

and whether the market thinks that is a viable resolution process. 

And that is not a foregone conclusion, because I will tell you that 

if you have a trillion dollar institution and it is in difficulty and 

you have a weekend in which to make a decision, so you are on a 

Friday, it is incurring a huge liquidity problem, people are running 

from this largest institution. 

And you know that the impact of its failure, of the liquidity crisis, will be to affect the broader economy, and you have only a 

weekend. You have to have it resolved by Sunday night before the 

Asian markets open. Will you actually be able to get two-thirds 

votes from the FDIC, two-thirds votes from the Federal Reserve, 

get a court to agree to it, get the Secretary of the Treasury to agree 

to it and actually take it into receivership, which will be a very disruptive process—I think only time will tell. 

The markets are trying to figure that out right now. If they are 

convinced that it will be taken into receivership, then I think the 

advantage to the largest institution will be reduced. It will not be 

eliminated, but it will be reduced. And that will make it a more 

equal, more level playing field for the community bank. 

If it does not take it, then that largest bank, number one, will 

be thought of still as ‘‘too-big-to-fail.’’ So, number one, if a large 

firm or a medium-sized firm has to have a payroll account that is, 

say, several million dollars, it will not put it in a community bank 

that it knows can fail, but will put it in the largest bank where it 

may not fail. Secondly, knowing that and the markets who are 

issuing the debt to the largest banks know that they will get bailed 

out in a crisis, even though it is not supposed to happen, then they 

will provide funding to those banks at a less costly level. And so 

that will give them a cost of capital advantage. 

So those things have to go away. And that can only happen if the 

markets are absolutely convinced that ‘‘too-big-to-fail’’ has finally 

been ended, and only time will tell. So it is an open question. I am 

sorry I cannot answer yes or no. 

Ms. JENKINS. Okay. I guess to follow up on that, considering the 

Dodd-Frank reform bill seems to perpetuate the ‘‘too-big-to-fail’’ 

problem, is it not likely that the leverage problems will even get 

worse in the future and those ‘‘too-big-to-fail’’ institutions will continue to have funding advantages over the institutions like the 

ones that we have here today, so that the big will get bigger? Can 

you just comment on that potential problem? 

Mr. HOENIG. That is a risk. One of the things in the early parts 

of the discussions that I was actually in favor of was breaking up 

11 

the largest institutions so it would become clear that they were not 

‘‘too-big-to-fail.’’ But that is not what was done and we do have this 

resolution process. And I think it all depends on how carefully we 

enforce the Dodd-Frank bill in terms of eliminating ‘‘too-big-to-fail’’ 

or they will continue with an advantage over the regional and the 

community banks. So it is a major concern of mine, yes. 

Ms. JENKINS. Okay, thank you. I yield back. 

Chairman MOORE OF KANSAS. Thank you. Now, I recognize Representative Cleaver for up to 5 minutes, sir. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. Hoenig, I was in the room, and my colleague Dennis Moore 

was there, when President Bush sent over his Treasury Secretary 

Hank Paulson. Ben Bernanke was there, Christopher Cox from the 

SEC was there, and Sheila Bair from the FDIC. Most of us had no 

idea what would fall from their lips and we were in horror when 

they told us exactly what you just mentioned, that if we failed to 

act—or if they failed to act, then by Monday, we could have one 

of the worst economic crises in history. And I do not know about 

Congressman Moore, but I was shaking under the table. I have always been fascinated when I go to townhall meetings and people 

who majored in geography say, ‘‘That was stupid, you people are 

stupid. 

Retrospectively, do you think we acted correctly in responding to 

the Bush Administration’s call for action? 

Mr. HOENIG. I think that under the circumstances, there were 

not a whole lot of choices. And one of the things that you have to 

keep in mind is there was no contingency. For example, one of my 

arguments was not that you did not take actions to make sure our 

financial system and our economy did not collapse, but that in 

doing so, we bailed out the stockholders of the largest institutions, 

whose responsibility it was to oversee these institutions by their selection of directors and so forth. And there were models—the Continental Illinois failure, which was itself ‘‘too-big-to-fail,’’ but at least 

the stockholders were not wiped out and the market did have some 

discipline back on those institutions. In this instance, there was not 

that kind of ability to pre-plan and, therefore, you ended up with 

this very chaotic weekend. 

What I am also saying though, is what is the lesson from that? 

We have a new bill and it has a resolution process. And I encourage all the authorities—the Federal Reserve, the FDIC and others—to say all right, let us say very clearly, let us make sure we 

have rules that will be in place should we have a crisis 10 years 

from now or whenever it is, that says when this happens, we have 

enough notice, we set up who will be the management who comes 

in as we wipe out the other management, the directors who come 

in as we wipe out the directors who are responsible for this, make 

sure that we are in fact putting it into a receivership with an operating unit so that it does not have to be shut down, it can be run 

but with new ownership. And that we have in place how we are 

going to hold the debtholders who loaned maybe at very good rates 

to these institutions, so that they share the burden rather than the 

taxpayer. 

12 

The main thing we ought to take from this is it was a crisis, we 

went through it as we did, but let us not repeat that process the 

next time through. That is my best advice going forward. 

Mr. CLEAVER. Thank you. I agree with you absolutely. 

Last night, I re-read this article by Kurt Anderson that was written in March of 2009, ‘‘The End of Excess.’’ In a very interesting 

part of this, he says, ‘‘I don’t pretend we didn’t see this coming for 

a long time.’’ And now when you look back, there were those who 

suggested that we were heading for the precipice. Six months before this weekend that we all experienced in terror, we had the Fed 

Chairman, we had the SEC Chairman, we had the FDIC Chairman, and the heads of the three credit rating agencies before our 

committee. And not one of them—not one—expressed concern about 

the direction of the economy. People criticize John McCain for making some comments about the economy being healthy. He was simply reporting what the financial services oversight group said we 

were experiencing. And yet, there are those who said that they saw 

this coming for a long, long time. 

I guess my question is, is there something in the financial reform 

or is there anything that we can do to take the long view of the 

U.S. economy to prevent us from a weekend collapse? 

Mr. HOENIG. I think that there is not only in the legislation, but 

in the regulatory scheme, there is a mechanism there to give warning. For example, financial stability, oversight committee and the 

researchers around that, the economists at the Federal Reserve, 

others. There is the mechanism, but I will tell you that the real 

test is in whether you can act in the face of an economy, a broad 

populace who at the moment feels everything is very good. And just 

to give you examples, these people that you are talking about saw 

this coming in 2005 and 2006 and 2007, saying there is this leverage and so forth. And in fact, the regulatory authorities put out 

proposed guidelines to begin to put some kind of guideline limit 

around exposures to certain kinds of real estate—land development, commercial real estate. And the blowback on that was enormous. You cannot do this because we want everyone to have a 

home. We want to make sure that the economy stays strong and 

the only way you do that is have it continue. 

I do not think it will be—I do not think we will miss it again 

in the sense of seeing where there is risk. We may not identify specifically when the economy will go into a slowdown, but the ability 

to go against the wind and against the forces that are in play is 

overwhelming in any economy, and certainly in the United States. 

So that will be the real test: can we step up to it and say I know 

you think things are really good, but we are going to put some limits on this because we do not want another bubble and we do not 

want the leverage to continue. And that will be a lot harder than 

any of us realize right now. 

Mr. CLEAVER. So measuring the systemic risk—thank you, Mr. 

Chairman. 

Chairman MOORE OF KANSAS. Thank you. The gentleman’s time 

has expired. 

Mr. Hoenig, if you are available, we have time for a second round 

of questions, if you are available for just one more round of questions, please? 

13 

Mr. HOENIG. Sure, I would be happy to stay. 

Chairman MOORE OF KANSAS. Thank you. 

Mr. Hoenig, you testified before this subcommittee in Washington on the topic of reversing our dependence on leverage and 

debt earlier this year. To be clear, Midwest banks and credit 

unions never have had the level of leverage that firms like AIG and 

Lehman Brothers had; is that correct? And if so, what can we learn 

from the smaller financial firms that are not overleveraged? 

Mr. HOENIG. I think we can learn about the principles of leverage regardless of firm. It is just a fact that as you leverage up to— 

if you really run a normal leverage of about 15 to 1 and you leverage up to 30, you have that much less capital to absorb any losses. 

And therefore, your margin of error slims out increasingly as you 

leverage up. And the thing about it is when you get the economy 

going into a downturn on asset value, those values fall immediately. That debt stays there with all that cash flow. And it is inevitably a crisis. When you have more capital, you have the ability 

to weather a downturn for a longer period. You still may fail if you 

have too many bad assets on your books, but certainly the margin 

of error is in your favor. That is what we have to learn going forward. And it is a huge issue because a lot of the issue right now 

is maybe what Representative Cleaver was referring to, when you 

talk now—and there is a lot of discussion about raising the capital 

level for the largest institutions, in other words, lower the leverage 

that we will accept. The first thing that is talked about is you are 

going to cause a credit crisis because as you have to build capital, 

you have to constrain your asset growth or bring in new capital 

and that will slow the ability to fund new loans. Right away, you 

are in a conflict. You know you need to get to a stronger position 

but you know it is not a free choice. It is going to cost something 

else and how you work through that, my suggestion has been you 

put the leverage number out there that is the right number, 15 or 

16 to 1, and you give the industry time to get there. And it is part 

of the very harsh—it is painful. And that is the deleveraging of the 

country, which I am afraid has to take place. 

Chairman MOORE OF KANSAS. Right. Thank you. You have used 

the word ‘‘painful’’ referring to the recession and it has been very 

painful for a lot of people in our country. According to the New 

York Times, the popular belief is that as housing prices rebound, 

they will continue to go up forever. The article cites a recent survey 

by Case-Shiller where many people said they still believe, ‘‘prices 

would rise about 10 percent a year for the next decade.’’ Yale economist Shiller was quoted saying, ‘‘People think it’s a law of nature.’’ 

Should people have new expectations for the housing market in the 

next generation? Should we believe that the housing market is 

going to continue to rise and rise? 

Mr. HOENIG. If the American people are looking for the housing 

market to be their investment opportunity, I think they are making 

a mistake. I do not think that the economics of the housing industry, as Professor Shiller is suggesting, is really designed for that. 

And right now, the facts are we have an excess supply and we created that by providing financing leverage that was almost nonsense. So now we have to adjust from that. Housing may eventually start to rise again, as other assets across the country begin to 

14 

rise again; but it is not something that I think that the American 

consumer should be speculating on in terms of investment. 

I would like everyone to have a home, but not everyone can afford a home, and if we try and make it so when it is not possible, 

you create the next problem. So that is the challenge going ahead. 

Chairman MOORE OF KANSAS. Thank you, sir. 

Reform of Fannie Mae and Freddie Mac will be hotly debated in 

the next Congress. How will those reforms in the housing market 

generally affect Midwest banks and credit unions? 

Mr. HOENIG. It will vary widely depending on what they in fact 

decide. If, as I read some of the discussions that went on here very 

recently, it is determined that this is not the way to go with government guarantees where you privatize the gains and socialize the 

losses and if you try and bring the financing in housing back to the 

private industry banks, credit unions, thrifts and so forth, whatever it is, and they take both sides of the risk, then it will have 

profound effects, because it will take and put I think additional opportunity on regional and community banks, but also additional 

risk. You cannot just sell it off your books. But if they then—on the 

other hand, if they decide to merely make this a government agency that does it, you make Fannie and Freddie like Ginnie and it 

is all guaranteed, then you will have a different outcome. So I 

think it is really in the hands of the Congress and the Administration right now as they define what should be the future of how you 

finance housing in America. It is more than just what do you do 

with Fannie and Freddie. That is hard enough. But it is how you 

are going to decide to finance housing in America in the future that 

will define what impact it has on regional and community banks. 

Chairman MOORE OF KANSAS. Thank you. My time has expired. 

Representative Jenkins, if you have any additional questions, 

you have 5 minutes. 

Ms. JENKINS. Thank you, Mr. Chairman. 

I really just have one final question for you today. If I have heard 

one thing in the last 20 months since I have been in office, it has 

been from my local financial institutions who are frustrated that 

they are getting mixed messages. They hear from policymakers 

that they need to lend and regulators tell them that they need to 

tighten lending standards and increase their balance sheets. So I 

am just curious as to what steps you suggest that we all take to 

ensure that undue pressure is not placed on our financial institutions during these hard times, but that it allows them to continue 

to make worthy loans to our constituents? 

Mr. HOENIG. That is one question that is a very difficult question. The first thing about it is the amount of pressure across community banks, regional banks, will vary very much depending on 

the condition therein. If you have a bank that has had a heavy 

portfolio of commercial land development loans, they are under 

pressure and the examiners are probably going to be saying, you 

need to build your capital up, you need to prepare for that. And 

there will be impediments to lending, because that institution is 

under real stress. 

On the other hand, if you are a bank that has been more conservative during that period, then I think there is clearly less pressure on you from the examiner to hold down your lending. They 

15 

would, I think, be in favor. And I tell people no examiner that I 

know, no examiner worth their salt would ever say we want a bank 

to fail. It is just not in anyone’s interest, even that examiner’s, as 

tough as they may be. So that is not the goal. The goal is to separate out those banks that can lend and those that have to rebuild 

their capital. 

The other thing about it is, and this is where I think leadership 

within the agencies, the Federal Reserve, the FDIC, the Comptroller, has to be. What we tell our examiners is if you go into a 

bank and it has a portfolio, it has some stress—it is hard not to 

have some stress—but you see the loans and they have structured 

them in a way that can work, you do not have to come down on 

them harshly. It would serve no useful purpose, and I will stand— 

as the leadership of this institution, I will stand behind you in your 

judgments regarding that institution. That is important for me and 

for the leadership to say because I will assure you that if a bank 

does in fact fail, whether it is large or small, there is an IG review 

of how well you supervised. And that examiner, just like any other 

human being, does not want to be the one to say, you were too easy 

on them and that is why they failed. So you have this very important balance and that is why we train our examiners well and why 

we do give them discretion in the field and stand behind them. And 

I think that is critical going forward. 

There is still going to be pressure, many banks still are under 

earnings pressure. But I think there is the ability now beginning 

to emerge to lend and we want to encourage them to do that. 

Ms. JENKINS. So you would not have any advice and counsel for 

things that we could do? 

Mr. HOENIG. I think you have passed the law. I think you need 

to let the regulatory authorities carry it out, with good oversight. 

I think we need to be accountable to you, answer questions specific 

to the issue that may come up before you. Our bank gets calls from 

various Representatives around the district and we try and answer 

their questions about the bank to the extent that we can in terms 

of confidentiality. So we have to be responsive to you and I think 

you have to give us some benefit of the doubt, given where we are 

today in this economy of ours. 

Ms. JENKINS. Thank you. 

Chairman MOORE OF KANSAS. Congressman Cleaver, you are recognized for 5 minutes, sir. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

I want to stick with this article, I just think it is so fascinating, 

Kurt Anderson’s article, ‘‘The End of Excess: Is this Crisis Good for 

America?’’ And he goes on to write, ‘‘We are in a state of shock. In 

a matter of months, half the value of the stock market and more 

than half of Wall Street’s corporate pillars have disappeared along 

with several million jobs. Venerable corporate enterprises are teetering, but as we gasp in terror at our half glass of water, we really 

can—we must—come to see it as half full as well as half empty. 

Now that we are accustomed to the unthinkable suddenly becoming 

not just thinkable but actual, we ought to be able to think the unthinkable on the upside, as America plots its reconstruction and reinvention.’’ 

16 

Do you think with all of our new financial structure and practices laid out in the Wall Street Reform bill that the United States 

is now in a position where we are able to think the unthinkable 

on the upside as we plot our reconstruction and reinvention? 

Mr. HOENIG. I think one of our country’s strongest points has 

been that we have always been optimistic and I think we will continue to be so. 

We do have in the meantime though—I do not consider a crisis 

a good thing. It is sometimes unavoidable when you do not take 

necessary steps, and that is the nature of capitalism, it gets very 

enthusiastic on the upside and then overdoes it and then has to adjust. And that is part of the process. It is what you learn from that. 

One of the things we need to do—and to answer your question, yes, 

I think the economy will continue to improve. I think we will have 

new opportunities and I think we will prosper. However, we have 

some things to get through. 

First of all, we have a great deal of uncertainty. I have no other 

opinion other than we have new pieces of legislation we have to 

learn. And that takes time. And so we have to learn about both the 

healthcare bill, about the regulatory reform bill and as we do that, 

then that will be put behind us and we will build going forward 

from here. So that is the process we are in right now. And we are 

also in the process of deleveraging. 

An economy that is well capitalized, which has a high savings 

rate, at least a reasonable savings rate, systematically does better 

than an economy that has a very low savings rate and is highly leveraged. We are adjusting, and as we adjust, new opportunities 

will present themselves and I think, given our basic capitalistic 

system, that we have every reason to be optimistic long term. But 

we have, as I have talked about before this committee actually, we 

have to think about what we are going to do with our national debt 

in a systematic fashion that gives the American people confidence 

that we will not try and solve it all in one year, but that we will 

get on a path that will solve it and, therefore, they can make decisions, both consumers and businesses can make decisions that are 

long-term oriented. And then we can think about very optimistic 

outcomes for the U.S. economy. 

Mr. CLEAVER. Thank you. 

Chairman MOORE OF KANSAS. Thank you Congressman Cleaver. 

And thank you, President Hoenig, for your testimony and your 

years of public service. 

You are now excused and I will invite the second panel of witnesses to please take your seats and we will have about a 3-minute 

recess while the panelists change. Thank you, sir. 

Mr. HOENIG. Thank you very much. 

[recess] 

Chairman MOORE OF KANSAS. The committee will come to order. 

I am pleased to introduce our second witness panel: Mr. Chuck 

Stones, president, Kansas Bankers Association; Mr. David Herndon, president and CEO, First State Bank; Mr. Mariner Kemper, 

chairman and CEO, UMB Financial Corporation; Mr. Jonathan 

Kemper, chairman and CEO, Commerce Bank, Kansas City, and 

vice chairman, Commerce Bancshares, Inc.; Ms. Marla Marsh, 

17 

president and CEO, Kansas Credit Union Association; and Mr. 

John Beverlin, president and CEO, Mainstreet Credit Union. 

I want to thank our panelists for being on the panel today and 

sharing your information with us and your wisdom with us. Without objection, your written statements will be made a part of the 

record and you will each have up to 5 minutes to summarize your 

written statements. 

We will start with Mr. Stones. You are recognized, sir, for 5 minutes. 

STATEMENT OF CHARLES A. STONES, PRESIDENT, KANSAS 

BANKERS ASSOCIATION 

Mr. STONES. Thank you, Mr. Chairman, Representative Jenkins, 

and Representative Cleaver. It is a pleasure to be here. I think it 

is appropriate that we are in the Capital Federal Auditorium within the Regnier Center at the Johnson County Community College. 

It is a pleasure to be here. 

My name is Chuck Stones, and I am the president of the Kansas 

Bankers Association. Just a few comments on banking in Kansas 

to start off with, and these statistics early on are meant to represent commercial banks, not savings banks or credit unions. 

The Kansas Bankers Association represents 320 traditional community banks in Kansas. Kansas is a State with a large number 

of community banks. As of 12/31/09, there were 323 chartered 

banks in the State, ranging from $4.5 million in assets to $3.7 billion in assets. The average size of a Kansas chartered bank is $155 

million, and 36 percent of all chartered banks in Kansas have less 

than $100 million in assets. The total assets of all chartered banks 

in Kansas is just a little over $50 billion. So it is not surprising 

that a high percentage of our Kansas banks can be found in rural 

communities. Nearly 20 percent of all Kansas chartered banks are 

located in towns of fewer than 500 people, and 60 percent of all 

Kansas banks are located in towns of fewer than 5,000 population. 

It is also important to understand that nearly two-thirds of all 

Kansas banks have 14 or fewer employees. 

The overwhelming majority of Kansas banks—or banks in the 

Midwest and specifically in Kansas—were performing well leading 

up to the current economic downturn and continue to do so. The 

agriculture economy has been very strong and banks in rural areas 

continue to be strong and profitable. However, as Tom Hoenig said, 

some banks in the few metropolitan areas of Kansas that experienced rapid commercial and residential development growth in the 

early part of the decade are now experiencing some distress and 

are attempting to address those issues to the best of their abilities. 

They are dealing with declining value of collateral and the slow 

market causing their customers to be unable to remain current on 

their loans. It is important to remember that banks are reliant on 

their customers’ ability to repay the loan commitments in order to 

remain profitable and well capitalized. 

Traditional banking has been the backbone of our Nation’s economy and yet the term ‘‘bank’’ has been misused by almost everyone 

in the media and in Washington, D.C. Kansas banks still adhere 

to the 3-C’s of credit—capacity, character, and collateral—when 

making loans. The extension of credit is in essence the evaluation 

18 

of risk. We believe government intervention into this process altered decision making by many lenders and allowed loans to be 

made that never would have been in a free market system. The 

Community Reinvestment Act is one example of this type of intervention, as is the relaxed underwriting standards of Fannie Mae 

and Freddie Mac. While homeownership is a worthy goal, encouraging people to purchase homes they cannot afford is much worse, 

in the long run, for everyone. Government intervention in the lending process altered decision-making and interfered with the free 

market system on the front end of many transactions. Expecting 

that same free market system to work on the back end is unrealistic. 

Traditional banking needs to be strengthened and encouraged because, as in years past, it will be the engine that drives any economic recovery. Traditional bankers are just like any other small 

business men and women trying to keep their communities strong. 

Too big has failed. There are no chartered banks in Kansas that 

meet the criteria of ‘‘too-big-to-fail.’’ In fact, at $50 billion in assets, 

the entire State of Kansas probably fails to meet that test. In some 

people’s eyes, that makes Kansas and Kansas banks insignificant. 

Yet when you look at the thousands of individuals, small businesses, and agricultural operations that are financed by the traditional community banks in Kansas, one could hardly call it insignificant. However, the 325 banks in Kansas are negatively impacted by the policy of ‘‘too-big-to-fail.’’ 

When megabanks are systematically bailed out time after time, 

they no longer see downside to their overly risky behavior, yet traditional community banks in the whole country are hurt by the economic downturn that inevitably follows. It has been my view for 

quite some time that business lines, operations, and functions outside of the traditional banking function of taking deposits and making loans have put the FDIC Deposit Insurance Fund at risk. Those 

functions need to be identified, segregated and capitalized separately; thereby, reducing the risk to the entire banking system. 

Will the new systemic risk council and other policies put in place 

by the Dodd-Frank bill work? As Tom Hoenig said, time will tell. 

It will take a great amount of fortitude by policymakers and regulators to see if that does ultimately work. 

In the last part of my testimony, I would like to focus on regulatory burden and its effects on banks, on consumers, and on the 

economy as a whole. There are some policymakers who believe 

there is no such thing as too much regulation. Traditional banks 

feel the burden of regulation. With a typical small bank, more than 

$1 out of every $4 of operating expense goes to pay for governmental regulation and that was before the Dodd-Frank bill. 

We are aware that traditional community banks have a growing 

list of regulatory burden. I have brought a list of those new rules 

and regs that have been put in place the last 2 years. The customers are hurt by overregulation. Banks in Kansas have told me 

that they are trying to decide whether it is just impossible or not 

to remain in business after the Dodd-Frank bill takes effect. And 

the realities of lending, especially in the mortgage area in the rural 

area are not given consideration when new rules are implemented. 

19 

Chairman MOORE OF KANSAS. The gentleman’s time has expired. 

Can you wind up, sir? 

Mr. STONES. Yes, thank you. 

Just briefly, everyone should be concerned about overregulation 

and an efficient banking industry. The term ‘‘financial intermediation’’ from economics 101, from my economics textbooks, ‘‘commercial banks also perform an additional function which other financial institutions and businesses do not. That unique function is to 

create money by taking deposits and making loans. Because of 

their unique money-creating abilities, commercial banks are unique 

and highly strategic institutions in our economy.’’ 

It should be important to all of you, policymakers and consumers 

and business people alike, to maintain a highly efficient banking 

system. 

Thank you. 

[The prepared statement of Mr. Stones can be found on page 84 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Stones. 

Mr. Herndon, you are recognized for 5 minutes, sir. 

STATEMENT OF DAVID L. HERNDON, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FIRST STATE BANK OF KANSAS CITY, 

KANSAS 

Mr. HERNDON. Good morning, Chairman Moore, Representative 

Jenkins, and Representative Cleaver. My name is David Herndon, 

and I am the president and chief executive officer of First State 

Bank in Kansas City, Kansas. I am also the immediate past chairman of the Kansas Bankers Association. 

First State Bank was founded in 1901. We celebrated our 109th 

anniversary on July 1st of this year. Special uniqueness to our 

bank is that it was founded and remains headquartered in Kansas 

City, Kansas, and it has always been privately and locally owned. 

I have been associated with the bank since 1978 and served as its 

President and CEO since 1990. 

Based on asset size, First State Bank is one of the smallest 

banks in the Kansas City metropolitan area. Yet we offer a full 

range of bank services and delivery systems directed to our customers and to our community. Our trade area is primarily southeast and south central Wyandotte County, Kansas, northeast and 

north central Johnson County, Kansas, and west central Jackson 

County, Missouri. This area includes a sizable portion of the urban 

core of Kansas City, Kansas, and it represents a significant number 

of our customers. Our business customers are primarily manufacturing, transportation, warehousing, distribution, and subcontracting businesses. The consumers that we serve are historically 

employees of these businesses as well as other low- to moderateincome, urban core residents. 

Our business model reflects our clients’ banking requirements. 

When depositors and borrowers are enjoying good times, so do we. 

The challenge is just the same when those times are not so good. 

Throughout the 1990’s and the early 2000’s, First State Bank led 

its peers in nearly all measures of financial performance. Following 

12 consecutive years of increasing net income and asset growth, 

profits suffered a decline but remained positive after the terrorist 

20 

attacks of September 11th. The bank worked with its business customers at that time to help them recover from the far-reaching economic shocks and business setbacks from this event. But some of 

our clients did not make it and were unable to repay their borrowings. The result was that we were forced to boost our reserves, 

increase our capital, and slow our asset growth. Despite the adverse impact to the earnings, we still remained profitable and we 

still remained well capitalized. 

We rebounded our earnings in 2005 and returned to the pre 9/ 

11 levels in 2006 and 2007. Then 2008 hit and the world changed 

again. But they changed and led to headlines that reported that 

banks were in trouble, that banks were failing, that banks were not 

going to be able to help their clients. Unfortunately, many of those 

reports were true. 

But they were not true at First State Bank and they were not 

true at other Kansas banks. 

First State Bank, like it has for 109 years, still makes loans to 

qualified borrowers, still offers professional banking services, and 

strives to build the same strong relationships with its clients. And 

those relationships allow us to adjust our business model and work 

with the bank clients as their business models change, whether it 

be by economic circumstances or other circumstances. That adaptability has allowed us to survive through the Depression of the 

1930’s, the 1980’s, the post-9/11 economy, and it is allowing us to 

survive today. 

We are trying to position ourselves to persevere in this economy 

just as the other banks throughout the Midwest are doing. To put 

it simply, we are healthy, and we are profitable and we remain cornerstones in our communities. But as you heard before, many 

banks and bankers and directors of small banks are judging whether they can stay in business and feel that they are needlessly under 

attack. Too many feel that they are being punished for actions 

which they never undertook. For example, we never participated in 

any subprime lending and never relaxed our lending standards, yet 

we were brushed into that group when it was in vogue to do so. 

Most of our borrowers are repaying their loans, but some are not. 

And we are working diligently to work with those who are struggling. It usually takes a long time to turn around a troubled debt 

but we are not being granted that time in too many cases. Banks 

should not have to write down loans to legitimate borrowers who 

are working through a financial crisis they have never seen before 

but yet they are required to do that. 

Additionally, our profits of small and medium-sized banks are 

being attacked. Recent legislative and regulatory actions have dramatically decreased income sources and increased operating expenses. Increased deposit insurance premiums, compliance costs, 

and restricting interchange fees are certainly examples. It appears 

that many of the banks in this area are concerned that government 

regulators have begun choosing winners and losers and if so, the 

small and medium-sized banks will regrettably be those losers. 

We were well equipped to meet the requirements of our clients, 

both depositors and borrowers. Liquidity at our bank and throughout Kansas banks is and has been significantly higher than our 

peers in several areas of the country. And most certainly higher 

21 

than many of those non-regulated or lesser-regulated institutions 

that are mistakenly referred to by so many as banks. We are profitable, we have strong reserves, and we have aggressively added to 

those reserves since the economy turned sour, further protecting 

our clients. Our capital is strong. First State has and will as long 

as the current ownership is involved always be well capitalized or 

above based on the regulatory definitions. And the majority of 

bankers throughout this region have the same attitudes. Our clients have confidence in us and because they know we are their financial partners in their success, their success will breed our success. 

That mutual process will prove to be the catalyst for an economic 

recovery, I believe. The sources will create and sustain jobs. 

Chairman MOORE OF KANSAS. The gentleman’s time has expired. 

If you can wind up, sir. 

Mr. HERNDON. I can, thank you. 

The risk of unsubsided legislative and regulatory burdens will 

have unintended adverse consequences. Too many of us will be put 

out of business. We respectfully request the continued work—we 

are anxious to work with regulators and legislators to make that 

happen. But only through persevering in a diverse financial industry will our economy sustain. 

Thank you. 

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

45 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, sir. 

Mr. Mariner Kemper, you are recognized, sir, for 5 minutes. 

STATEMENT OF MARINER KEMPER, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, UMB FINANCIAL CORPORATION 

Mr. MARINER KEMPER. Thank you, Chairman Moore, Representative Jenkins, and Representative Cleaver. We are pleased to be 

with you today to join in this dialogue along with my colleagues 

here in the credit union arena and the banking sector. The country 

is entering a new era for financial services after a very rough time 

for many in the financial sector, as well as consumers and businesses. 

I particularly appreciate the comments by Tom Hoenig. Tom has 

shown outstanding leadership, both in the Federal Reserve’s relationship with banks here in the Tenth Fed District, as well as a 

sound voice for reasoned policy nationally. 

From our interactions with customers, we can tell you that many 

businesses and consumers continue to face a challenging economy, 

whether through unemployment or weak demand for products and 

services. This makes it especially important that we are having 

this conversation today. 

We believe, as you do, that solid Midwestern businesses like 

UMB and our colleagues here today are very much a part of the 

solution. It is critical that policymakers focus on constructive actions now to strengthen business, create private sector jobs, and restore growth in places like Kansas and Missouri. 

Let me comment briefly on UMB’s approach to banking. Unlike 

some financial institutions, UMB did not plunge into the bubble 

mentality. UMB has pursued three goals as pillars of our business 

22 

strategy—quality, diversity, and stability. These goals have served 

us, our customers and our shareholders very well over the years. 

UMB ranks as number two in the United States, according to a 

study by Forbes magazine ranking banks on asset quality, capital 

adequacy, and profitability. We take great pride in the fact that 

relative to industry averages, UMB has posted strong and consistent earnings year over year through the financial crisis. 

Throughout the crisis, we have had no need or desire to seek government bailouts or outside capital infusions. 

In 2010, the Nation is entering a new financial era in what we 

call the ‘‘new normal.’’ There is a hangover from this period of financial excess, which is hindering the lending environment and 

there is an increase in regulatory involvement with banks and 

other financial institutions, which has only begun. 

The lending environment is a topic of much concern. Let me assure you, UMB Bank never stopped making loans and has plenty 

of liquidity to meet the needs of any qualified prospective borrower. 

We have increased our total loan balances through 2007 to the 

mid-2010 period an average of 5 percent per year and our total 

commercial loan commitment figures have increased 40 percent 

since 2007. 

As the economy has slowed down, however, we have experienced 

a decline in demand for commercial and industrial loans. The 

strains of the recession have caused many businesses to scale back 

their plans. We believe it would be a mistake for banks to loosen 

underwriting standards now and take speculative loans on in an 

attempt to return to what we perceive as normal levels. 

If our goal is to stimulate prosperity, I encourage political leadership to act on the counsel from leaders in the private sector who 

identify specific constructive actions to help restore a more vibrant 

economy. For instance, the Business Roundtable has called on Congress for tax reform to help U.S. corporations stay competitive and 

get on a path of expansion. The Roundtable has spelled out specific 

provisions of the Tax Code that create a drag on growth and competitiveness. To bring on economic recovery and put people to work, 

we need to stimulate business spending, not by increasing government spending or pressuring banks to lend, but by reducing the 

burden on businesses. 

Another example of constructive action involves the regulation of 

banking and finance. Passage of the Dodd-Frank Act this summer 

was just the beginning, not the end of this process. And many, 

many questions remain unanswered. 

As further changes are made and rules are developed, we support the strengthening of bank capital requirements, including both 

the tiered and risk-based capital levels. But this approach should 

be risk-based to start with, and should focus on incentives rather 

than regulatory penalties. Deposit insurance rates also could be incorporated into a set of incentives. That is, the higher the risk profile in an institution, the higher the insurance rate they should 

pay. The reverse should be true. This distinction between both categories is very slight today. This would drive the principal behavior 

that poses less systemic risk such as that demonstrated by UMB 

and others today. 

23 

Although the Dodd-Frank Act was designed with good intention 

of addressing excessive leverage and the ‘‘too-big-to-fail’’ issue, it 

has unfortunately become a mechanism to regulate bank profitability as well as product design and competition. History tells us 

that a lack of regulation is not the catalyst for a financial crisis. 

Rather, the stability of a system rests on the will of business and 

political leadership to do what is right when it is right. 

If we truly wish to change behavior and counter the forces of 

human nature, we need to provide incentives for financial discipline. We believe banks and other players in the financial system, 

including policymakers and regulators, would do well to pay attention to quality, diversity, and stability. We will achieve long-term 

recovery by encouraging sound financial practices at every level 

from banks to business to consumer and even government. 

I am happy to discuss the particulars with you as we move forward. I will leave you with one of my favorite quotes from President Truman, and it seems to apply to shaping this new era for our 

financial system: ‘‘Men make history, not the other way around. In 

periods where there is no leadership, society stands still. Progress 

occurs when courageous, skillful leaders seize the opportunity to 

change things for the better.’’ 

Thank you again for having me with you today. 

[The prepared statement of Mr. Mariner Kemper can be found on 

page 72 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Kemper. 

And Mr. Jonathan Kemper, sir, you are recognized for 5 minutes. 

STATEMENT OF JONATHAN M. KEMPER, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, COMMERCE BANK, KANSAS 

CITY, AND VICE CHAIRMAN, COMMERCE BANCSHARES, INC. 

Mr. JONATHAN KEMPER. Thank you, Chairman Moore, Representative Jenkins, and Representative Cleaver. I always love it when 

my cousin quotes our former employee, Harry Truman. 

[laughter] 

Mr. JONATHAN KEMPER. I am Jonathan Kemper and, as mentioned previously, I am vice chairman of Commerce Bancshares 

and chairman of Commerce Bank of Kansas City. 

In the interest of time, rather than recite my formal testimony 

and repeat those of the co-panelists which I certainly endorse, I 

will attempt to keep to a few major points, which I believe are of 

critical importance, especially given Representative Jenkins’ comments of taking lessons back to Washington. 

As has been said, we really appreciate your efforts in setting the 

record straight, because much of the financial crisis stemmed from 

the very largest financial services companies and not the community-oriented banks that you have heard from already. The banks 

have been lumped together without distinction and we find ourselves blamed for a financial meltdown that we actually warned 

people about and had no part of. This has been the biggest financial crisis since the Great Depression and has caused sweeping 

changes in the banking business, not all of which are complete 

now. 

In the discussion of the questions, I would expand small and medium-sized Midwestern banks to traditional banks in my remarks 

24 

and I would say that except for the top four banks in our country, 

the rest of us are all small banks in many of the ways that have 

been described today. I have put a graph into my testimony, and 

I think you have a copy of it, which shows where Commerce Bank 

fits. And when I put this together, I just could not believe that 

there are really two orders of magnitude between us and the largest banks. 

To give you a sense of what is going on here, the four largest 

banks are in a world all unto themselves in the trillion dollar club. 

It falls off from Wells Fargo to U.S. Bank by a factor of four. So 

there really has been a complete sea change and Tom Hoenig went 

through that, about how much banking has been concentrated in 

the very, very top. Those trillion dollar clubs of megabanks and 

brokers differ from traditional banks both in size, in business style, 

and on their individual impact on the national and global financial 

systems. So we have resisted and certainly would caution against 

lumping us in that pot. 

It has also been fashionable, many have said that the government bailed out the banks with TARP. And just to set the record 

straight on that one, not only did traditional banks not cause the 

crisis, but the government will in fact make a profit on the money 

placed into the traditional banks and the bad actors who caused 

the large bailouts, AIG and GMAC, are going to have us pay their 

bills, which is really galling. 

Commerce Bank today is $18 billion. We have operations in five 

States, primarily Missouri and Kansas. Our success—and you have 

seen this in our testimony—is really because we have stronger customer focus. Our growth has been a solid organic basis and a 

knowledge and involvement in our communities. We would characterize ourselves as a good bank and a good corporate citizen. We 

are among the best capitalized banks, we declined TARP funds, 

and we did not contribute to the crisis, but we are paying the cost 

and bearing the extraordinary regulatory burdens. And I will just 

mention a comment made in the press in the signing of the DoddFrank bill, President Obama said, ‘‘Unless your business model depends on cutting corners and bilking your customers, you have 

nothing to fear from this reform.’’ I respectfully submit we are concerned and we do not believe that is a true statement. We think 

that the FDIC insurance costs have increased already and are now 

going to increase on banks of $10 billion and above. That is clearly 

something that is going to affect our bank. The Consumer Financial Protection Bureau has potential to add substantial cost and restrict business and the price setting as established by the Durbin 

amendment significantly affects future fee income. In fact, there 

are more than 200 new regulations in the Dodd-Frank bill that are 

going to tax our staff and increase our costs. 

I am going to skip over the comments about the last few years. 

I think they have been well summarized previously. All I can say 

is that we, as has been mentioned before, saw what was going on 

in the excesses and did not make the mistakes that others did, but 

we are tremendously affected by it, that the growth in borrowing 

taught by the hedge funds using leverage and credit default swaps 

still is out there and we still have a very difficult and ugly picture. 

25 

In fact, in 2007, we had—financial services represented over 25 

percent of all the profits in the United States. 

In conclusion, I just wanted to say that there is terrible trouble 

if the government gets involved in the level of pushing the scale 

in favor of the largest banks and against us. And I have given you 

a recent—in fact, it is coming out next month—a Harvard Business 

Review on where the judgment deficit is going to be and I recommend it for your reading. It was done by a classmate of mine 

at the Harvard Business School, and talks about the need and importance of local decision-making, and if we see the disincentives 

to the community-oriented banks that are represented by the panel 

and by mid-sized banks and small banks, we are going to see a deficit in judgment in the field that will provide the future for the 

economy that we need to see grow. 

Thank you so much. 

[The prepared statement of Mr. Jonathan Kemper can be found 

on page 60 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you for your testimony, Mr. 

Kemper. 

Next, the Chair recognizes Ms. Marsh for 5 minutes. 

STATEMENT OF MARLA S. MARSH, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, KANSAS CREDIT UNION ASSOCIATION 

Ms. MARSH. Chairman Moore and members of the subcommittee, 

I appreciate the opportunity to appear before you today on behalf 

of the Kansas Credit Union Association. Kansas has 103 credit 

unions serving 590,000-plus member owners. 

Heavy focus has been placed on the risky practices that contributed to the great recession and what the government needs to do 

to prevent systemic failures in the future. We appreciate your willingness to also look at the players that did not contribute to the 

recession and are helping to restore economic stability. Much can 

be learned from credit unions with their philosophy of putting people before profit. My written testimony provides pertinent statistics 

on the State of Kansas’ economy and Kansas credit unions in general. 

Here are a few highlights: 

The economy and Kansas credit unions have fared better on 

many economic indicators without the dramatic boom-and-bust experienced in other regions. However, we have felt the effects of actions by those less cautious and/or more greedy. A flight to the 

safety of a trusted partner is evidenced by our sizable asset growth 

over the past 18 months. Loan growth remains strong at over 5 

percent as of March. Overall, credit unions are healthy and well 

capitalized at an average 10.8 percent net worth to assets ratio. 

And any consolidation since 2008 can be attributed more to the increasing marketplace complexity and the escalating compliance and 

regulatory burden than the recession. We hope that the committee 

will monitor the overall impact of new and current regulations and 

how the Dodd-Frank law is implemented. 

As far as systemic risk, no credit union or group of credit unions 

is large enough to negatively impact the entire financial system 

and, therefore, the cost of any credit union failures would be contained within the credit union system itself. 

26 

The greatest risk to credit unions comes from collateral damage 

caused by the ‘‘too-big-to-fail’’ institutions. The devaluing of property, the decrease in consumer confidence and the increase in unemployment all negatively impact our member owners. 

A second and equally damaging result of ‘‘too-big-to-fail’’ is the 

rise in regulatory burden, an examiner one-size-fits-all approach 

that stifles our efforts to provide solutions that meet member needs 

and help grow local economies. 

So what lessons can be learned from Kansas credit unions? First, 

structure matters. The biggest difference between the Wall Street 

business model and the credit union business model is the member 

ownership component. When the institution is owned by the customer, there is a mutual responsibility to act in the best interest 

of each party. The large degree of separation from decision maker 

to end user seen in large financial firms encourages an internal 

profit focus and excessive risk-taking. 

Second, business practices matter. Credit unions have solid underwriting processes, hold most of their loans on their books, and 

their loan decisions rely on character and capacity to repay, not 

just collateral or a credit score. 

Third, people matter. Credit unions focus on member needs, not 

greed, offering solutions such as restructuring loans, deferring payments, and providing financial education and counseling. 

In summary, credit unions are a small portion of the overall marketplace. In Kansas, it is only 6 percent. They have a strong role 

to play in financial services as a solid alternative to for-profit banking. Even though credit unions did not cause the problem, they face 

steep compliance costs as part of the clean-up. We urge Congress 

to recognize the enormous challenges these regulatory changes 

present to small and mid-sized institutions. We also urge Congress 

to allow flexibility and to increase options for credit unions to serve 

their members, such as passing legislation to increase the statutory 

credit union member business lending cap. 

The credit union mission of putting people before profits has 

been good for Kansas. Please help us to continue to deliver on that 

mission. On behalf of Kansas credit unions and their member owners, I thank you for inviting us to testify. 

[The prepared statement of Ms. Marsh can be found on page 79 

of the appendix.] 

Chairman MOORE OF KANSAS. Thank you. 

The Chair next recognizes Mr. Beverlin for 5 minutes, sir. 

STATEMENT OF JOHN D. BEVERLIN, Sr., PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, MAINSTREET CREDIT UNION 

Mr. BEVERLIN. Chairman Moore, and members of the subcommittee, I am John Beverlin, president and CEO of Mainstreet 

Credit Union, formerly the Credit Union of Johnson County, a $260 

million cooperative serving over 52,000 members. We were chartered in 1953 by a group of school teachers who wanted to control 

their own financial destiny. We currently have branches in Johnson 

County, Lawrence, Leavenworth, and Kansas City, Missouri. We 

serve employees of the community college where this meeting is 

being held, employees of the Shawnee Mission Medical Center and 

the Honeywell plant in Olathe, and over 100 employee groups. 

27 

Mainstreet has had employee groups that have faced employment uncertainty and layoffs. This continues today. I share this information so that you understand the diverse group we serve. In 

2009, Mainstreet was making adjustments to our operations to better survive the economic downturn. We faced assessments from 

NCUA for the year 2009 of over $627,000, over a third of our anticipated net income for the year. We did, nevertheless, record a 

positive bottom line for 2009 and remained very well capitalized. 

We continue to review expenses. We froze management salaries, 

reduced the amount of employee raises, and cut contributions to 

employee retirement. 

Some good things did happen in 2009, loans grew as a result of 

larger lenders exiting the lending market. Auto loans issued increased over 195 percent, mortgage loans over 75 percent. In the 

end, we survived 2009. A good part of it has to do with 

Mainstreet’s conservative approach to business, including a diversified loan portfolio, avoiding concentrations in any one area. 

Another part of it has to do with the nature of a credit union. 

As a financial cooperative, a member is an owner of their credit 

union. We get to know our member owners and will work with 

members when they are faced with financial difficulty. 

So far, we have faced continuing challenges in 2010. We have had an assessment of $295,000 from NCUA with an additional of 

up to $400,000 expected. Mortgage lending continues to be on the 

increase; however, auto loans are down. Large national auto lenders have re-entered the market utilizing subsidized rates as low as 

zero percent. To date, we have not laid off any employees and have 

refrained from increasing fees to our members. 

We continue to review expenses looking for ways to lend money, 

our main source of income and ways to better serve our members. 

We anticipate additional premiums for several years to come from 

NCUA. NCUA assessments aside, these are things we do every 

year. What was unique for this past year and will pose additional 

concerns for us in the future are legislative and regulatory burdens. It seems to me that the mere presence of this subcommittee 

and the topic of today’s discussion, that there is agreement that 

Midwest banks and credit unions did not cause the financial crisis 

we are dealing with. Yet all financial institutions seem to be 

grouped together when any attempt is made to look for solutions 

to the crisis. 

This past year, Mainstreet has had to deal with credit card legislation, spend almost $50,000 educating our members because of imposed regulatory changes to overdraft protection, and the recent 

passing of an amendment on debit/credit card interchange will result in additional lost income. 

We are concerned with where it will all stop. The impact of these 

regulatory changes will ultimately fall on the shoulders of our 

members and Kansas consumers. 

One area where I think credit unions can help is in the area of 

business lending to members. Mainstreet does not currently do 

business lending by definition of regulation. An arbitrary business 

lending cap of 12.25 percent of assets was legislated in 1998 and 

it is hard to justify putting the needed resources in place with a 

cap at the current level. Legislation has been imposed that would 

28 

increase this cap to 27.5 percent of assets. An alternative, it would 

seem to me, would be let our regulator determine the cap. The regulator is in a better position, while examining a credit union for 

risk, to determine the cap. 

Mainstreet will survive and continue to serve our members. We 

are anticipating continued pressure on our bottom line, reducing 

our net income for the next 3 to 5 years. It is important to note 

that as a not-for-profit cooperative, we are not after net income just 

for its own sake. Retained earnings are our only source of capital. 

In conclusion, Mr. Chairman, I appreciate the subcommittee taking the time to explore these important issues. And thank you for 

inviting us to testify. 

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

40 of the appendix.] 

Chairman MOORE OF KANSAS. Thank you, Mr. Beverlin. And I 

thank the panelists for their testimony. I am going to start with 

questions. 

Mr. Hoenig testified that community banks will survive the crisis 

and recession and will continue to play their role as the economy 

recovers. The more lasting threat to their survival, though, concerns whether this model will continue to be placed at a competitive disadvantage to larger banks. I would like to ask each of the 

panelists if you would care to comment, and please keep your responses kind of short so everybody will have a chance to comment. 

Do you believe that is a concern? I would like to hear your opinion, 

please. 

Mr. STONES. Absolutely, we think that is a concern. Thank you 

for the question. We think that in the long run, the regulatory burden placed on all banks by this law and laws in the past have 

placed an undue burden, a more heavily concentrated burden, on 

community banks. They just simply do not have the resources to 

hire new people, to do whatever it takes to comply, to try to comply 

with the new laws and regulations. 

Chairman MOORE OF KANSAS. Thank you, sir. Mr. Herndon? 

Mr. HERNDON. I would concur. Our bank has 26 people who work 

for it. Other banks have departments of 260 people to absorb that. 

So it is absolutely tilted—we need to level the playing field. 

Chairman MOORE OF KANSAS. Thank you, sir. Mr. Kemper, Mariner Kemper? 

Mr. MARINER KEMPER. There are a couple of areas I think to 

focus on. One is just the pure compliance costs of living with the 

new bill. I think we will all be finding out what that is over the 

coming years, there are what, 2,000 pages of it. There is a tremendous amount of that we do not know what it looks like yet, it is 

going to cost the industry a great deal and the smaller banks obviously have a harder time shouldering that burden. 

Additionally, I still have a hard time bringing together the intended purpose of Dodd-Frank to end or affect the crisis, in a lot 

of the things that have ended up in there like the Durbin bill and 

things like that, that have really nothing to do with the crisis and 

will cost us. I think that is really where the greatest fear for the 

industry is, is the fee income that will disappear over the next few 

years. 

29 

Mr. JONATHAN KEMPER. Without question, the Dodd-Frank bill 

disadvantages community banks and it is going to add to their cost 

and restrict their activities. I think this is a very valid concern and 

should be looked into, especially as it affects the Midwest. 

Chairman MOORE OF KANSAS. Ms. Marsh? 

Ms. MARSH. I think the complexity of the Dodd-Frank bill leaves 

us all kind of wondering exactly what is going to affect each of us. 

It is very complex, 200 new rules, and we know at least 35 affect 

credit unions at this time. Debit interchange is a major cost for our 

credit unions and the Fed sitting on identifying what those tier levels will be is very important for us. The Consumer Protection Agency and who heads that is going to be very important out of that 

bill. Mortgage lending and disclosures and then payments and settlements are also contained in there, and that will have a direct 

impact on us too. 

Chairman MOORE OF KANSAS. Thank you. Mr. Beverlin? 

Mr. BEVERLIN. I think overall the credit unions’ concern has always been that because of our size, we sometimes are forgotten. 

And the impact that regulation has on us is not, a lot of times, 

looked at. I know Mainstreet, for the very first time 2 months ago, 

we now have a full time VP of Risk Management or Regulation and 

Compliance. A lot of small credit unions cannot afford to do that. 

So they rely on other sources and sometimes, it is the manager of 

that credit union who has to fill that need and it takes him away 

from doing other things and helping his members. 

Chairman MOORE OF KANSAS. Thank you. 

I talked to Mr. Hoenig about this and would like to ask your reaction, if you have reaction to this. Despite the painful recession, 

according to today’s New York Times, the popular belief is that as 

housing prices rebound, they will continue to go up forever. The article cites a recent survey by Case-Shiller where many people said 

they still believe prices would rise about 10 percent a year for the 

next decade. Yale economist Bob Shiller was quoted, saying, ‘‘People think it’s a law of nature.’’ Should people have new expectations for the housing market for the next generation? Mr. Mariner 

Kemper, do you have any thoughts about that? 

Mr. MARINER KEMPER. I absolutely concur with Mr. Hoenig. 

What goes up must come down. We have had 36 some-odd recessions since the mid-1850’s, most caused by a real estate crisis. That 

is the only fact out of this whole thing is we will see it again. 

Chairman MOORE OF KANSAS. Mr. Jonathan Kemper? 

Mr. JONATHAN KEMPER. Housing is one of the most important industries as well as important feature in America. And we would 

like to be supportive of responsible resurgence of housing, but as 

you say, there is an unrealistic—as Tom said, there is an unrealistic expectation that it is going to recover and bounce back. I think 

the new normal is going to be related much more to the value of 

housing relative to income. It got way out of whack and as Tom 

said, we had several years’ supply that created a damping effect. 

As that is worked off, I think the valuation of housing will be much 

more reflective of the income available to support it and with the 

increases in energy prices and changes in living, we are going to 

have to look at our housing stock that is fit more for what our Nation’s needs are. 

30 

Chairman MOORE OF KANSAS. Thank you. My time has expired, 

and I would ask the other panelists if you have some comment you 

would like to make, if you would submit those please in writing, 

I would appreciate that very much. 

The Chair next recognizes Representative Jenkins for 5 minutes. 

Ms. JENKINS. Thank you, Mr. Chairman, and thank you all for 

your words this morning. 

I will start with Mr. Stones. Your written testimony indicates 

that a majority of traditional community banks in Kansas serve 

towns of fewer than 5,000 citizens and operate with just a few employees. Given that regulatory costs already represent more than 

25 percent of the operating budgets of these community banks, can 

you just summarize again for us how the Dodd-Frank bill will add 

to these banks’ operating costs? 

Mr. STONES. As I think Mr. Mariner Kemper mentioned, there 

are over 240 new regulations that will come out of the Dodd-Frank 

bill. It is estimated based on historical legislation to regulation that 

there is going to be in excess of 5,000 to 10,000 new pages of regulation that banks are going to have to comply with. Obviously, it 

would be speculation on my part to say how much additional cost 

that would be, but obviously with those kinds of numbers, the 

amount will be significant. KBA employs four full-time attorneys 

whose job is to answer compliance questions for our members. They 

answer—currently in the past few years, they answer somewhere 

around 5,000 inquiries per year. That is starting to exponentially 

increase. Most of those are obviously from community banks, but 

some of the larger banks in our State like to just kind of ask questions of other attorneys to kind of make sure they are thinking 

along the same lines, but we are trying the best we can to help our 

smaller banks comply with all the laws and get ready for the new 

Dodd-Frank legislation. 

Thank you. 

Ms. JENKINS. Okay, thank you. 

Moving right down the table, I guess I will address this one to 

Mr. Herndon, but certainly if anybody has anything to add, please 

do. You mentioned in your written testimony that many bankers 

and directors of small to medium-sized financial institutions in the 

Midwest feel that they are needlessly under attack and many feel 

that they are being punished for the actions for which they never 

took and that government and regulators are choosing winners and 

losers and it seems that small and mid-sized banks are the losers. 

What can Washington do or could we have done differently to 

treat traditional community banks better and what can we do in 

the future to ensure that this very reliable sector of banking is not 

the recipient of further unintended consequences? 

Mr. HERNDON. It seems that every time that we mention that— 

we being small and medium-sized banks throughout the country— 

did not participate in the events that led to the crisis, that the response was, ‘‘Yes, we know, you were not part of the problem.’’ In 

fact, the legislation has directed the cure to those that were not 

part of the problem. We did not participate in those new and exotic 

financial instruments, most of them, and probably those that did 

create them do not understand the consequences. 

31 

So, despite the fact that we were doing our jobs serving our communities, serving our customers, the new regulations are going to 

have a tremendous adverse unintended consequence on the banks 

of my size, in my opinion. We cannot absorb the cost of compliance; 

the burden is just too great to stay in business. So I think that had 

the direction been to those that were responsible instead of the 

easy target that we turned out to be, it would have been more effective. 

Ms. JENKINS. Okay, thank you. 

Mariner, I think you mentioned in your testimony that your 

bank has expanded further into the financial services sector in 

order to hedge and diversify your profit centers. How will the enactment of the financial regulatory reform bill affect the way you 

and other banks do business? 

Mr. MARINER KEMPER. For the most part, our furthering of our 

diversity actually stabilizes that. It helps minimize the impact of 

the bill because most of our diversity comes from non-consumer oriented business lines. Most of the pain in the bill is directed at the 

products and services that we provide for consumers as an industry 

and our diversity actually moves us away from that. So as a particular institution, our diversity helps us. 

I guess my greatest concern is that the bill has moved away from 

what its intended purpose was, and that was to address excess in 

the system and ‘‘too-big-to-fail.’’ The ‘‘too-big-to-fail’’ has many loopholes in it still. I think that would be something I would have you 

focus on, as to how you tighten—as Mr. Hoenig mentioned, it is 

going to be awfully hard to see what can happen over a weekend. 

So I think we focus on the ‘‘too-big-to-fail’’ issue and then as it relates to the excess, bringing in the unregulated is great, but there 

are too many things in that bill that have absolutely nothing to do 

with the problems that came about. And I would ask that we try 

to minimize the impact of those things and focus on the crisis oriented issues. 

Ms. JENKINS. Thank you, I yield back. 

Chairman MOORE OF KANSAS. I thank the gentlelady. The Chair 

next recognizes Congressman Cleaver for 5 minutes, sir. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Let me thank all of you for giving this kind of time to us today, 

and your testimony has been much appreciated. 

Mr. Stones, in your testimony, I agree with almost all of your 

comments, with a slight disagreement that the most misused word 

in the English language for the last 18 months is ‘‘banks.’’ I agree 

we misuse it. I think the most misused word for the last 18 months 

and the last 18 centuries is ‘‘love.’’ 

[laughter] 

Mr. STONES. I defer to that, thank you. 

Mr. CLEAVER. But my concern centers on your comments on page 

2 and they relate to the Community Reinvestment Act. The Community Reinvestment Act was approved long before any of us were 

here. In fact, I think most of us were just getting out of school 

when it was passed, but it was enacted because there was a severe 

shortage of credit in low- to moderate-income communities. And 

during this financial meltdown—actually before, from time to time, 

32 

we have people who say, as did you, that CRA was somehow connected to the financial collapse. 

All the evidence points to the contrary. In fact, I debated this 

issue on the Floor for 1 hour, and it is one of those things that just 

continues to roll in spite of the evidence. The Federal Reserve conducted a study which showed that only 6 percent of the mortgages 

that were made just prior to the collapse were made in CRA assessment areas. 

The language in the bill, and I am paraphrasing it, I did not 

know I would end up talking about it, but the language in the bill 

says something like ‘‘and loans should be made with the highest 

possible prudence’’ and so forth. In hearing after hearing after 

hearing, we have asked experts, we have asked Treasury Secretaries, FDIC Chairs, economists who appear before our committee, 

and we have never had anyone from the expert community say that 

CRA contributed. But it is still one of those things that floats 

around out here and is said repeatedly. 

So I am just curious about your comment. 

Mr. STONES. Thank you, Representative Cleaver. I guess my 

comment is meant to talk about a broader issue. I agree with you, 

I am not convinced that Community Reinvestment Act loans in and 

of themselves were a large contributing factor to the crisis. The 

point I was trying to make was that there were laws and regulations put in place, like the Community Reinvestment Act, that took 

over the free market system, in that loans were made—and again, 

not necessarily created the crisis—but loans were made, and just 

one example was the CRA. 

Loans were made that would not necessarily have been made 

otherwise, that loans were made in order to comply, to make sure 

your bank complies with CRA and, as you said, low- to moderateincome areas, that those individuals might not qualify for a loan. 

Now if you take that out into California and Florida and Arizona, 

and I agree these were not CRA loans that were involved in the 

crisis necessarily, but they were the same kind of loan that were 

talked about by the theory and the wont of Administration—and 

the Bush Administration was part of this also—was that homeownership is the American dream and that every person should have 

the ability to own a home. That just is not going to happen in a 

real free market system. I saw evidence and stories about people 

making $100,000 in California who were purchasing $800,000 and 

$1 million dollar houses that in Kansas, there is not a bank in 

Kansas that would have made that loan. Yet, these were loans that 

were being made, piling subprime loans on top of each other to 

these consumers who had no business having those kinds of loans. 

And they were being told—and this goes to Chairman Moore’s 

question to Ton Hoenig—they were told that asset value of that collateral would continue to grow and that even when they decided to 

sell, if they could no longer make those payments, that the value 

of that home would be high enough that they could sell the home, 

pay off the loan and still come away with some value in their property. When the bubble collapsed, that just went away. 

And so the general philosophical economic point I was trying to 

make is there were policies put into place that in a totally free— 

33 

that allowed loans to be made that would not have been made in 

a totally free market system. 

Mr. CLEAVER. I would agree, everyone should not own a home. 

I think that was a big mistake. I have a cousin, Herman, Junior, 

and I would not sell him a $200,000 home for $200. So I agree. 

I guess my deep concern is that it has leached into the community that somehow poor people being addressed in CRA caused the 

collapse, and so I understand what you are saying. You are saying 

that in general, pushing toward giving everybody a home loan, 

helped. But I am just—I have been pushing back against this, 

along with other members of our committee and the Fed Chairman 

and everybody else, because the Community Reinvestment Act has 

contributed to this issue. 

And I yield back no time. 

[laughter] 

Chairman MOORE OF KANSAS. I have one more question. The 

other panelists up here may have another question as well, the 

other members of our committee. 

I appreciate the concern about new rules from the Dodd-Frank 

Act, and one number used is that there are 250 new rules from it. 

Many of these rules relate to derivatives, securities and insurance 

regulation. Many only apply to the very biggest financial firms in 

the United States. 

Mr. Stones, most banks in Kansas are not engaged in derivatives 

or securities transactions; is that correct? So those rules would not 

apply to the smaller banks. Is that also correct, sir? 

Mr. STONES. I think the rules on derivatives are one of the big 

question marks in the bill. I think you are correct that the majority 

of banks in Kansas do not deal in the kinds of derivatives that 

were addressed in the law. However—and I am basing this on another Wall Street Journal article which talked about the agricultural community that does deal in the kinds of derivatives that 

possibly could be affected. And those, while they are not affected 

directly within the bank, are going to affect our agricultural customers in their ability to address the risk within their crops. 

Chairman MOORE OF KANSAS. Thank you. Ms. Jenkins, do you 

have any questions? 

Ms. JENKINS. Thank you, Mr. Chairman. If I could maybe just 

ask one more at this end of the table. 

Ms. Marsh, you expressed concern in your written testimony that 

a one-size-fits-all view towards regulation stifles our efforts to do 

what we do best, which is to provide solutions to meet the financial 

needs of our members and to help grow economies. 

I happen to share that concern and, in fact, that was one of the 

many reasons that I did oppose the financial reform bill when it 

was before the House. But I would like to know, and I am just curious, is it your belief that this Dodd-Frank bill is guilty of imposing 

a one-size-fits-all view towards credit unions and could perhaps 

provide a competitive advantage to the larger institutions? And 

then, Mr. Beverlin, if you would like to comment on that as well, 

then I would yield back. Thank you. 

Ms. MARSH. I think that the devil is in the details and it will depend upon the regulations that are promulgated out of the law 

itself. It has all indications that we will have some negative imVerDate Nov 24 2008 11:18 Dec 06, 2010 Jkt 061855 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\61855.TXT TERRIE
34 

pact, but until we see the actual regulations—right now, the Credit 

Union National Association, our national trade association, is saying that although there are over 200 sections of the law that could 

impact financial institutions, just as Chairman Moore said, some of 

them are dealing with large institution issues like derivatives. We 

estimate that it is more in the 30s to 40s that will be actually directly impacting our credit unions. 

But there are also auxiliary issues that come out of this and that 

is, right now, you being a CPA in a former life know that they are 

looking at mark-to-market of loans. Of course, we were also having 

the impact of the OTTI for us. And so things that start out simple 

in the law have a tendency to balloon and even though we really 

do not need to have mark-to-market on our loans, I think that will 

be something that will be extended out on this. And the same thing 

will happen on other parts of the Dodd-Frank. 

Mr. BEVERLIN. Just this morning, before heading over to this 

hearing, KCUA did put out an email that they feel that there are, 

as Marla said, about 35 areas that could affect credit unions. But 

it really does come down to what regulation ends up being written 

to impose those 35. And again, our fear is that we are such a small 

part of the market, that we will not be heard, we will not be looked 

at and how it might affect us versus larger financial institutions. 

Chairman MOORE OF KANSAS. Thank you. 

The Chair next recognizes Representative Cleaver for 5 minutes. 

Mr. CLEAVER. I do think that we have to be vigilant now. I think 

most people—you obviously know the difference but most people 

believe that when we pass legislation, that is it. We pass a broad 

overview of the legislation and then these various regulators will 

put all of the rules together. And I think we have to be vigilant 

during that process. 

But I love to brag about UMB and Commerce in front of our committee and in Washington. It is a great story, I think. One of the 

responses that I have gotten from some of my colleagues is that the 

Midwest is simply more conservative and some of the residue from 

the Great Depression seems to linger around in the Midwest and 

so the truth of the matter is, they did nothing special, they just 

practiced the same conservatism and that in fact prevented them 

from experiencing a problem. 

Do you think that it was just the conservative nature of banks 

in the Midwest that enabled you to have such a good record? And 

if that is the case, how do we export it? 

Either or both of you? 

Mr. MARINER KEMPER. I will take a stab at it. 

First of all, I guess if conservative is a bad word, shame on me. 

I think that I look at it as sound business practices and, if not participating in subprime is somehow conservative, then I guess we 

are conservative. And if knowing that asset values go up and down 

is conservative, then we are conservative. Selling products we understand, if that is conservative, we are conservative. It is just 

sound business, I guess, and if that is Midwestern or conservative, 

then I guess that is what we are. 

Mr. JONATHAN KEMPER. That is a good question. I think you 

should just go back to them and tell them that we are the heartland of America and they should not criticize us because they are 

35 

criticizing what we are all about. Our basic business model is customer oriented, community-oriented banking. And as Mariner said, 

we handle the money as if it were our own. It is backed by our own 

capital. We do not get involved in things we do not understand and 

we stress long-term relationships. That may be conservative, but it 

also happens to be best for our shareholders and best for our customers and best for the communities we serve and we are going to 

make no apologies for it. 

Mr. CLEAVER. I am a non-conservative, and I appreciate and celebrate your conservative nature, and I think it has made not only 

the State and this community look good, but I think we have some 

valuable lessons for the rest of the country. 

Thank you, Mr. Chairman. 

Chairman MOORE OF KANSAS. Thanks to our panel and thanks 

to our members who appeared here today for this hearing. 

I ask unanimous consent that the following documents be made 

part of the hearing record: a letter from the National Association 

of Federal Credit Unions; a letter from Dennis McKinney, the 

Treasurer for the State of Kansas, who will be testifying at our 

hearing tomorrow at the Dole Institute in Lawrence on the topic 

of financial literacy; and a two-page document my office put together on a list of provisions where community banks, credit 

unions, and small businesses were shielded from excessive regulation in the Dodd-Frank Act. 

Without objection, these documents will be made a part of the 

record. 

Again, I would like to thank our first and second panel of witnesses for your testimony today. I know my colleagues and I will 

take what we learned from today’s hearing back to Washington 

with us and share it with our colleagues. 

I also want to thank Johnson County Community College for 

being such an excellent host for us today. 

I will also want to invite everyone here to attend a second field 

hearing we are doing in Kansas this week, and that will be on the 

topic of financial literacy. The hearing is open to the public and 

will begin at 10 a.m. tomorrow at the Dole Institute in Lawrence, 

Kansas. 

Finally, the Chair notes that some members may have additional 

questions for our witnesses which they may wish to submit in writing. Without objection, the hearing record will be kept open for 30 

days for members to submit written questions to these witnesses 

and to place their responses in the record. 

This hearing is adjourned, and again, I thank all of our panel 

members and I thank our colleagues up here. Thank you all. 

[Whereupon, at 10:50 a.m., the hearing was adjourned.] 

(37) 

A P P E N D I X 

August 23, 2010 

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